From open balking to open banking

Banks have long embraced the idea that they must evolve technologically or cede ground to slick fintechs and fast-moving competitors. But when it comes to fully opening themselves up via open banking, many U.S. financial services organizations have balked.

The open banking concept involves financial institutions creating application program interfaces, or APIs. Open banking allows for banks to share data with third-party companies in real time through these APIs, which act as the glue to connect multiple systems into one efficient platform. You can think of the ride sharing application Lyft, which uses APIs to synchronize maps, payments and texting in one application.

Banks have traditionally acted as gatekeepers of customer financial data, facilitating most exchanges of money. Yet from the customer perspective, open banking creates the ability to easily share data with third parties; compare, analyze and manage accounts more effectively; and ultimately make more sound financial decisions.

It’s not as though the European Union’s foray into open banking has inspired confidence among America’s financial services organizations. As of January 2018, the EU’s second Payment Services Directive (PSD2) ordered banks to allow third parties—including digital startups and challenger banks—access to their customers’ financial data, including transaction history and spending patterns.

The rule is seen as ending the banking industry’s longheld grip on payment services and as a catalyst for a potential revolution in retail banking. Yet the reaction of banks was described as “subdued” even as consumers continued to worry in a more general sense about data security.

Consumers believe that privacy is paramount, with three quarters (75 percent) saying they are very cautious about the privacy of their personal data, according to Accenture’s 2019 Financial Services Consumer Study, based on a survey of 47,000 consumers in 28 global markets.

And eager to manage customer relationships and data as completely as they can, U.S. banks have historically shown more reluctance to allow outside control and manipulation of that information. But open banking is already happening, even as consumers remain security conscious and some bankers in denial.

Open banking on the move

For all their privacy and safety concerns, consumers also clearly want banks to do more with the data they have, as BAI Banking Outlook research indicates. For example, they would like to see financial services organizations make better use of consumer data to improve product and service recommendations.

In the United Kingdom, government officials hope to incite greater competition in the banking sector, encourage new product development, bring in new disruptive players and provide consumers with more choice and better deals. And consumers have responded in kind. Yolt, an app that syncs credit cards and accounts to monitor spending and upcoming debits, had more than one half million registered users as of the start of 2019—and 900,000 just six months later.

And more than a year before the initial PSD2 deadline, Spain’s BBVA, opened up eight APIs to third parties and has since added more than a dozen others. BBVA also offers an open platform sandbox with API design; one platform webpage features case studies on five fintechs involved in the initiative to run integration and business models in a safe environment.

Safety matters

Before overseas banks received a firm nudge via PSD2, aggregation websites such as Mint offered customers a broad view of their financial accounts across institutions. Yet these aggregators require users to enter all their usernames and passwords. That information is then screen scraped and collected into one dashboard. Some open banking proponents believe this old-school process presents major security risks.

And security in large part causes U.S. banks to worry. 

While mandates and security infrastructure protect open banking in Europe, the U.S. financial services system is more market driven—at least for the time being. Irrational as it may sound, many bankers fear that making customer data available via APIs will put this sensitive information at risk of being stolen by competitors and fraudsters. They see no upside to sharing.

Yet the same consumer demand that’s pushing open banking in the EU is bound to have an effect here. Despite the many concerns, open banking is in motion and no one can afford to ignore it. Opportunities may exist if financial services organizations are willing to consider them proactively. At least in theory, U.S. banks could charge a subscription fee for businesses to participate in an API while gaining exposure to potential new clients from the subscriber.

Putting it all together: Here’s what we know

BAI has provided the industry with banking research and data for years, and we’ve garnered valuable insights along the way. I believe this experience will help us provide valuable thought leadership on how banks can evaluate and succeed in an open model. As we’ve shared our proprietary data, we’ve learned to operate under common-sense rules and constraints that ensures the security of the information. At the same time, our benchmarking framework has taught us much about how data can be effectively organized and shared.

For these reasons and many more, BAI will continue to monitor open banking with great interest and will put forward our best actionable insights along the way. BAI also stands for innovation. Following the development of open banking reflects our commitment to provide trusted information that empowers leaders to make smart decisions, drive positive change and move the industry forward. To that end, the bottom line is clear. Open banking is changing how the financial services industry conducts its business, just as mobile technology and the internet did when first introduced.

Banks may have well-founded concerns about how open banking could compromise their data resources, whether to competitors or criminals. In reality, unfamiliarity and fear are partly at work. Regardless, standing still in the face of change is not a viable option. With the revolution already under way, open banks and closed minds do not make for a good mix.

Karl Dahlgren is managing director of Research at BAI.

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