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Customer demand is driving open banking adoption

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If customers own their banking data and can decide how it’s used, what does that mean for banks and credit unions?

David Foss, CEO at Jack Henry & Associates, joins us to discuss open banking and the scale-defying opportunities it can provide for regional and community institutions.

A few takeaways from the conversation:

  • Resisting the open banking trend risks losing customer primacy; embracing it can help banks deepen the relationship.
  • Open banking can serve to offset to some degree the scale-based challenges that smaller banking institutions face.
  • One way to take advantage of the open banking opportunity is to build a strategy around a unique or specialized capability.

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Below is a full transcript of my interview with David Foss.

Open banking promises to remake how banks think about customer data, and in that remaking, there’s both opportunity and risk. Joining us this week is David Foss, CEO at Jack Henry & Associates. He’s here to offer his views on open banking – where it is now in the U.S. and where he thinks it’s heading. Dave, happy to have you as a guest on the BAI Banking Strategies podcast.

Thank you, Terry. I’m happy to be here.

Dave, start us out, if you could, by giving us a snapshot of where things stand with open banking in the U.S. as you see it.

Open banking is an interesting topic because most people believe that open banking is just starting to emerge in the United States and, in reality, there’s a lot of activity around the topic of open banking in the U.S. Not only is there consumer demand – consumers have been driving this – but there’s been a lot of activity in fintech to try to take advantage of the concepts behind open banking. You have bankers on one side who are concerned, I guess, that open banking will potentially create a door for them to lose customers, but the reality is, today in the United States, there is much more activity than in Europe. People tend to think of Europe as being the hotbed for open banking, and all this stuff is going on in Europe, but in reality today there are 60 million accounts connected through open banking platforms in Europe. In the United States, there are 200 million accounts through Plaid alone. That doesn’t count all the other providers in the United States. There’s this real disconnect between what people think is happening in the U.S. versus Europe and what is really happening in the U.S. versus Europe when it comes to the topic of open banking.

Wait a second here. That answer comes as a surprise to me – the notion that there’s more of an embrace of open banking in the U.S. than there is, say, in the U.K. or Europe as a whole. Everything I read suggests the opposite, so let’s make sure we’re talking about the same thing here, open banking being the idea that consumers control their data and they control how that data is shared with different financial services providers. Is this what we’re talking about?

That is what we’re talking about. The thing I think where there’s confusion is a lot of people mix open banking with open connectivity. Open banking is exactly what you just stated – where the consumer controls their data, the consumer decides who they want to share their data with and in what form they want to share their data. That is open banking. Where there’s a lot of confusion and concern in the U.S. is around the topic of open connectivity. Open connectivity is when you have a financial application, whether it’s from a company like ours or anybody else, you need the ability to connect that application to other applications in order for the data to become meaningful. For example, think about a bank, which houses all kinds of data. Now if you have an app on your phone for that application to be meaningful, you need access to some of that data at the bank, and you need open connectivity in order to facilitate that. As an example, at Jack Henry today, we have open connections between our platforms and more than 850 fintechs to establish that open connectivity. Once you have open connectivity, then open banking becomes a reality. But the foundation is you have to have open connectivity supported by the financial technology providers in order for it to be meaningful.

Let’s stick to open banking as I defined it in the previous question. The idea that the customer owns their banking data has really been picking up momentum in the past few years. What do you think is driving this evolving thinking about who owns the data? Is it a result of the disintermediation that we’re seeing from fintechs and neobanks? Is it arising out of the privacy concerns that we hear more about as well? Is it that or is it something else altogether?

It’s an interesting thing because it’s been an evolution. Where much of the conversation around open banking started was with the evolution of what’s called PSD2 in Europe. PSD2 mandated that banks in particular had to provide access to data and had to enable the consumer – the customer – to control that data. It established that the customer owns the data, not the financial institution. The customer should be able to decide who has access to that data and in what form. That was, I think, the beginnings of all of this was the evolution of PSD2. Now, as that’s become a big topic worldwide, I think fintech have taken advantage of that, and I don’t mean that in a negative sense – I mean in a positive sense. Fintechs have taken advantage of that discussion and have created this talking point with consumers about, “Hey, it’s your data. Who owns that data? Shouldn’t you be able to control where that data goes and when it goes, and shouldn’t you have more control over your privacy?” I think it’s been this evolution from PSD2 to it becoming a talking point for a lot of fintechs. It’s become a talking point in the news. People, with the rise of concern about security and ransomware and hacking and all that kind of stuff, all those things have come together to create this real focus by consumers on the idea of sharing my data, the fact that it’s my data and I should be able to decide who gets that. I think all of those things have come together to create this demand that we see today for open banking.

