Data sharing is capable of bringing wider societal benefits

Access to data is increasingly important in ensuring that financial markets work effectively for consumers. It helps firms supply the services customers need and want, it allows more tailored and innovative services to be developed, and it helps consumers seek out the best firms, and firms seek out the most appropriate consumers.

Here, we focus on the potential positive externalities of data sharing and how we might unlock the wider value of data, while also being mindful of the challenges highlighted in the previous Insight article.

Data can have the characteristics of a public good – it creates benefits for society as a whole and those benefits increase the more data is used and the more widely it is dispersed.

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Data has been described as the ‘new oil’, but in one regard it is quite unlike other commodities. Data is not ‘used up’ when it is accessed or exploited. This can mean that, from a common good perspective, it can be efficient to make data available for free at the point of use for appropriate use-cases.

The aggregation and dissemination of data can have diffused social benefits, for example in the use of “track and trace” data to understand and control the Covid-19 pandemic. By allowing our health and location data to be combined with that of other individuals, we help researchers compile a data set that can be used to understand how Covid-19 is transmitted across the population, and to identify which individuals need to self-isolate.  The value of this data set is greater than the sum of its parts, and it accrues more widely than to those whom the data is about.

Data sharing can also be a driver of innovation and help new firms to enter markets. New products and applications can in turn create more data, which be used by other firms, creating a virtuous circle.

However, these very same characteristics pose challenges in the incentives to collect and collate data -  if it is available at no charge, then it may be undersupplied by private firms as the value of data is not always fully captured by those who own or create it.

Firms can sometimes capture this value – for example by making it available to innovators seeking to develop services that complement and enhance the value of the services provided by the data owner. But they may also hoard data particularly where there is a strategic advantage to doing so, for example, in preventing firms from creating substitute products or in order to sell exclusive use of it to the highest bidders. This is further complicated with multi-sided platforms, like financial exchanges, where market competition may lead to expensive data and cheap (or even subsidised) activities that generate data. The FCA’s Call for Input on the use of and access to wholesale data starts the conversation on this issue.

Might individuals' concerns for privacy stand in the way of the benefits from data sharing?

Capturing the full economic and social benefits of data sharing will also require that privacy concerns are overcome.

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One challenge here is that privacy also has public good characteristics – a lot of private data in fact contains information about a wider group than the individual. If an individual reveals private information about their self, for example that they have been victim of a spate of burglaries, that may also reveal information about their neighbours: they live in an area targeted by thieves. This could, for example, affect their neighbour’s insurance premiums.

So, while giving up some privacy can have a positive benefit on society by allowing data to be shared and aggregated, it potentially also has a negative externality on certain groups, by undermining the privacy choices of others.

This illustrates the complexity of social issues around data sharing, and that providing consumers with informed consent and protection over how their data may be used, may not be sufficient to solve these problems, particularly where privacy is highly valued or where the public good benefits of wide dissemination are substantial.

The role of trust in financial services

Trust is a prerequisite for a well-functioning competitive market. It gives consumers confidence that they will be treated fairly, allowing more mutually beneficial trades to take place.

Trust between financial service providers – for example, that interbank loans will be honoured – is also critical for the liquidity and stability of the financial system.

Trust in financial institutions, and in the services they offer, is provided in a number of ways. It can be provided by the firms themselves through investing in brand and reputation, through intermediaries such as credit reference agencies and auditors, and by regulatory supervision.

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The financial crisis dealt a blow to trust in the financial services sector and recovery has been slow, with a series of scandals ranging from illegal price fixing to lax money laundering controls and product mis-selling.

Can new forms of trust emerge?

There are signs of new forms of trust emerging, many of which rely on trust being provided by new intermediaries. These include technological solutions, such as distributed ledger technology (DLT), and blockchain, which provide the possibility of third party verification of transactions.

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