Open Banking – Time to Pay Attention?

Howard Schulman

“Open Banking” is an emerging trend designed to enable third party providers, whether another bank, payment processor, FinTech startup, or creative app developer, to provide a wider variety of new financial and complementary services.

With Open Banking, banks can securely provide other banks and third-party providers with seamless access to, and communication with, customer data through Application Programming Interfaces (APIs).

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Regulators May Force the Hand of US Banks

Although the concept of data sharing with third-party providers is not entirely new to the US banking industry, the method of data sharing has mostly been through a less secure and integrated process called screen scraping rather than through open APIs.

Further, any data sharing is based on mutual agreements and not required by legislation.  By contrast, the UK and EU are driving Open Banking with recent regulatory initiatives. In 2016 UK regulators required nine of the country’s biggest banks to allow licensed startups direct access to their data, including account transactions.  Europe followed in January 2018 with the PSD2 rules requiring European banks to share customer transaction data0 with third parties that request it (with customer consent).

In the US and elsewhere, the banking industry is more conservative about sharing customer information and the added security risks it poses.  As such, US regulators are for the time being taking a hands-off approach to see how the concept of third party providers develops naturally, as well as how the European “experiment” unfolds.  The critical question is, how far behind are they?

Traditional Banking Model Becoming Obsolete

Open Banking, although still in its infancy, is much further developed in the UK and Europe due to the different regulatory approaches.  Nevertheless, one thing is certain for US banks, they cannot afford to remain in a vertically integrated business model that controls almost everything from front-end customer management to product development and marketing, through to balance sheet and risk management.

There are simply too many other banking service providers with innovative products integrated into entirely digital ecosystems that deliver more convenience and options.  Google Pay, Apple Pay, WhatsApp Pay, and Amazon Pay are a few examples.

Amazon is reportedly in talks with JP Morgan Chase and Capital One to set up an Amazon-branded checking account for its customers.  Consumers in their 20s and early 30s are becoming more and more receptive towards these non-bank financial services, which better fit their digital, social media lifestyle.

Banks Need Chargeable Value-Added Services to Maintain Profitability

Whether Open Banking arrives on US shores or not, banks must consider the new competitive landscape where banking services are becoming a series of horizontal layers that connect with each other as well as non-banking services, exchanging data easily.  Basic account services, which are now offered by just about every retail business, are not enough to keep customers loyal.

Compounding the problem of innovative service providers is the commoditization of basic banking products and services – meaning shrinking profits for banks.  More and more the future of customer and profit growth appears to be chargeable value-added services that bring customers closer and encourage them to do more with their money.

The New Banking Model: A Broad Range of Seamless Digital Complementary Services

Many US banks may wonder how seriously they need to take the Open Banking call to arms, especially in light of conservative regulators and the idea of giving away valuable proprietary data.  In the UK however, the new model is slowly revolutionizing the banking industry.

Several of the big traditional banks, including HSBC and Royal Bank of Scotland, have embraced Open Banking rules to move closer to an Amazon business model, offering third party products and services alongside, or in lieu of their own.  For example, allowing customers to see all of their current account, savings and mortgage accounts in one place, regardless of the provider.

If Open Banking doesn’t make it across the pond, US banks must still contend with consumer expectations of a broad range of seamless digital complementary services.  If it does arrive, it will be a boon to technology giants like Google, Amazon, Facebook, and Apple, giving them much more leverage to steal market share from traditional banks.

Open Source API Providers Can Bridge the Bank Technology Gap

While banks should embrace the new horizontal business model for their own survival, that’s easier said than done.  Moving to an open, or platform business model is a major change of direction. Besides convincing senior executives and boards, it requires the kind of modern technology that most US banks currently don’t have.

The vast majority continue to operate using older versions of core software.  Thus, to bridge the technology gap they will increasingly need to rely on outside providers.  A report published in September 2018 by Morgan Stanley suggests that only 7% of banks are developing in-house tech solutions, with the majority seeing better value in partnering with and investing in third party providers.

In Open Banking, third party providers use open source technology and APIs to build applications and services that plug into the technology backbone of traditional banks, but with greater access to private customer data.

As such, they are able to provide a greater depth and breadth of service offerings.  This is why the Open Banking concept is so compelling, it promises to accelerate innovation in the financial industry and in the end give consumers more options and greater convenience.  But even if Open Banking doesn’t arrive on US shores, banks can still use third-party providers to position themselves against the encroaching threat from the new-age tech giants.

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