The digital imperative for banks and financial institutions cannot be understated. Even prior to the advent of COVID-19 when customer interactions could occur in branch locations and in-person settings, the industry was grappling with the need to meet the digital demands of an evolving market. The events of 2020 and our reliance on digital interactions and banking self-service have only cemented the urgency and need for banks to become more digital. As banks chart their course to digitization, open banking is emerging as a capability banks will also need to confront to remain competitive and keep the pace of an increasingly digital marketplace.
Open banking is a technology-enabled approach to financial services that utilizes aggregated and authenticated data, connected via APIs, to give consumers more ways to consume their financial data while also making transactions more secure.
It’s pushing the banks into new innovative waters—whether they like it or not. The shift to open banking is well underway in Europe, Singapore, and Hong Kong. Consumer protection regulations, specifically the PSD2 law which went into effect in January 2018, have driven its adoption in the EU. Enacted with the aim to increase innovation and competition in banking, PSD2-mandated European banks open APIs to share data with consumer-requested third-party providers.
The result has been an explosion of consumer-facing fintech innovation using the mandated API standard. In the UK in particular, where open banking has taken off the fastest, the use of third-party fintech apps for personal money management skyrocketed during COVID-19, with 20% of all UK adults using fintech platforms like Mint, Plaid, QuickBooks, and Quicken. The same survey found that for young adults, use of fintech platforms rose to 50% during the pandemic. In the United States, both Visa and Mastercard are moving rapidly to add fintechs to their platforms to support open banking and create a network-agnostic payment technology system .
It’s not just consumers who stand to benefit. The move toward open banking has spurred the creation of dozens of new fintech platforms and solutions that are pushing the envelope further on innovation and economic development in their respective countries. Combined, they are creating a distinct ecosystem for small, medium, and large businesses that can benefit directly from connecting via API’s to financial institutions, or leverage the ecosystem between banks, fintechs, and consumers to tailor their commercial offerings to their customers.
Even as the whole market stands to benefit, banks can position themselves as the gatekeepers for the most important asset in open banking: data. On the retail side, banks can take advantage of this new technology to strengthen customer relationships and customer retention by helping customers manage their finances better rather than simply facilitating transactions.
More broadly, open banking will also allow retail and commercial clients to select from a wider set of products and services with greater ease and consolidate connections to adjacent accounts and programs. This connectivity stands to provide a significant benefit for bank clients with the ability to more easily share data with financial advisors, accelerate lending, reduce cost, and secure the transfer of data .
Although change is already underway, banks will ultimately determine, through their own action or inaction, whether that change is for the better or worse.
Regulators are already preparing guidance for open banking in the U.S., and banks will be faced with the decision to invest in this customer experience-driven innovation and whether or not enough value can be derived to justify the means.
From our perspective, banks that do not embrace open banking will not only limit their abilities to connect with clients in meaningful ways but also limit opportunities to be on the forefront of innovation. Instead of being caught flat-footed when the U.S. regulations arrive, or losing a competitive position in an evolving market, banks should start preparing their strategies and investing in the infrastructure they’ll need to take full advantage of open banking.
The most dynamic open banking markets today are in Europe and the U.K., thanks to sweeping EU policies that opened the door to open banking. The Second Payments Services Directive (known as PSD2) required banks operating under EU jurisdiction to allow licensed third-party payment service providers access to bank infrastructure and account data through a specific API protocol.
The results so far have U.S. regulators, consumer advocates, fintech startups, and banks looking across the Atlantic with anticipation. By 2022, open banking in the UK is expected to generate more than $9 billion of revenue opportunities for financial service providers—and over 10 million Britons are expected to participate. While the U.S. has yet to take the same sweeping approach, it’s a topic that has been brought to light given the observable benefits of the EU’s trial.
In the U.S., demand for open banking solutions has been driven by consumer and commercial demand. That demand, coupled with the increased activity on the other side of the Atlantic, piqued the interest of the Consumer Financial Protection Bureau (CFPB). They issued an advanced notice of proposed rulemaking (ANPR) in October 2020 on how consumers’ access to their financial records ought to be regulated—what is likely a first step towards creating a formal regulation in the U.S. around open banking.
So far, moves toward open banking have been driven by regulation, but there’s another way banks can look at the benefits of open banking and take a proactive approach to make changes even without government mandates.
