What Open Banking Means for US Consumers

And what does it mean for financial service brands?

Image Credit: Visa

The financial landscape in the United States is on the brink of a major transformation with the impending arrival of open banking. This new model promises to revolutionize how consumers interact with financial services, spur more competitions, and facilitate more financial “super apps”. Here’s what open banking means for us consumers, and what it means for financial service brands.

What is Open Banking?

Open banking is a financial services model that allows third-party developers to access financial data from traditional banking systems through application programming interfaces (APIs). In other words, it is a legal framework for consumers to grant consent for a third-party service to have secure access to some of their bank records, thus enabling third-party service providers to develop innovative financial products and services.

Key elements of open banking include:

• APIs: Securely facilitate the exchange of financial information between banks and third-party providers.
• Consumer Consent: Consumers must provide explicit consent for their data to be shared, and the consent can be revoked at any time.
• Regulation and Standards: Regulatory frameworks, such as the EU’s Revised Payment Services Directive (PSD2), set standards and requirements for data sharing.

By opening up financial data, open banking aims to create a more interconnected and competitive financial ecosystem. This model not only enhances transparency but also empowers consumers by giving them more control over their financial information. The potential for tailored financial services, personalized advice, and improved product offerings is significant, as third-party providers can use this data to innovate and meet specific consumer needs more effectively.

Open Banking Outside the US

If you live outside the US, then open banking is not exactly news. In the past five years, this API-driven framework has seen significant uptake in regions like Europe, Singapore, and Hong Kong.

In the UK, for example, open banking was introduced following the Competition and Markets Authority’s market investigation into retail banking. The regulation, officially passed in 2018, created a secure and standardized way for financial data to be shared. By January 2023, the 6 largest banking providers in the UK had fully implemented the standards required by the CMA to deliver open banking.

As a result, it has lowered barriers to entry for fintech companies in the UK, enabling them to develop innovative products and services benefiting over 6 million British consumers so far. The UK’s vibrant fintech landscape, boosting some of the most successful neobanks, is a testament to the success of open banking.

In Singapore and Hong Kong, meanwhile, regulatory bodies have actively promoted open banking initiatives to boost their status as financial hubs, per a Delloite report. These regions have seen a surge in fintech startups leveraging open banking to offer innovative solutions, from digital wallets to automated investment platforms.

On a related tangent on financial services and regulation — amid antitrust scrutiny, Apple has settled with the EU over Apple Pay and avoids potential fines by agreeing to open NFC access on iOS to third-party wallet developers for free for a decade.This means that third-party wallet apps like Paypal or Cash app will now be able to provide tap-and-pay in the EU in the same way that Apple Pay supports today. Should this trend continue, we may see more consumer-centric decisions that help facilitate a more open competitive environment in the EU.

The success of open banking in other regions provides a blueprint for the US, highlighting the importance of regulatory support, consumer consent, and secure data sharing. As the financial landscape evolves, traditional banks, fintech companies, and consumers alike will need to adapt to the new opportunities and challenges presented by open banking.

Open Banking Coming to the US

In the US, the Consumer Finance Protection Bureau (CFPB) is pushing banks and fintechs toward open banking. Last October, the CFPB published proposals for a new regulatory framework governing “Personal Financial Data Rights,” which requires banks to provide qualified third parties access to consumer financial data. It is set to be finalized this fall. Once it takes effect, financial institutions across the country will need to provide access to customers’ financial data for checking, savings, and credit card accounts, prepaid cards, and digital wallets, at their request, to third-party service providers. This regulatory shift will call for significant upgrades in data infrastructure and the development of APIs for incumbent banks and financial institutions, creating both challenges and opportunities for them.

For what it’s worth, younger consumers are ready for open banking in the US. A recent PYMNTS survey of 2,541 US consumers found that almost half are ready for open banking if it means faster, easier banking services. In particular, 71.5% of Gen Z and 66% of millennials say they are ready to use open banking for faster, easier financial services.

The funny thing is, even without the regulatory mandate, there are already many fintech startups that function as data brokers to enable open banking for US consumers.

Third-party data brokers. A 2022 survey conducted by Visa found that 87% of US consumers already use some form of open banking to link their financial accounts to third parties; Yet, only 34% of them are aware that open banking enables these services.

Third-party aggregators like Plaid or Tink are already getting ahead of the rule by inking deals directly with banks and FIs. For example, Plaid signed a data agreement with JPMorgan Chase in 2018 to allow Plaid to access customer information directly through the bank’s secure API connection. In April 2024, Visa announcedthat Tink had signed data access agreements with some US banks and vendors, including Capital One.

Spurring Competitions

Open banking is expected to supercharge competition within the US financial sector. For the incumbent banks and financial service brands, there’s a lot at stake, starting with valuable customer relationships. With open banking, consumers can choose from a broader range of financial products and services. Third-party providers can offer specialized solutions that might not be available from traditional banks.

