How US banks can benefit by embracing open banking
This past July, US President Joe Biden announced plans to sign an executive order promoting the issuance of rules to give consumers full control of their financial data.
This is considered a significant win for open banking as it facilitates data portability and enables consumers to easily switch financial institutions. Given Biden’s decree, the US may well start to adopt open banking standards and when that happens, traditional banks will need to ensure that they’re in compliance.
What is open banking?
APIs are the basis for open banking, so before a bank can adopt open banking, it must first have a clear understanding of APIs.
APIs are used by organisations to enhance their digital offerings by integrating the capabilities of other applications into their own.
As such, the advent of APIs has been critical to the explosion of the internet, especially in the case of mobile applications as they are developed for different devices and operating systems than legacy mainframes were initially designed to support.
According to McKinsey, open banking is defined as “…a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace”.
Under this model, fintech companies can leverage the existing data from traditional banks to create their own new digital offerings for customers, in turn creating a new business dynamic.
The adoption of open banking has been slow in the US due to the perceived technical challenges. There is also a hesitancy to invest in change that results in sharing information with others.
As daunting as it can be, an open banking strategy provides traditional banks with the best opportunity to rapidly accelerate their digital transformation initiatives, as well as create fintech partnerships to offer new forms of value to their consumers.
Open banking lessons from Europe
Europe has been more forward-thinking as open banking in the region has become the law of the land. On a global scale, the EU is the furthest along in open banking with the advent of PSD2, a regulation for electronic payment services which all member countries must follow.
Proposed in 2013 as an amendment to the Payment Services Directive (PSD), the goal of PSD2 is to make payments in Europe more secure through open APIs while boosting innovation and assisting banking institutions to adapt to new technologies.
Done properly, PSD2 compliance enables banks and financial institutions to create a new ecosystem and build a regulated BaaS (Banking as a Service) platform.
With PSD2 in place, the EU positioned itself as the global leader for open banking. Additionally, the EU is doubling down on these standards with a regulation on instant payments as a key new initiative in 2022.
Instant payments are electronic retail payments that are processed in real time where the funds are made available immediately for use by the recipient. US financial enterprises that continue doing business globally will face increasing pressure to comply with relevant regulatory requirements.
Why US banks should embrace open banking
Even prior to the pandemic, research suggested that only 20% of consumers prefer to visit a bank in person. As customers become more accustomed to remote access banking, traditional banks have a definitive business need to deliver digital services that mirror the in-person experience.
As traditional banks try to strike a balance between time spent delivering a new digital offering vs. how long consumers wait, virtual banks are positioned to address the modern needs of consumers quickly and reliably.
Traditional banks that embrace open banking provide new kinds of digital services to customers while still using their existing systems. Since this eliminates the need to rip and replace systems, they can continue to leverage decades of institutional knowledge to address business-critical issues, such as compliance and governance.
By ensuring they can effectively meet the digital needs of their customers, traditional banks can position themselves to better compete against the uprising of fintechs.
Preparing for the banking revolution
Every revolution has winners and losers, and the ones who strategise reactively will lose. If traditional banks embrace the sharing of banking data, they give themselves the best chance to compete in a landscape where otherwise fintechs would take over.
As banks look to take that first step towards digital transformation, they must ask themselves, “How long does it take to actually put out a new offering on the market?”
If it’s long enough to cause frustration for their customers, they’re already losing.