Instead of competing directly against fintech and third-party institutions, incumbents can leverage open banking to partner with them, and thereby remain competitive in the rapidly evolving industry.
For consumers, the benefits of open banking are clear—and younger, digitally native generations already expect them. Letting consumers have ultimate authority over their financial data and allowing them to share with providers of their choosing in a secure standard format promotes the development of new technologies and services. It brings more people into the banking system with greater choices and options while also reducing the time and complexity to access banking services like loans, approvals, and other financing instruments.
And for third party providers—most commonly new fintech startups and digital banks—open banking ecosystems allow for exponentially more innovation and business opportunities. Instead of viewing these new organizations as disruptive competition, institutional banks can embrace the new wave while leveraging their dominant incumbent positions.
While we see regulations taking hold, it will be market demand from both consumers and third-party partners that ultimately will drive new industry standards around open banking. Regulations will undoubtedly come into play, but banks not looking ahead to a future of open banking are missing a critical opportunity to increase the value of data, their key asset.
Banks maintain vast archives of customer data, and the revolution in Big Data over the last decade has allowed some banks to realize the benefits of that data internally. For the mid-market, we see a persistent gap in these banks’ abilities to leverage their own data. Without closing this gap, these banks will remain in a defensive market position as the pace to open banking quickens.
Those that are able to embrace open banking will be the ones who effectively use data to: inform decision-making and determine strategy; find new customers and cross-sell existing products and services; improve services; and build new partnerships.
Open banking has the potential to increase existing revenue streams and add new ones while expanding customer reach for financial institutions. It can also create revenue-sharing ecosystems, where incumbents give customers access to third party-developed services while profiting from a subscription or referral basis. Open banking relies on a bank’s ability to leverage its data, highlighting an urgent first step in any banks’ journey.
Taking into account potential looming regulations, but perhaps more importantly, the value to be gained from embracing open banking — there are a number of ways banks can orient themselves to prepare to take advantage of the open banking future.
Before pulling the trigger on allocating investment dollars to upgrade and build the technologies necessary for open banking, banks first need to build their strategic business cases. First, leadership must identify the ways in which open banking can drive value for the bank and what sort of return on investment profile banks can expect not only in terms of revenue but also in customer loyalty, referrals, and increased share of wallet.
The overall business rationale is crucial not only to secure funding for new investments but also to align the various departments of the organization that will be involved in ensuring success (Sales, Deposit, Treasury, DevOps, Information Security, Customer Experience, Senior Leadership Teams, Business Transformation, Marketing, Customer Service, etc.).
Customer intelligence is a great place to start discovering the inputs that will shape the strategy.
Banks should survey customers to gain insights on which type of tools and services they would want to have their financial data available to. They should apply advanced customer insight approaches to clearly understand the customer journey, including needs, wants and pain points, and continue to refresh these insights over time. Along with the business case, a prioritized open banking roadmap should be developed to guide the open banking implementation.
And of course, no business case is complete without identifying ROI drivers and measurement indicators for what success from third-party partnerships looks like both to the bank and to the customers consuming the third-party service.
Mid-market banks must have the foundational data capabilities in place to realize the benefits of open banking. A precursor requirement to any open banking initiative will be the successful implementation of robust data governance and information security programs to provide oversight and protect consumer data. Apart from open banking implications, this is a best practice for any bank especially the increasing number of mid-market banks that leverage cloud services or SaaS technology solutions.
In addition to data, there are a number of technical capabilities that are not only requirements for any open banking initiative but also table stakes in the digital world.
Looking ahead, banks will want to direct investment to their internal infrastructure and reference architecture making sure that the tools, policies and procedures are in place regarding cloud data management, CRM and workflow platforms tied to transactions, Master Data Management (party master, product master, etc.).
Open banking should be at the forefront of digital strategy for banks in the U.S.—just as it already is in Europe and around the world. Data can be used in more ways than ever to drive value to incumbent banks by monetizing with third parties, extending engagement with customers through external digital channels, and providing a more valuable customer-centric experience by extending customer data beyond the “walls” of the institution. It can introduce new revenue streams through novel and proprietary APIs and so much more.
Even without the heavy hand of regulation, the move to open banking is yet another digital imperative for U.S. banks. For banks that want to keep pace with market demands and outpace competitors, an open banking strategy will be paramount to their success.