For example, open banking is one reason that it is much easier to change banks in, say, the UK, than in the US. Yet, Gen Z are already ghosting banks without closing old accounts. A recent survey found that 60% of Gen Zers who switched banks kept the original account open but no longer considered it their primary bank account. Moreover, Gen Zers using neobanks are less likely to switch — less than 5% of those who switched accounts were switching from neobanks. Overall, traditional banks are losing young primary account holders to digital-native competitors, a trend that the impending arrival of open banking may further accelerate.

For traditional banks, this shift will mean rethinking their business models. The deep, established relationships they have with their customers may no longer be enough to retain their market share. Instead, they will need to innovate and potentially collaborate with fintech companies to stay competitive. The potential for banks to lose young, tech-savvy customers to neobanks and fintechs is significant, as these consumers are more likely to seek out financial services that offer greater convenience and better user experiences.

For example, what if all the financial services you need can be accessed simply via texting? Solutions by Textis a fintech startup that does just that, offering users a way to pay their bills or apply for loans via standard text messaging. It has recently secured $110 million in new growth funding. More innovative financial services like this could be made possible by open banking.

May The Best UX Wins

Open banking will likely lead to a financial ecosystem where the best user experience wins. Financial apps with superior user interfaces and user experiences will have a competitive edge. This trend is already evident with apps like Copilot Money, which recently won an Apple Design Award for its intuitive budgeting tools. As consumers gravitate toward platforms offering the best user experience, traditional banks and new entrants alike will need to prioritize user-centric design and functionality.

Moreover, it seems somewhat likely that, depending on how the US open banking law is framed, the financial app with the best user experience (UX) will dominate the market, and this app will probably not be created by an existing bank. Yet, the idea of “best UX” is multifaceted and fluid, as it depends on various factors, such as the platforms on which the app is available, and its ability to leverage advanced AI models (such as the upcoming Apple Intelligence capabilities). For instance, an app that seamlessly integrates across multiple devices, from smartphones to smartwatches, will likely provide a more cohesive and convenient experience. These elements, among others, will play crucial roles in determining or at least influencing the overall user experience.

On the other hand, there is a delicate balance between having the best UI/UX and gaining consumer trust. Startups may excel in creating sleek, user-friendly interfaces, but they often struggle to build the level of trust that established banks enjoy. This challenge is especially pronounced in times of socio-economic uncertainty and financial anxiety, where consumers may prioritize security and reliability over a superior digital experience. Trust is built over time through consistent performance, robust security measures, and regulatory compliance, all areas where established banks have an advantage. Thus, while an excellent UI/UX is essential, it must be complemented by efforts to build and maintain consumer trust to achieve long-term success.

The Dawn of Financial Super Apps

The emphasis on user experience extends beyond just the interface. Consumers are increasingly looking for seamless, integrated financial services that can be accessed from a single platform. A recent Chase consumer survey found that 86% of customers prefer to manage all of their banking activities in one app, including paying off loans and making purchases.

This consumer demand dovetails with the rise of financial super-apps, which combine multiple financial services into one cohesive offering for convenient access. For example, San Diego-based neobank Axos Bank allows customers to manage savings, spending, payments, investments, and credit scores from its mobile app.

After personal finance app Mint shut down at the end of 2023, its customers mourned the loss of its all-in-one budgeting experience, which its successor Credit Karma didn’t offer. Empower’s and Rocket Money’s free budgeting apps can connect to a user’s bank accounts, which may fill the specific gap left by Mint.

Meanwhile, banks are responding by consolidating and integrating services. According to Bankrate, Ally, Bank of America, Capital One, Chase, Huntington National Bank, Regions Bank, SoFi, and Wells Fargo all offer some in-app budgeting capabilities. Bank of America, in particular, recently consolidated its banking, investment, and retirement mobile apps, reflecting a strategic shift to cater to consumer preferences for managing their finances in one place.

The core principle of open banking — facilitating secure access to financial data for third-party providers — enables the integration of various financial services into a single, cohesive platform. Open banking plays a pivotal role in enabling the type of integrations that spur more financial super-apps, ensuring that data flows seamlessly between different financial services, ultimately enhancing the user experience, and fostering the growth of financial super-apps.

While open banking presents promising opportunities, it also brings challenges. Security concerns remain a significant barrier, particularly among older consumers. Ensuring robust consumer protection and data privacy will be crucial to gaining widespread acceptance. Additionally, the transition to open banking will require substantial investments in technology and infrastructure, which may pose challenges for smaller financial institutions.

Overall, The advent of open banking in the US marks a significant milestone in the evolution of the financial sector. By fostering competition, empowering fintech innovation, and enhancing user experiences, open banking promises to transform how consumers interact with financial services. However, realizing these benefits will require careful implementation, robust regulatory frameworks, and a focus on security and consumer protection.