Building ‘Open Banking’ on a Platform of Trust

By Julien Courbe

Last May, a major global bank announced that it was opening its platform to allow access to consumer data for use within third-party applications. This came exactly 10 years after a major global technology company announced the same, yet that industry is mired in a data privacy scandal while financial services has taken methodical steps to ensure that appropriate safeguards exist prior to the sharing of consumer data.

In large part, the technology industry has taken the lead in promoting open models. Even the staunchest supporters of proprietary software code have come around to utilize and contribute to open-source projects. This approach has progressed to include the use of open protocols, which has spurred innovation and has been a contributing factor for overall growth of the technology industry by lowering the barriers for new entrants.

The keys for any open model are large and active communities with effective governance models. This is true for open-source software projects, technology platforms and social networks—large communities of users support the code or provide personal details in order to form a collection of resources that can then be accessed. Strong accountability is a necessity, which is why foundations exist to advance open-source projects. As concerns over digital privacy continue to escalate, responsible governance—whether industry- or regulatory-led—will be instrumental for success.

Personal data is currency

The collection of personal data comes with great responsibilities. Federal laws mandate that banks protect the privacy and security of consumer financial data, and these laws extend to the sharing, access and use of this data. Because of this well-established framework, banks have a tremendous opportunity to advance the use of open models across financial service in a controlled fashion. Considering that for the last several years banks have been criticized as slow to respond to the expansion of technology into financial services, banks can now use their inherent trust and safety as a springboard to accelerate innovation and digitization efforts.

It is clear that open models are beneficial. They create new sources of value by unlocking creativity and knowledge to increase the pace of innovation and to expand product diversity—two areas banks can improve upon. Unforeseen breakthroughs in areas ranging from medical research to new technology development are possible due to the communal exchange of information through open models. However, these models rely on a give-and-get approach in which users gain access to software or services in exchange for something, in many cases this is personal data.

Personal data has become a currency of the modern economy, and it should be treated as such. Banks have long used data to support decisions or direct new market expansion and, in the instance of consumer data, safeguards are in place for both the protection and sharing of this personal data. Banks can leverage their role as custodians of consumer data to more aggressively introduce new partner-based services or cater to new demographics based on a strong safety and soundness foundation. A bank-housed marketplace where third-parties can retrieve private user information (with consumer authorization) to populate forms or commence new services now exists and is a leading indicator for how the development and accessibility of financial services may soon occur. After all, it is not an open model or concept of data sharing that has failed. It has been the lax controls and checks that have enabled the exploitation of improper data use.

Open banking is a path for trusted innovation

The technology industry is playing catch up with the type of systems, controls, and governance models that the financial sector has long relied on. What does “know your customer” mean for technology companies that provide money transfer capabilities through their messaging systems? How well do these technology companies need to know their customers as financial services are further embedded in day-to-day digital activities? The technology sector has fostered open marketplaces that now extend into ancillary industries and arguably society as a whole. We don’t know whether regulation of technology or consumer pushback will slow this expansion, but trust will almost certainly be a required ingredient for sustained growth.

In just the last three months, several leading global banks have announced the addition of basic bank services or expansion to new geographic markets solely through digital offerings. One bank announced a free personal financial management tool in exchange for third-party financial data. Another bank, in its shareholder letter, discussed the creation of an application programming interface, or API, store to enable outside developers to access the bank’s core technology services. Key to these services is a standards-based and secure access/authorization gateway to expose banking functionality and data to expand the reach of the bank and facilitate innovation.

Open banking models will facilitate these consumer-oriented digital services. Providing consumer choice and transparency into how data and credentials are used is a prerequisite for any open model and banks have an inherent trust advantage in these areas. Imagine a single payment dashboard where a user could view what media subscriptions, ride-hailing services, or e-commerce platforms have access to their payment credentials. Users could easily control what services have access or revoke these payment credentials—perhaps a simple way for banks to provide consumer control and increase relevancy in an environment where this bank-consumer relationship is fading.

These simple services are just a first step with a more partner-based market approach a likely next step. An open approach in offering public APIs to partners will allow banks to established data privacy frameworks to share data and mitigate security concerns. APIs can help divide the sharing of data into manageable aspects and should allow banks to begin to monetize the effort by exposing internal services, introducing new products, or expanding to new markets. Support of standard APIs such as the Open Financial Exchange or the durable data API is also growing, to the point that the current data privacy scandal in the tech industry could even serve as a rallying point for industry coordination to credentialize certain approved API standards.

The adoption of open models in banking is a natural component for a consumer-oriented innovation strategy. This, however, does not come without challenges. Beyond security and data privacy, banks will need to consider compliance requirements, partner needs, culture differences and technology architecture. If banks recognize the opportunity to build on their inherent trust, they can take the next step to discuss the upside that open models can bring. Even if starting small by carefully curating the various third-party services to begin to share data, banks can begin to leverage these open frameworks to set a foundation for trusted innovation.

Julien Courbe is financial services advisory leader at PwC.