One of the hottest topics in banking these days is “open banking.” In open banking, banking data is shared through APIs (application programming interfaces) between two or more unaffiliated parties to bring enhanced financial services capabilities to the marketplace. Open banking is about to transform the financial services industry in Europe and the UK, but is still nascent in the U.S.
Government Mandates in Europe and the UK
In Europe, a government directive called “PSD2” has declared that banks must make their customer data (from both businesses and consumers) available to other parties with the customer’s explicit consent. With a compliance deadline of September 2019, PSD2 will enable fintechs and other non-bank providers to aggregate banking data to provide new and/or enhanced financial services. The UK’s Competition and Markets Authority has done something similar by giving consumers ownership over their data; open banking has since spread rapidly there.
While open banking is racing toward ubiquity overseas, it will take hold more slowly here in the U.S. A government mandate is unlikely to happen here, especially given the scale required in a market of 12,000+ financial institutions. Savvy banks, though, are moving into open banking because they see the opportunity that lies in early adoption.
Potential Benefits to the Industry
Open banking has the potential to bring numerous, substantial benefits in the financial services market, including improved customer experience, new revenue streams, and a sustainable service model for underserved markets, according to an article by McKinsey & Company. In Europe, vast numbers of fintechs now have the freedom to solve longstanding pain points in financial services. The fever for innovation, however, must be tempered by caution, as banking is still a highly regulated industry.
Here in the U.S., banks can seize the open banking opportunity by legally or technically blocking free access to their customer data and/or APIs, and then charging third parties for access. They can leverage their status as trusted agents to partner with lesser-known fintechs and other providers to deliver innovative new services through APIs. Companies like Xtensifi, for example, could partner with banks to provide microservices to corporate customers via banks’ cash management platforms, especially since many banks are migrating to new platforms. This arrangement could pave the way toward the Holy Grail of digitizing and monetizing B2B payments.
Preparing for Open Banking
Some banks understandably feel threatened by open banking; after all, they have spent countless dollars collecting and safeguarding their customers’ data and are loath to give it up to third parties. But open banking is coming, whether banks like it or not. Firms like Chase and Wells Fargo are already putting things in motion. To prepare, they should start to explore data-sharing agreements with fintechs and non-financial services firms. It would also be beneficial to begin developing a plan and strategy—even if it’s a defensive one—for APIs, open banking, and their potential effects—good and bad—on the bank’s service model. From a technology perspective it may not even be that complicated, like layering an Open Authentication service in front of an OFX implementation like Chase did. Banks that begin this process now stand to gain the most from the coming tide of open banking.