As the Payments Services Directive 2 (PSD2) and the U.K.’s Open Banking Standard pioneered open banking in Europe, many regions’ policymakers look to mimic this success. However, we must be careful about overindexing on the European experience when considering the U.S. financial services market given the sheer number of financial institutions operating in a comparatively decentralized model.
That said, when thinking about how the adoption of open banking in Europe can influence the U.S., two lessons jump out.
First, U.S. regulators need to mandate a position. The initial iteration of this was the passage of the California Consumer Privacy Act (CCPA). European banks didn’t commit to the extra work to adhere to open banking standards to drive client satisfaction. Instead, financial institutions responded to an imposed regulatory burden vis-a-vis General Data Protection Regulation (GDPR) and PSD2.
The second lesson we can learn from the European adoption of open banking is that we’re beginning to discern between use cases that hypothetically seem good but may not have a practical application versus those use cases that provide genuine market utility.
For example, open banking has been a boon for third parties that connect, analyze and distill banking and enterprise resource planning (ERP) data for the benefit of small business owners seeking new credit facilities, adhering to financial covenants or trying to better manage their cash flow.
Conversely, we’ve not seen a great proliferation of the garage-based tinkerers creating new financial widgets to be embedded within digital banking services. This is not to say they’re not coming, but because they’re not low-hanging fruit, they would require more time and resources to develop.
Instead of looking outward to mimic Europe, the U.S. should start by looking inward. Fragmentation is a barrier to adoption in the U.S. market, though we’ve seen that challenge beginning to resolve itself as more players rally around emerging standards like Financial Data Exchange (FDX) and Banking Industry Architecture Network (BIAN).
That said, these standards are still nascent and yield insights into the challenges of creating a single way to distill disparate data requirements in a space with tens of thousands of participants and no direct guidance toward standardization. Even to open a checking account in the U.S. today, banks differ in the information they seek and in their interpretation of regulatory requirements and business risk preferences.
So, what’s a bank to do? The answer, as always, is “it depends.”
If your bank is using dated technology and has no intention of transforming digitally or otherwise over the next few years, then you’re all set. Just make sure your vendors are squared away for forthcoming CCPA requirements and keep focusing on meeting your quarterly earnings forecasts.
But if your bank has a passion for growth and the desire to innovate and reinvent, here are a couple of steps you can take now.
Make your data useful
Move data out of the disparate systems across your organization and into a data lake or warehouse where a business intelligence tool can drive powerful insights into your customers. Your goal should be to know them well enough to understand their specific needs, then to be nimble enough to deliver the resulting message, offer or opportunity at the moment it is needed.
Develop an API strategy
This might be painful to hear, but you may have to get rid of your bank core and digital platforms. Yes, it will be a challenge and yes, it will impact your existing “top-priority” technology projects. If you just can’t imagine that lift, a lighter-weight alternative is to wrap your existing tech stack with a middleware, provided you’re OK with the data and speed limitations of the underlying systems.
The goal of either of these activities is to be able to leverage APIs for the purpose of powering partnerships with innovative service providers, and extending banking services to non-bank partners so that they can market those services to new customer bases on your behalf.
This is the pot of gold at the end of the rainbow for the enterprising financial institution. Open banking is about much more than just customer data ownership. It’s also about how some banks are going to position themselves to thrive for years to come.
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