Open Banking Adoption Strategy in Major Market USA
Introduction
This paper highlights some of the major problems in laying the foundation for open banking in the United States. New digital banking technologies increases the bank expansion and open market access for American consumers and emerging businesses. Americans will be able to earn higher rates on their savings, pay lower rates on their loans, and more efficiently manage their finances. But the new technologies have not yet reached widely.
The CFPB is working to accelerate the open banking through a new personal data rights rule intended to break down these obstacles. To do this, the CFPB is formalizing an unused legal authority enacted. This authority gives consumers the right to control their personal financial data. But the agency must not micromanage open banking. Fair standards rule will be critical to the creation and maintenance of an open banking system in which consumers can agree and exercise their data rights without being trapped by powerful incumbents and without losing control of their data.
Our proposal will recognize that the CFPB must resolve certain core issues like many of the details in open banking will be handled through standard-setting outside of the agency. Properly pursued, such standards can allow open banking to evolve as new technologies emerge, new products develop, and new data security challenges arise.
As the CFPB expects fair standards to play a critical role in open banking, our proposed rule will seek to take appropriate account of that role. We continue to encourage those seeking to develop industry open banking standards in the United States to discuss their plans with the CFPB so that those standards appropriately allow consumers to exercise their personal financial data rights.
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 organizations 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. the existing data from traditional banks to create their own new digital offerings for customers, in turn creating a new business dynamic. An open banking strategy provides traditional banks with the best opportunity to rapidly accelerate their digital transformation initiatives.
There are majorly 3 beneficiaries
· Financial institutions — Open banking will allow financial service providers to significantly innovate their product offerings to businesses.
· Businesses persons — Innovations made by financial service providers will mean more effective and efficient financial tools in your business.
· Customers — Open banking will mean better ways to spend, borrow, invest, transfer money and easy purchase and payments
How does Open Banking work?
Open banking relies on APIs (application programming interfaces). An API is just a structured way for one program to offer services to another program. the data we’ve covered above — account holder’s name, account type, currency, etc.… APIs are effectively the instructions for how a third party can access that data from a bank. APIs are agreed upon by everyone involved in the open banking initiative (e.g. the government, regulators, and banks), it’s up to the banks to build and implement them.
Once they have, businesses can start accessing them and building new and innovative products using them. The customers of these businesses — which could be consumers, small businesses, or even enterprise companies — would then ultimately benefit by using these innovative products.
Open Banking & USA
Why should US banks 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.
Advantages of Open Banking
· Better payment solutions for businesses — With the payment initiation side of open banking, businesses could use payment products that improve cash flow, lower costs, increase visibility and control, and reduce fraud.
· Better borrowing terms — If you don’t have much credit history, you could be prevented from getting favorable borrowing terms. But with open banking, your historical bank account data can be accessed by lenders to help better demonstrate your creditworthiness.
· Account aggregation — Essentially, being able to see all of your accounts in one place. Instead of having to log in to multiple different accounts in your web browser, or switch between multiple apps on your phone.
Challenges faced by Open Banking & Recommendations
Open banking is a concept that allows customers to share their financial data and access various services from different providers through application programming interfaces (APIs). This can offer benefits such as more choice, convenience. However, implementing open banking APIs also comes with some significant challenges and risks that need to be addressed.
· Regulatory compliance — One of the main challenges of implementing open banking APIs is to comply with the relevant regulations and standards in different markets and jurisdictions. For example, in the European Union, the Payment Services Directive 2 (PSD2) and the General Data Protection Regulation (GDPR) set the rules and requirements for open banking, such as data protection, consent, security, and liability. Providers need to ensure that their APIs are compliant with these regulations, as well as any other local or regional laws that may apply.
· Data security and privacy — Another major challenge and risk of implementing open banking APIs is to ensure the security and privacy of the customers’ data and transactions. Open banking APIs involve sharing sensitive and personal information, such as account details, balances, transactions, preferences, and identity, with multiple third-party providers.
· Customer trust and adoption — A third challenge and risk of implementing open banking APIs is to gain the trust and adoption of the customers. Open banking APIs require customers to share their data and access services from different providers, which may raise some concerns or doubts about the quality, reliability, or value of these services. Customers may also be unaware or confused about the benefits and risks of open banking, or how to use the APIs effectively.
