Fundamentally, open banking is “part of the overall open data movement—science, government, finance. The premise is that sharing data can accelerate innovation and create new forms of value in the market from others who use the data,” said Eric Marts, industry principal, banking and payments, at software giant Red Hat. “It has been put forward in many markets as a means to increase financial inclusion through increased competition in the context of the banking industry.”
More simply, open banking offers consumers “more convenient ways to view and manage their money and simpler ways to access credit or personalized deals and rewards,” according to Hayden Harrison with Mastercard, which published an “essential guide” on the topic. This sounds good, but here’s the rub, according to Harrison: It is “poised to transform financial services, with the potential to disrupt traditional financial services providers as more specialized and targeted services come online.”
Open banking is well underway in the U.K., and momentum is building elsewhere in Europe and inEast Asia. But with such disruptive potential, it’s no surprise that open banking has seen slower tractionin the U.S., a nation known for tradition-steeped banks entrenched in operational silos. Still, according to Marts, who has more than 20 years of professional experience across both startups and incumbents, the U.S. has a long history of data sharing in the banking industry, sometimes referred to as market-driven versus regulatory-driven open banking. Plaid and others came on the scene about a decade ago and provided a way to connect banking information with third parties, he said, but “it was based on screen scraping and other techniques that potentially put the data and customer at risk.”
However, he doesn’t think this has slowed adoptionof third-party applications connecting with banks. Infact, partnerships between banks and nonbanks are very extended across the country, he added. The pluses of open banking, he said, start with data protection. “For customers and institutions, there is greater protection on the data that is shared. This is because it typically mandates the use of APIs instead of screen scraping. It also establishes formal controls on authentication, authorization and consent, which are typically stronger than what is found in the market,” he said. “Customers will control the ‘scope’ of the data that they want to share, not an ‘all or nothing’ like screen scraping does.”
Consumers should also see increasing options on how their banking data is used by third parties, Marts said, adding that there are already great examples in consumer lending, finance management, taxes, payroll and payments. “Digital continues to reshape the economy and the way consumers want to interact with it,” he said. “This is reflected by ‘embedding’ banking into consumer experiences, in everything from buying homes and cars to making deferred payments with their favorite retailer.”
But, there are still risks. Partner risks mean that banks will have to bolster their compliance function to cope with onboarding and monitoring new partners. There is also commercial risk in that banks can potentially be commoditized. Finally, Marts said, there’s data risk. “Inevitably, criminals will use these access points to attempt to perform criminal activity. Banks will have to step up their defenses to protect themselves.”
In June, the Consumer Financial Protection Bureau weighed in on the topic. The government agency “is working to accelerate the shift to open banking through a new personal data rights rule intended to break down these obstacles, jumpstart competition, and protect financial privacy.” To do this, the CFPBsaid it is formalizing an unused legal authority enacted by Congress in 2010. This authority gives consumers the right to control their personal financial data.
These rights will become a practical reality after the CFPB implements a rule that sets expectations forthe market. It expects to solicit comments on a formal proposal later this year and finalize it in 2024.
The agency recognizes its important role in the situation. The “CFPB must resolve certain core issuesbecause system participants are deadlocked or because existing approaches do not put consumersfully in the driver’s seat,” the agency noted. “Properly pursued, such standards can allow open banking to evolve as new technologies emerge, new products develop, and new data security challenges arise.”
Healthy relationships: Open banking requires a healthy relationship between banks, third-party service providers and other organizations that offer specific services to customers. It points out that a “healthy relationship is not an easy thing to achieve, particularly when one side, in this case, the banks, holds the balance of power.”
A framework for ethical use of personal data: Because open banking is all about data, the ethical access, use and sharing of data is therefore critical to the success of open banking and open finance ecosystems. The consultancy points out that “the industry and regulators must work together to develop an easy-to-access system of redress that is matched with serious penalties for companies that abuse consent or mismanage the collection of data.”
Supporting digital and financial inclusion: This support has to be a key feature of open banking. Banks must promote and partner with organizations that are specifically serving the financially and digitally excluded. They then must continue that relationship with funding and support for startups to enter the market and grow. Attention should be placed on creating analog access to open banking to ensure that the digitally excluded, and those who are less confident using digital services, can also realize the benefits.
Good regulation: Finally, whether a country is implementing a regulator or market-led approach to open banking, it’s necessary to have good regulation to ensure that all of these actions can be achieved.
Overall, the key to adoption and success is to get the general public on board. “Open banking will be brought to light using the consumer satisfaction route. Improvement of life is one of the many reasons for technological advancement, as this is a significant way to get consumers to buy into the advancement,” said Mark Stewart, an in-house accountant for Step by Step Business. “This has to be the path that open banking will take because no one will willingly choose to allow their financial information to be transferred if it doesn’t do them any good.”
Marts, who helped shape global solutions in the retail banking and wealth management business at HSBC, also thinks that consumers play a key role in the future. “The future of banking goes to serving and selling to customers wherever they are, and whenever they want,” he said. “Having open banking rules is, without a doubt, a good step to the path forward.”
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