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Open banking – What financial institutions need to know

Dec 17, 2019

Rapid advances in technology continue to change our lives, often creating new approaches to traditional activities and even entire industries. Banking is no exception, and financial institutions must be ready and able to adapt to these changes while still offering their customers the security they expect. When it comes to financial records — customer information and transactions data moving from paper to a digital platform — much of what financial institutions once practiced is quickly becoming more obsolete as the industry continues to evolve. One key area of innovation driving these industry changes is open banking.

Increasingly, consumers want to have all their financial information — from each of their providers — readily available to them through a single point of access. Open banking is a financial model of providing users with a network of financial institution data using application programming interfaces (APIs). This design allows customers to securely share their financial data with other approved companies. This not only enhances their experience and lowers their banking costs, but it also has the potential to increase the services available, giving them more options from which to choose. 

These APIs allow disparate systems to share data by translating between different data structures and components. There are three main types of APIs: partner APIs that are limited to strategic partners; internal APIs that cannot be accessed outside of the organization; and open APIs that are available to the public with no restriction of access. 

While there are numerous advantages to leveraging APIs, the technology can be expensive, which often creates barriers for smaller financial institutions and FinTech companies that may be interested in pursuing open banking opportunities. For many, though, the benefits of open banking do outweigh the costs of the API technology, including:

  • Money transfers between financial institutions, credit cards and investment accounts instantly through a centralized application or portal.
  • Applications with the ability to calculate spending patterns and automatically place spare money into high-interest savings and investments.
  • The ability to quickly provide financial data for a customer when applying for a loan.
  • The ability for a customer to more easily verify their identity using online banking credentials when signing up with a new third party.

As the technology becomes more pervasive, the growing demand for a better, faster banking experience will continue. However, for many smaller community institutions, this presents a challenge, and they risk falling behind their larger competitors who can afford to spend billions on technology and innovation. But many community financial institutions have recognized that open banking is worth the investment as it can provide the opportunity to partner with innovative FinTechs that can help expand their service offerings, creating deeper relationships and potentially leveling the technological playing field with their larger competitors.

As U.S. financial institutions begin to explore the idea of open banking, they should investigate how it is being handled and applied in other countries. For example, open banking practices are growing (and even thriving) across Europe, especially in the U.K. In 2016, U.K. regulators issued a ruling that required its nine largest banks to allow licensed startups direct access to their data. Then in January of 2018, the European Banking Authority passed the Second Payment Services Directive (PSD2). The aim of this directive was to create a more customer-focused open banking environment in the U.K., enabling new and existing providers to engage customers more efficiently while encouraging competition and innovation. 

Currently, these initiatives appear to have succeeded in their goals, as multiple companies have grown and flourished under these rulings. One such company is Chip (https://www.getchip.uk/), which is now fully connected with all U.K. high street banks. The company utilizes AI to calculate how much users should be saving based on criteria like age and housing, and then through open banking, it moves money into a savings account automatically. 

Seeing some of the success in Europe, U.S. companies are now also beginning to embrace the benefits that open banking can offer. One of these is US Bank, which recently entered into a data-sharing agreement with a variety of FinTech companies offering capabilities like loan verification and financial planning. Another example is the company FileThis, whose platform automatically gathers and categorizes financial documents for its users as well as giving them the ability to grant third-party access to information required for loans, tax returns and more.

As with all new technology, there is the potential for unexpected pitfalls. When considering implementing open banking, financial institutions should carefully consider the entire process and ecosystem because open banking requires an increase in the due diligence of vendors and partners. With sensitive information now being moved and accessed by third parties, these connections will likely require enhanced data security to ensure privacy and bolster protection. 

Financial institutions can also expect more regulatory scrutiny when it comes to open banking practices. They will need to become the experts to help combat and/or offset any lack of buy-in from regulators, learning all the details of open banking’s impact and how they themselves are implementing the methods across their own institution. 

Another concern for some is the fear of losing direct control of the customer experience. However, it is their customers who are clamoring for this change. Open banking has the potential to allow institutions to not only offer more, often better, services to their customers, but also improve operational efficiencies. In addition, it allows financial institutions leveraging these practices to remain competitive in a rapidly changing banking environment while allowing noninterest and interest income from referrals to become available, generating additional revenue that previously would not have existed.

As open banking continues to become ubiquitous, what should financial institutions be doing now to prepare? Most importantly is learning everything possible about the key issues and activities driving current open banking practices. Paying close attention to the technologies and methods being developed both here and abroad can help institutions stay up to date on the latest capabilities. Becoming a subject matter expert now will be a tremendous benefit when it comes time for implementation down the road. A better understanding will also help these institutions make critical, informed decisions as they consider updates to their strategic plans to include implementing open banking technologies. Implementing these practices has the potential to not only provide financial institutions a new, better way to serve their customers, but could also open new streams of revenue, helping them remain competitive in the long run.


Mike Morris, CISA
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