Jerry has been a regular customer of the local bagel shop for years. The workers start toasting his sesame bagel and preparing his coffee when they see him walk through the door. When he forgot his debit card last week, the manager said, “just get us next time.” And Jerry can always be counted on to cater a holiday brunch from the store every December.
When a new bagel shop opens down the street, will Jerry be tempted to switch? Sure, he might wander over to the new place to see what they’re offering. And it is even a block closer to his home. But chances are that he will decide to stick with the shop that already knows him and has served him so well over the years.
That is the spot that banks find themselves in as open banking takes hold around the world. All of a sudden, customer information and accounts are up for grabs – often with just a few clicks.
While the initial reaction to open banking might be fear, Curinos believes that incumbent providers have a distinct advantage over new entrants. In Europe and parts of Asia, open banking has been fairly well established in recent years and some providers have now embraced it. But to solidify their position and capitalize on this advantage, they must use the power of their data to learn more about their customers, deepen relationships and develop products that fit their needs.
Many financial-services providers around the world are adapting to open banking as it takes hold from the U.K. to India. Some were caught off guard. In the U.S. and Canada, where some form of open banking is likely around the corner, banks should already be preparing for even more competition from new entrants.
DRIVING DIGITAL ADVANCEMENTS
Open banking may not be ubiquitous, but there’s little doubt that the policies aimed at eliminating traditional customer barriers are driving digital advancements around the globe. And so far, many fintechs are leading the way.
From Apple’s purchase of a company that helps lenders make credit decisions to a U.K. fintech that allows business to find out which loans they can get, the collapse of limitations in customer data is pushing providers to offer more products, financial management platforms and better payments capabilities.
Institutions that operate in regions where open banking hasn’t been adopted are already seeing digital capabilities flowing from schemes in other countries. That means the push to develop savvy digital offerings is likely to accelerate even before (or if) open banking becomes the law of the land.
STILL NEW, BUT ALREADY INFLUENTIAL
At its core, open banking aims to eliminate the longstanding hurdles that occur when a customer wants to share their financial data that sits at one institution with other providers. Customers give consent to their financial institution to share their financial data with third parties – all in the aim of making it easier to take advantage of products and services that are offered by other providers.
Open banking took shape less than a decade ago and is still very much in the adoption phase by customers and providers. There are 4.5 million regular users of open banking in the U.K., including a 60% increase in new customers in the period between December 2020 and December 2021, according to the Open Banking Implementation Entity, which creates industry guidelines in the U.K.
Although the concept of open banking is a global paradigm, widespread differences in the regulatory guidance that motivates banks to engage in customer data sharing means that there is little symmetry among those that have adopted it. That includes the European Union, South Africa, India, Brazil, Mexico and Australia.
In Canada, the government recently named a digital banking expert to oversee and implement key pillars of the country’s open banking system. A government committee last year found that technology advancements had spurred more than four million Canadians to engage in some type of financial data sharing even though there wasn’t yet a centrally-backed infrastructure in place.
In Asia, authorities in Japan, Singapore, South Korea and Japan have issued recommendations and guidance relating to the open API standards that are the foundation of open banking.
Meanwhile, the U.S. has lagged other countries in formalizing open banking rules. President Joe Biden last year issued an executive order that encouraged the Consumer Financial Protection Bureau to consider rules “to facilitate the portability of consumer financial transaction data.” The CFPB is currently exploring ways to reduce barriers to switching accounts and providers.
Needless to say, U.S. fintechs are eager for the change and already making their moves. Fintech challenger Current recently struck a deal with technology platform Plaid to offer a service that will help customers use other fintech apps.
Although Canada hasn’t officially adopted open banking,
the government’s website is preparing residents for what’s to come.
How Open Banking Works
You find a fintech app that can help you manage your finances.
The app prompts you to link your bank accounts to access your financial data.
You authorize your bank to share your financial data with the app via open banking (your account username and password are not required, keeping you protected in the event of unauthorized transactions, a data breach or fraud).
Your financial data is shared using a secured online channel.
The app analyzes your data and recommends personalized financial products and services:
• Product comparison tools
• Budgetary tools
• Viewing all your accounts in one place
ONCE HESITANT, NOW AN EMBRACE?
It goes without saying that traditional financial institutions may be leery of rules that let their customers walk out the door with just a couple of clicks. After all, the pain associated with switching providers typically leaves customers sticking with the same institutions for years. A recent Bankrate survey found that U.S. adults on average have used the same primary and savings account for about 17 years.
But interest rates are now rising, which means some customers will start shopping around for the best rate. For countries that have adopted open banking, that switch will be easier than ever.
That means lenders should be working harder to stay engaged with their customers. Lending and affordability tools are particularly appealing in this environment as both consumers and business grapple with rising inflation. A number of U.K. banks, for example, have teamed up with ClearScore to offer in-app credit rating checks and insights on how to become more financially healthy based on how that consumer is currently tracking.
Others are figuring out ways to woo new customers. India’s ICICI, for instance, has opened up access to its personal financial management (PFM) app to non-customers, who can connect their accounts to the tool via open banking. The goal: to demonstrate the value of ICICI solutions and convince non-users to open an ICICI account.
Meanwhile, new providers are getting a piece of the action. Not only did Apple buy Credit Kudo, a U.K. open banking fintech that helps lenders make decisions and deliver credit scores, but Visa last year spent $2 billion for Tink, a Swedish startup that lets banks and other providers share consumer financial data. Is it a leap to think these acquisitions were made with an eye to eventual open banking in the U.S.? Expect more of this from other behemoths that straddle banking and whiz-bang technology.
Commercial banking hasn’t been left out, either. The U.K.’s Tide, for example, allows users to connect external business accounts in order to identify potential loan eligibility.
In the U.S., a slew of players like PayPal, Betterment, MINT, Plaid, Finicity and Yodlee have essentially created open banking provisions that have driven competitive and open innovation to market.
NOT ALWAYS A SMOOTH TRANSITION
The transition to open banking isn’t always smooth. Privacy and security are, of course, big concerns for all providers.
There have been calls for greater clarity on API integrity and interoperable technical standards. And some open banking advocates have questioned the technical proficiency of banking regulators. Consumer advocates have spoken up too. In Australia, a consumer group recently told the government it is concerned that non-bank lenders could misuse data or act in a way that is detrimental to consumers’ financial health.
The sensitivity of consumer data is also a big issue for the CFPB in the U.S. as the agency tries to unsnarl the thorny issue of how to handle consumer privacy and data protection. Once it is eventually established, the CFPB’s rules could essentially create an open banking regime that is overseen by regulators.
That might not be such a bad thing. Around the world, regulatory programs have helped drive widespread innovation. In the U.K., rules that permit variable recurring payments (VRPs) – or sweeping – allow consumers to set up automatic transfers between their own account and other providers. Government-led open banking programs like Brazil’s Pix, Australia’s New Payments Platform, Singapore’s PayNow and India’s Unified Payments Interface (UPI) are based on open banking principles and are encouraging competition in digital banking experiences.
But a pure compliance approach doesn’t address the innovation that is needed to compete successfully in open banking. Instead, banks should use open banking as an opportunity to do things differently and consider existing customer data as a valuable currency. That means using it to build relationships and re-think sales, marketing and products.
Open banking is still new and evolving, but it is already having repercussions across the industry and the world. Traditional banks would be wise to act like it is the de facto future of