There’s a new buzzword on the block – Open Banking, which has been moving the needle for many financial institutions. It marks the end of banks’ monopoly on customer data: with open banking in play, banks give up their right to be the primary keepers of their customers’ financial data as that financial intel becomes available to other industry providers and Fintechs as well.
Let’s explore all the ins and outs of open banking, what it means for financial institutions and what they can do to adjust to this new era.
So, How Did Open Banking Come to Life?
Open banking takes root in Europe, thanks to regulation, specifically PSD2 (Payment Services Directive) which obligates banks to share their customers’ financial data with other authorized TPPs (or Third Party Providers) via APIs – and it has to be done no later than September 2019.
More than that, according to PSD2, both banks and TPPs must apply strong customer authentication (SCA) methods like two-factor authentication and authentication codes.
Open banking may have started in Europe – specifically, the UK – but it has already made its mark on the world.
Open Banking Regulation in the U.S.
By no means open banking is unheard of in the U.S. – as we’ve seen many data exchange partnerships forming in the recent years between different financial providers (Wells Fargo and Finicity, for one).
However, US legislation is more of a federal-level game, with laws set on a state-by-state basis.
When it comes to specific regulation, the authorities in the U.S. seem to be fonder of a hands-off approach: no regulator has issued prescriptive nationwide, wholesale requirements. Instead, they issue nonbinding guidelines and provide guidance for open banking, letting the industry develop freely. It very well may be that the nation is facing this reality partially because of a quite complicated network of legislative bodies, in which there are several authorities with overlapping responsibilities.
For instance, you’ve got a set of data sharing principles from the Consumer Financial Protection Bureau (or CFPB) from 2017 as the driver for open banking. In a nutshell, these non-binding guidelines relate to the access and use of consumer data, addressing issues like customer data security, transparency regarding data collection and storage, and data disputes resolution.
In the same year, the National Automated Clearing House Association (or NACHA) has climbed on the bandwagon as well by setting up a working group with over a hundred banks and other financial service providers, such as Accenture, to publish a set of standards that discuss account validation, account data information, fraud prevention, bank contract APIs, and more.
There’s also the Federal Financial Institutions Examination Council (or FFIEC) that has published a set of guidelines on topics such as retail payments and tech services outsourcing.
Keep in mind, though, that unlike PSD2 in Europe, these guidelines aren’t mandatory, and can be classified more like market initiatives – banks in the U.S. still have the prerogative to decide with whom to share their data and who should be left on the outs.
What’s Possible with Open Banking APIs?
When we’re talking about open banking APIs, millions of opportunities come to mind, not only for TPPs and banks but for customers themselves:
- Payments made quicker – Customers skipping the stage in the payment process where third parties take time to clear payments, which makes payments a quicker, simpler, and more transparent
- Making informed decisions using data – TPPs using open APIs to access customers’ financial data like basic account info and using their customers’ financial history and other relevant data to make informed decisions and help their customers with transactions, account management, etc.
- Different interface – Customers viewing their financial data in one platform and interface and using the platform to reach out to various financial institutions and TPPs.
- Better processes – Using open APIs to validate account information and systematize authentication processes among financial institutions and TPPs. For example, making fraud alerts notification systems more seamless between different players in the financial industry.
Why Open Banking Brings Great News to Banks?
With open banking gaining momentum, banks should focus on making the most out of this newly established game in the financial industry and avoid perceiving it as a compliance burden because business opportunities are endless.
Open banking is a fantastic opportunity for banks to expand, innovate their product range and offer services with extra value to their customers – and one of the best parts about this is: they don’t have to build or maintain those services themselves.
It’s the innovative products and services with added-value that result from such partnerships that help banks stay relevant in the eyes of their customers, who have become very demanding in today’s expectation era. Such products help banks identify customer expectations and preferences, deliver personalized experiences, and improve customer loyalty.
Open banking also means new revenue streams and presents a chance to offer a sustainable service model to different underserved markets. India’s RBL Bank is a case in point: the bank has successfully expanded its partnership with non-banking financial institutions and Fintechs like Wirecard to “drive financial inclusion in India.”
Open Banking in Action
In the absence of nationwide regulation in the U.S., market forces become the beacon for open banking. The path is open for different players in the industry with compelling products to pave their way and fill the void in the industry – and we’ve seen several successes already:
Take Yodlee, for instance. It connects users to all financial institutions in the U.S. via a single API. You’ve also got Plaid whose banking API is open for third parties and it connects with more than 1700 financial institutions, allowing account access and authentication.
Such providers not only help move open banking towards a wider adoption in the U.S., they also make it easier for Fintechs to roll out and, ultimately, improve customer experience.
Open Banking Has Its Challenges and Concerns
Open banking has a lot to offer, but let’s not forget that it does bring a bunch of challenges and concerns to the table as well.
The thought of your own financial data reaching some unknown provider gives you chills. This and the fact that open banking makes it easier for fraudsters to access customer data only show how crucial regulation is when it comes to open banking. It’s vital for financial institutions and TPPs to be on the same page regarding the matter and be ready to adjust authentication levels to the risk of the service provided.
Also, open banking blurs the boundaries of responsibility when it comes to customers’ data security since you have many parties involved. Considering that, it’s crucial for banks to carefully review their contracts with TPPs and customers to ensure that clear, well-defined compliance responsibilities are in place.
Banks should also concentrate on improving their ability to respond quickly if they suspect that a TPP has been attacked and data has been compromised. Seamless, clearly defined procedures should be in place, and banks should be capable of blocking the TPP in question.
On the bright side, open banking is bringing a new financial ecosystem to life that can change the way banks approach their products, marketing, and security. This ecosystem will be full of start-ups, service providers, banks, Fintechs that want to get to know their customers better to enrich user experiences.
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