By Chris Zingo
Is open banking a regulation or an ideology? Is it just a fancy new wrapper to describe open APIs? Or is it something more?
What is certain is that open banking is already changing the way financial providers interact with and serve their customers. It’s a concept that all bankers will need to know. But first, we need to debunk some of the common myths and misperceptions about it.
Myth 1: Open banking is just another name for open APIs.
Some might argue that open banking is just a catchier term for open APIs, which banks have made available in some form for years. While open APIs are indeed fundamental to open banking they are not the extent of it. Open banking is a paradigm shift in the way the financial services ecosystem operates. It has the potential to eliminate the friction that fintech firms, partners and end customers face when coming into contact with banks.
In order to operate, many fintech apps need access to financial data that customers trust banks to store and secure. Current practices in the data aggregation market, however, may leave consumers exposed and create risks that undermine this trust. Today, third parties often ask customers for their account and login information so that they may acquire account data in a process known as “screen scraping.” In this process third parties log into a customer’s bank account as the customer and uses algorithms to “read” whatever account data they can find. In return they offer the customer little transparency about how they are monetizing these data and limiting their own liability should things go wrong.
Today, banks are building platforms that put customers in control of their financial data. These allow customers to securely share their financial data, without giving up access credentials. They also give customers transparency into where their data is being shared and the ability to revoke access.
Myth 2: Open banking isn’t relevant because it isn’t mandated in the United States.
It’s true that in some jurisdictions the open banking movement is being driven by regulatory forces. In the U.K. for example, it has become a proper noun—Open Banking—complete with an official index of providers regulated by the Financial Conduct Authority (FCA). While there are currently no such rules guiding the banking industry in the U.S. towards a more open future it does not mean it lacks relevance here.
While U.S. banks have no open banking mandate, they are acting quickly to give customers the ability to securely share their data. In fact, a recent survey by Accenture found that many large U.S. banks are already planning to make significant investments in open banking by 2020, while two-thirds recognized open banking as vital to their ability to compete with fintech firms and tech entrants. Those banks that have not yet considered what the imminent arrival of open banking in the U.S. means for their organizations might be missing an opportunity to shape the future of the industry and secure their place in it, leaving it instead in the hands of regulators and competitors.
Myth 3: Open banking is not worth the investment.
Incumbent players are burdened by the cost of maintaining legacy core systems—an expense that does not factor in for their younger, nimbler digital rivals. According to an article in Financial News London, experts often cite that banks typically spend 80% of their IT budgets on legacy technology maintenance. That means banks can spend up to $300 million a year updating these outdated systems. Furthermore, CB Insights reports that since 2012 the top U.S. banks have spent $4.1 billion on fintech and innovation.
Despite the expense and challenge of implementing any new system, banks need also consider the longer-term benefits of open banking on IT and innovation budgets, customer retention and overall agility. This is particularly true for smaller players, such as regional and community banks that lack the deep pockets of national players to invest heavily in their own innovation labs or acquire fintech companies with the capabilities they seek to offer customers. Adopting API standards can help banks more nimbly respond to customer needs by allowing them to more quickly partner with technology companies.
More than shifting IT budgets around, traditional banks should consider a shift in their mindset regarding how they compete and bring new innovative offerings to market.
Myth 4: Open banking opens up our customer data to the competition.
Nimble fintech players and even tech giants like Amazon threaten to disintermediate the traditional banking model—which would eliminate the traditional role that banks play in their customers’ lives. In this environment, banks must reconsider the view that their core strength is holding a customer’s money. Instead, banks should focus on their ability to offer customers a seamless experience for accessing, moving, and using their money in a way that fits their lifestyle, not the bank’s convenience.
Open banking gives banks the opportunity to access and integrate the innovation taking place outside of their organizations.
According to a McKinsey report, customer loyalty to banks that provide an “average customer experience” is 30% lower than in 2009. The report also found that customers who are moving from average experiences to ones that have more of a “wow” factor is two times higher now than it was in 2009.
A bank’s agreement to the third-party exchange of customer data is not just a matter of giving away valuable information. It also means gaining access to deeper insights about customers, which can help banks enrich the experience and value they are able to deliver. By opening up and sharing data, banks are ensuring their own place in the future of the financial ecosystem.
Myth 5: Open banking will further extend banks’ cybersecurity risk.
Banks’ concerns about cybersecurity have long outdated the rise of open banking. It’s true that the open banking movement and data-sharing regulations like PSD2 will increase the flow of and access to financial data.
The fact is, customers are forfeiting their login credentials to share their financial data today. When customer information is shared, it leaves a secure bank environment, where it is accorded longstanding legal protections, and it is released into the data services market where it is accorded no more special status than data created through a consumer’s use of a social media platform.
Open banking and the further adoption of API standards can provide customers better security when their data is shared, providing a secure portal and eliminating the need to share usernames and passwords. Moreover, by giving customers increased transparency and control over how their data is shared banks can empower customers to make smart decisions about how they share their data.
The authors of a 2017 article by McKinsey wrote that “change is rarely comfortable but as market evolution in the United States and other countries illustrates, the forces of change are inevitable.”
Banks that are leading in today’s world, and wish to lead in tomorrow’s, have no option but to embrace the industry’s shift towards a more open, collaborative environment. More than requiring the opening up of their financial data, this will require the opening up of their minds to new ways of serving customers and doing business.
Chris Zingo is managing director, Americas enterprise markets at Finastra, a financial services technology company. Based on the belief that 90 percent of financial services innovation takes place outside of an individual organization, Finastra has created an open platform for banks and fintechs to build, deploy and consume financial apps on top of our core system to accelerate the speed and lower the cost of fintech innovation.