We’ve been talking about the control of the data, but let’s talk a minute about the value of data. Most people in the industry seem to think that data is a pretty valuable treasure for banks, but I’ve heard some make the case that that value may be a little overstated – that, for instance, it can be hard to put to work because there’s so much of it, that it’s stored in isolated silos that are hard to match together, that it can be perishable and so on. Dave, where do you come down on the value of customer data that’s held by banks?

It’s a big topic and it’s an interesting topic. I think there is tremendous value in the data, but you have to know what to do with the data in order to leverage that value. For example, most banks have struggled with the idea of maximizing that data, creating actionable intelligence out of that data that you can use to help the consumer or to drive business or whatever it is. This is where I think fintechs have come in and many of them have focused on the data, focused on some niche of that data and trying to figure out how to make it more usable, how to make it more friendly to the average customer to help them improve their financial life. But in order to really leverage the data, you have to have a data strategy. You hear a lot of institutions talk about standing up a data lake. Data lake is a whole bunch of data from a whole bunch of different sources that you can connect together and provide actionable intelligence based on what you see there. Those are big projects and you have to have a lot of focus and you have to have a real intent before you get into something like establishing a data lake and trying to use that data to create a more informed customer based on that data. The value is there. I absolutely agree with the idea that the data is valuable and it can be leveraged for the benefit of the customer to really help them improve their financial life. The challenge is you’ve got to have a strategy at the bank that really defines “What are we going to do and how are we going to do it?” A lot of institutions that struggle with that.

Looking out at the regulators, the CFPB, for one, has said that it’s concerned about what big tech companies might do if they had access to consumer financial data and that’s slowing down progress for open banking. But many banks aren’t waiting for the regulators in preparing for open banking, on the other hand. Given the myriad other things that are already on their plates, why would these institutions be getting busy at this point before they have to and before the regulators have put rules in place?

The challenge for the average financial institution today is around the topic of disintermediation. There is a lot of disruption that’s happening in our space as a result of all these fintechs that have figured out how to take advantage of data. The CFPB has been very focused on big tech, the major technology providers in the United States. But there’s a lot of not-big tech, smaller tech, that has been taking advantage of these opportunities. We commissioned a study last year with Javelin, and what we determined was that the average customer has between 30 and 40 financial relationships. You first hear that number and you go, “How can that possibly be?” But just think about your own life, Terry. You probably have an application on your phone for whoever your bank is, whoever your primary banking relationship is. If you have a mortgage with somebody else, you probably have an app for that. You probably have credit cards that are issued not by your primary bank, but from other banks. You may have apps for those things. You probably have an investment account or in a 401(k) account, and maybe an HSA account. As you add up all those things, that’s the average person has 30 to 40 different banking relationships. As banks have realized this, they’re trying to figure out, “How can we bring some of that together and we become the center of the financial life for the customer?” You put that together with what’s happening with Gen Z and millennials, they tend to gravitate towards whatever is the quickest and the easiest and the most tech-forward. So I’m not necessarily going to do banking just with my bank – I’m going to do banking with whoever has something that’s really cool and usable when it comes to an application. Put all those things together, there is this movement among banks trying to figure out, “How do I solve that problem? How do I become the center of the financial life again for my customers? How do I do that in some way that is “elegant” to the end customer?”, meaning we allow them to take advantage of all this cool stuff that they’re using, but also have that closely connected to what the bank is providing, so the bank can become, again, the center of their financial life.

What you were saying in that answer gets to the crux of the issue here, and that’s for banks, their main concern here is the risk of being disintermediated, the risk that they will no longer have primacy in the relationship with their customers. It sounds like you’re saying that they figure – the banks I’m talking about here – they figure that open banking is coming for sure, so maybe it makes sense to get out ahead and start adapting to these new ways.

I think for most banks, they feel like they don’t have a choice. It’s happening. Open banking is coming. It’s here already, and it’s going to only become more of a topic in the United States. Customers are going to have access to the data that I have within my bank, whether I like it or not. There are all these fintechs out there that are evolving, and customers like them – they like the experience that they have with these fintech solutions. Now, how do I solve this problem of potentially losing customers to those things because of open banking, because of the rise of all these fintechs? How do I solve that problem? One way to solve the problem is to create relationships, whether they’re close partnerships or relatively distant relationships, with these different solutions out there so that I can pull information together – hopefully a single presentation layer — for the customer so that they can start to see everything in one place. Another result of that Javelin study that we did: 125 million respondents reported being financially fragmented or financially unhealthy. What that’s coming from is the fact that they’re using all these different things that are spread all over the place and there’s no way for them to see their financial picture anywhere in one place, and that’s being driven by open banking and by this rise of these fintech applications. If the bank can help solve that problem and help address their concern about financial fragmentation, that can really put the bank front of mind again for that customer.