· Technical integration and interoperability — A fourth challenge and risk of implementing open banking APIs is to achieve the technical integration and interoperability of the APIs across different platforms, systems, and providers. This requires a high level of compatibility and standardization of the APIs, as well as the underlying infrastructure and protocols. Providers need to ensure that their APIs are designed and developed according to the best practices and specifications.
Open Banking Vision Vs Implementation Gaps:
Open banking is a transformative financial concept that leverages data-sharing and API technologies to create a more interconnected and innovative financial ecosystem. By allowing consumers and businesses to securely share their financial data with authorized third-party providers, open banking promises to empower users with greater control over their financial information and foster the development of personalized financial products and services.
Vision vs Implementation Gaps:
The vision of open banking in the USA is promising, envisioning a future where customers have access to a wide range of tailored financial services, while businesses benefit from enriched data insights to deliver more efficient and targeted offerings. However, the implementation has faced challenges due to various factors, including:
Open Banking Strategy & Approach
The strategy could be divided into 6 categories depending upon customer channel ownership & how banking products are originated.
Strategies
Each strategy has its own pros and cons. For example, plug and play model can be cost effective for banks with minimal risks. Banking as a Service (BaaS) allows the banks an opportunity to become pioneers / leader of banking space, however it’s held back due to risk of cannibalization. The bottom 4 strategies are for banks and top 2 for Fintechs. However, it’s not necessary to apply these strategies in the entire portfolio of bank but can be done in isolation of 1 product too. However, while choosing strategies, trade-offs have to be made.
Approach
However, given the regulatory and banking landscape of USA, the banks could take variation of these strategies while implementing. The below table captures approach and their implications
Open Banking Security & Regulations
Regulation is playing catch up
Open banking essentially proposes the idea of unbundling retail banking services, creating more layers and segments. With financial regulation already being a huge undertaking for the more compact, traditional financial system, regulators are now faced with a greater challenge.
They will need to find new ways and more resources to oversee a much more fragmented financial ecosystem that will keep growing exponentially. To add more obstacles and raise the level of difficulty for regulators, this ecosystem will include non-financial services companies performing either regulated activities or acting as third-party providers of outsourced critical functions. Christine Lagarde, the Managing Director of the International Monetary Fund, explains this new reality for regulators:
“Traditionally, regulators have focused on overseeing well-defined entities. But as new providers come on stream in new shapes and forms, fitting these into buckets may not be so easy. Think of a social media company that is offering payments services without managing an active balance sheet. What label should we stick on that?”
Open banking security — how safe is your data?
The short answer — is an undeniably yes. Open banking is as safe as traditional digital banking. If you trust any digital banking activity, such as sending money from your smartphone, there is no reason why you shouldn’t trust open banking technology.
If anything, the API technology was designed to make the access, transfer, and management of information more secure. Access to APIs is safeguarded by specific banking industry standards such as the PSD2, which require technical authorisation, user authentication and consent.
For example, open banking in the UK is regulated through the Payment Services Regulations (2017), bringing the PSD2 into law. In the European Union, each member state has a specific regulatory entity responsible to enforce all the needed measures to ensure the safety of open banking.
Couple that with the fact that the technology requires integration with web single sign-in and Identity and Access Management (IAM), and what you have is layers upon layers of security that fortify your data.
Conclusion
Despite the open banking use case and possibilities, there is a gap of vision with implementation. USA moves to create open banking rules also underscore the importance within financial institutions of fast, secure access to quality data, with APIs as the enabling technology.
For consumers, the new rules represent a meaningful way to control how their data is used, beyond opt-out data privacy rules. Financial services firms will face more pressure to maintain or win customer loyalty, compete on individual products, and integrate third-party services into their own offerings. And while open banking does require banks to securely expose data for greater interoperability and competition, essentially becoming an API provider, it’s important to note that it also offers up a goldmine of actionable intelligence that can yield rich cross-selling opportunities and more.
For banks, it’s important to discover how open banking technology is helping banks grow their business & how to keep data timely and secure. First step is to understand CFPB rulemaking process.
The second step of the puzzle, choosing strategy and approach, banks have to be careful, weigh pros, cons and risks associated. More importantly, ask themselves questions about strategy, customer and Technology. What kind of digital transformation, ecosystem partnerships are we looking for? Which customer pain points do we need to serve and what will the customer experience standards be. Do we have right API strategy, analytics, governance and standards from technology point of view to manage data sharing.
Hence, Banks in USA have to prepare for the banking revolution. Every revolution has winners and losers, and the ones who strategies 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.
