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How financial data aggregation is improving the financial system

Pinwheel Team

May 16, 2022

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Financial data aggregation is a process in which consumers allow third parties to access their financial accounts and collect data. Then financial service providers use this data to offer consumers a service, such as providing them with a money management platform. Or they can use it to simplify manual processes like employment verification.

It’s impossible to underestimate the importance of financial data aggregators. Today, we use technology to manage every aspect of our financial lives, from how we get paid to investing and borrowing. As a result, there’s a lot of data inside those apps — data that traditional banks and fintechs can use to improve their services.

By connecting to separate data sources and making this information available outside of their native systems, data aggregators are laying the foundation for a new financial system that benefits everyone.

What is financial data aggregation?

Aggregating financial data means collecting a consumer’s financial information from various sources. A data aggregator can gather information from payroll, bank accounts, credit card accounts, investment accounts, lending platforms, and any other financial app a consumer uses to manage their finances.

Data aggregators rely on different technologies to collect information. The most common one is an API (application programming interface), a software application that allows two programs to exchange information. APIs are a part of apps we use on an everyday basis. For example, if you have ever paid for a service using Stripe, you have encountered a fintech API. An API also allows you to send money using Cash App or another digital wallet. When a consumer permits a data aggregator API to access their account information, the API can then securely retrieve the data.

By cracking open access to consumers’ financial data, financial aggregators have made open banking and open finance possible. Solutions that data aggregators provide can include both business-to-business and direct-to-consumer services.

For example, fintechs and financial institutions can use this payroll data for things like income and employment verification or paycheck-linked lending. On the direct-to-consumer front, companies such as Mint provide a money management platform where users can see all of their financial accounts in one place.

How data aggregation is building a better financial system

From both a business and consumer perspective, data aggregating has many advantages.

Benefits for consumers

Financial data aggregation has several benefits for consumers. For one, it enables them to easily manage their finances through wealth management platforms that compile account data from various sources.

As a result, users have a better overview of their account balances and transaction data without manually checking each account. A Cornerstone Advisors study found that people with several checking accounts are more likely to go into overdraft, so financial management platforms can help them avoid expensive overdraft fees.

Another consumer benefit is better financial products, such as low-interest loans. Payroll APIs can aggregate additional financial data that lenders can use to improve their credit decisions. So, even if a borrower has a subprime credit score, they can still qualify for a low-interest loan based on payroll data that confirms they have a steady source of income.

Finally, financial data aggregators can eliminate the need to submit paperwork when applying for a service, which saves consumers time and reduces stress.

Benefits for financial service providers

With access to more consumer data, financial service providers can create better customer experiences. They can improve their digital banking services by automating manual processes, which is essential considering 89% of consumers use mobile banking and are used to convenient digital solutions.

Banks and fintechs can also use these customers’ data to get more insights into their audience and develop new products that address their customers’ needs. Payroll data aggregators can power earned wage access, for example, an increasingly popular service among hourly workers.

Granular consumer data also allows for greater service personalization, which plays a key role in retention. As many as 78% of customers would stay with their bank if it provided personalized support. Since consumers have more options than ever before when it comes to financial service providers, delivering customized solutions is key.

Why finding a financial data aggregator that is a CRA matters

While the benefits of aggregating financial data are exciting, treating this data in accordance with the law should be the first priority. And a financial data aggregator that is a consumer reporting agency (CRA) protects the interests of consumers and financial service providers while also following regulatory requirements.

CRAs are credit bureaus and other data aggregators that collect consumer information. Financial service providers then use this information to approve consumers for credit products. CRAs must remain compliant with the Fair Credit Reporting Act (FCRA), which protects consumers from incorrect or outdated financial data. If an individual applies for a lease and the landlord rejects them based on their credit report, they have the right to request the report from the agency that provided it.

Financial service providers that rely on CRAs to do the data aggregating for them are protected from violating regulations since a CRA, such as Pinwheel, is responsible for the quality of payroll data it provides. However, obtaining data from an aggregator without a CRA status opens doors to FCRA violations. Penalties for violating the FCRA include fines in addition to actual and punitive damages.

Data aggregators are driving innovation in consumer finance

There’s no doubt that data aggregators are enabling innovation in consumer finance. Proptech companies are now using APIs to simplify income and employment checks for prospective tenants. Lenders are able to improve their underwriting models with data that can help them better determine a consumer’s risk. But this is only the beginning, and we can expect to see many exciting new use cases arise in the future.

Data aggregation helps banks and fintechs innovate not just to remain competitive and increase their share of wallet but also to improve their services for the end-user. This means creating a personalized user experience, giving customers the tools to manage their personal finances, and helping them improve their financial situation through fairer banking products.