How smaller banks can take control of their role in the US open banking movement
If you are a bank in the US, chances are you are part of the open banking movement – whether you realise it or not.
That’s because companies like Plaid, the open banking fintech recently betrothed to Visa for $5.3 billion, can by now support all of these institutions, allowing third parties to authenticate accounts and link up to them on a customer’s behalf. Specifically, Plaid’s Auth product, released in May 2019, claims to enable developers to authenticate accounts at every bank and credit union in the US.
So, what does that mean? It means that, if I am a customer of a small community bank in Missouri, and I’d like to use a snazzy new budgeting app I saw advertised on Facebook, I can connect my bank account to that app if it uses Plaid to authenticate accounts. And my bank may be none the wiser.
This is good for consumers, not to mention the third-party fintechs looking to capture their attention, but it means banks that aren’t actively taking control of these relationships are missing out on a huge opportunity. Instead of sitting idle while third-parties use their customers’ data to create new propositions, these firms can open their own systems and provide secure access to developers via application programming interfaces (APIs) to build solutions for consumers. Using APIs is also far more secure than screen-scraping, a common practice among aggregators like Plaid, which requires customers to hand over their passwords when they are going through authentication.
The adoption of open, API-based architectures that easily enable third-party integrations is gaining steam in the US, even absent the regulatory pushes seen in Europe and elsewhere. In fact, though only about a quarter of banks have already deployed platform-driven architectures through open interfaces/APIs, 39% are trialing such technology, according to Ovum’s ICT Enterprise Insights 2018-19.
Embracing open APIs offers plenty of benefits for financial institutions of all sizes, from the ability to quickly add new products to Banking-as-a-Service (BaaS) initiatives that enable firms to effectively “license their charter” to third-parties, broadening distribution. But, so far, the biggest players in US open banking have been…the biggest players. Incumbent giants like JP Morgan and Wells Fargo inked early deals with pioneers in the open banking sphere including Plaid.
Smaller institutions can win, too, though. And, truthfully, they may have the most to gain. Community banks in particular are getting squeezed by competition from banking giants and fintech players, and they need new ways to compete. (The 4,000 or so US banks with $1 billion or less in assets hold about 7% of all bank assets combined, according to the Wall Street Journal, while three decades ago, they held closer to a third.) Providing secure data access to third-party apps customers are already using could be one way to increase satisfaction and make their accounts stickier, while also reducing risk associated with screen-scraping. Such a setup would also give the bank, and the customer, more control.
For example, Wells Fargo customers have the ability to turn data-sharing with Plaid-supported apps on and off from inside their banking app. The technical side of this proposition may seem incredibly daunting for a bank without the development talent, but an entire crop of companies has emerged dedicated to exactly this effort. UK-based Teller, for example, recently announced plans to expand to the US and is positioning itself as an alternative to Plaid dedicated to providing access to bank accounts without screen-scraping techniques.
Plaid itself also works directly with smaller financial institutions to help them provide secure data access through Plaid Direct. Beyond secure data access, companies like Hydrogen are helping financial institutions get more out of open banking by offering one-stop-shop platforms that enable clients to quickly build new financial applications on top of customer data using prebuilt API catalogs. It’s possible that soon tackling open banking will be less about building integration capabilities from scratch, and more of an exercise in choosing the right partners.
To be fair, shifting mindsets and overhauling processes to support an open banking strategy internally will require some adjustments. This will involve thoughtful communication and educating staff on how these integrations work, so that they can interface with customers and handle issues when they arise.
For example, if my bank has enabled secure data access through an aggregator, and I am struggling to connect my account to a third-party app because the integration is down, a customer support representative will need to be able to explain the situation and any expected resolution. That means retraining initiatives, and potentially, re-skilling efforts. This road isn’t necessarily going to be an easy one; in fact, it will probably be more difficult than the technical side of things. But it is absolutely critical to driving success. Those banks that see the greatest value from their efforts will be the ones that create an environment in which there is a universal understanding that the data ultimately belongs to the customer, and the bank’s job is to help them make the most use of it in a secure way.
The way people and institutions think about data is changing. I will stop short of calling it the new oil, but that analogy does carry some weight; not only in the value sense, but in the sense that everyone is fighting over it. A good way to lose here is to not play, especially given that you’re probably already on the field; the nine-page deck Visa released when it announced the acquisition revealed that one in four consumers with a US bank account have connected to an app via Plaid. Banks that aren’t taking the steps to participate in this process risk being left out of the data economy. These firms have a unique opportunity to lean on their heaps of customer trust and loyalty, as well as their reputations for security, to become go-to custodians in an open data environment. They just have to take it.
By Kate Drew, manager, fintech solutions and research at Grant Thornton