The main discussion of open banking centers on the consumer owning their data, as we’ve been talking about, and being able to share it as they see fit. Okay, the customer gets to decide, but I’d imagine it’s not quite that simple. I mean, there will almost always be entities that will be trying to get consumers to share their data for shady purposes or even for fraudulent purposes. Is there a role for banking institutions to play in helping customers make good decisions when it comes to granting permission to access the consumer data?

I think there is. Again, if the bank is able to position themselves as the center of the customer’s financial life, that then can give them a platform to help that customer make decisions. The thing I think that’s important to know in all of this is, in a true open banking environment, the customer decides how and when they want their data to be shared and they can decide when they want to revoke those permissions. It’s not a matter of, “Okay, I’m going to share my data and now I can never go back and change my mind or do something different.” The customer can control that data and decide what they permission and what they don’t. The other thing is the real positive in what’s happening here is this process that we’re going through eliminates screen scraping. Screen scraping is old technology, but is still very present in the banking world where, let’s say you have an investment account, you go to the investment account you provide to a third party your password and username, and every time you want to aggregate data, they use that password and username through what’s called screen scraping to pull data down. It’s essentially an automated way of logging in, pretending that it’s you, but they’re just pulling data down. Think about all the security issues in something like that, where you don’t have any control over what’s happening. That’s the old way of doing it. The new way of doing it in an open-banking environment eliminates screen scraping and puts the control in the hands of the customer. It’s a much better environment, but definitely the bank can play a role in helping advise customers on how and when they should be taking advantage of those open-banking concepts.

Where does scale fit into this? We hear all the time about the need for scale to compete in today’s banking environment. It’s what’s behind the explosion of M&A in banking in recent years that we’ve been seeing, setting new records every year it seems. It sounds like you’re making something of a counterargument to the idea that scale is destined to be the be-all and end-all in banking. Is that an accurate way of interpreting it?

That’s very intuitive. You’re absolutely right. The interesting opportunity here is that scale isn’t the key thing in this equation. In fact, what we’re seeing already is a lot of banks are building a niche strategy around some of these concepts. Think about what’s happening with digital banking. I’m sitting in Dallas today, so I could be running a bank in Dallas that serves the community of Dallas and Fort Worth. But now with digital banking, with open banking, and with the connectivity options that I have, I can define niches of customers based on expertise that I have within my financial institution. I can define niches of customers, and I could potentially serve those customers nationwide or even worldwide, taking advantage of some of these concepts that you and I have just discussed today. It creates huge opportunities for some smaller financial institutions that can create a niche strategy and grab market share based on their niche strategy, not based on the fact that they’re a great big bank with a branch on every corner. It’s more about marketing and focus and creating a strategy, taking advantage of some of these concepts and the rise of digital banking that’s really exciting.

Dave, let’s finish up by getting into some specifics about what some smaller banks, community level banks, what they need to do to take advantage of the open banking opportunity, beyond teaming up with fintechs, which you mentioned earlier. In your view, where do they start and what do they do after that?

The first step is to identify what unique capabilities do you have within your financial institution that most other institutions don’t have. Now, whatever that capability is, and sometimes people don’t realize how significant or special the things that they know how to do might be, but identify that skill or that kind of area of expertise that you have within your financial institution. That’s step number one. Now, what could I do to create a strategy? That includes a marketing strategy, and it may include some kind of an online presence, but what can I do to leverage that skill set that I have within the four walls of the institution to really go in and create a much larger presence for my financial institution? I will tell you recently, and we follow surveys regularly around here, recently about 85% of financial institutions surveyed said that they were trying to think these things through now, and they were prioritizing within the next couple of years some way to create a niche strategy. I think that’s really exciting for community and regional banks to leverage that skill set that they have to go and create new markets. But it all starts with strategy. One of the things I talk to bankers about a lot is, you don’t start with the technology. Start with the strategy. Start with the skills that you have within your institution, and now figure out, how do I leverage those to create a new opportunity for the financial institution and now figure out what technology I need in order to do that – new niche strategies and executing on those using technology, tools and open banking.

I’m sure it’s tempting to look at available technology first and then try to reverse-engineer your way back to those early strategy decisions. But a first things first approach seems like it might work better. David Foss, CEO at Jack Henry & Associates, we appreciate you making time to be with us on the BAI Banking Strategies podcast.

You bet, Terry. Thank you for having me.

Terry Badger, CFA, is the managing editor at BAI.