- Even though it’s not mandated, 76 million users in North America have adopted some form of open banking, which could mean big opportunity for FIs – in competitive advantage and revenue growth.
- Because the U.S. doesn’t have a centralized identity system, the huge storage of data that banks have of their customers could be used commercially for permissioned identity sharing.
- But because of the sensitivity around customer data, regulators, FIs and tech providers will need to work in partnership to communicate clearly what open banking is intended to accomplish and how it will get there.
Opposition to the Consumer Financial Protection Bureau’s proposed rules to formalize open banking in the U.S. may seem like a natural reaction and in some ways legitimate. The prospect of banks sharing customer data and open tech stacks to third parties is counterintuitive to an industry that’s been struggling with how to manage its vast lakes of data. But formalizing open banking could mean big opportunity for banks – in revenue growth, a better customer experience and competitive advantage.
Conceived in the U.K., the vision for open banking was an API-based system that would enable the systematic sharing and portability of data and payments uniformity. The idea was to foster competition by introducing greater interoperability in a system protected by individual bank silos. Now, more than 124 countries, including the U.S., have converted the idea into market-driven initiatives. As momentum continues to build, skeptics should take note of this rate of maturation and the windows of opportunities already built into the system.
Consumers Are Already On Board
Americans started embracing the benefits of a more open data-sharing ecosystem long before it was formalized by the country’s rulemaking bodies – and the rate of adoption has been noteworthy. According to the Financial Data Exchange (FDX), 76 million North Americans were using data-sharing APIs by this March, compared to only 53 million at the end of last year and 32 million at the end of 2022. Call it open banking by stealth rather than by force: consumers have been offered use cases where speed and ease have encouraged rapid organic adoption.
One of those early use cases was data-sharing to accelerate loan originations. In 2020, Lending Club began offering API-based income and account verification to enable the end-to-end digital opening of unsecured loans (Figure 1). Today, eight out of 21 unsecured lenders tracked by Curinos’ Digital Banking Analyzer – including Avant, Best Egg, SoFi, Prosper, Lending Point, OneMain and Upstart – engage this capability to present applicants with a seamless approval process.
Figure 1: Lending Club October 2020 Plaid Income and Financial-Position Verification Journey
The use of account information services (AIS) also continues to grow: 30% of the institutions offering consumer checking tracked by the Analyzer provide funding via API data linking, which reduces the process significantly. Users can link accounts through a few clicks instead of manual entry of account and routing numbers. Because the speed of funding increases, it’s a win for the FI as well as the customer.
APIs: Institutions Are Already Tapping Into The Potential
Many banking institutions are pushing API–linking capabilities to tackle the ever-illusive question of customer share of wallet. Nearly a third of them tracked by our the Curinos Digital Banking Analyzer that offer checking do this by linking external accounts via APIs on mobile app home screens. Brands such as US Bank, Chase, Revolut and SoFi take it a step further. They encourage external account linking for greater insight into customer relationships so they can offer timely, competitive product recommendations (Figure 2).
Figure 2: Revolut, US Bank and Chase Encourage Account Linking Via API
And account linking via API is a natural for small business banking providers because their clients tend to have more than one banking relationship. Besides linking these accounts, it can allow the primary account provider to offer a range of third–party tools and capabilities – such as payroll, invoicing, utility management – all within its own platform, as is the case with Novo (Figure 3).
Figure 3: Novo’s Marketplace Allows For Third-Party Integrations
APIs Can Open Up New Revenue Streams
Every customer is required to fully verify their identity before opening a banking account. That makes FIs bastions of data that could be used commercially for permissioned identity sharing. The U.S. doesn’t have a centralized identity system, so banks could be the ones providing tokenized versions of verified identity for a range of uses online.
APIs could also be a revenue stream for banks in the U.S. “In the U.K. and Europe we’ve been exploring the commercial model for open banking,” says Jack Wilson, Head of Policy & Regulatory Affairs at TrueLayer, a tech engine for European open banking. “If you’re making your customer’s bank account accessible to third parties, the third party will pay for that access, enabled by so-called premium or commercial APIs.” He goes on to say that just as platforms like Apple are able to demand part of a bank’s interchange fee, “banks should be looking at open banking as a way to regain control from those platforms.” Open banking vendors are already gearing up for commercialization of identity access, with Plaid’s newly launched Plaid Layer. By signing up to the Plaid Network centralized identity platform, all an applicant needs to enter is a device phone number that is then used to speed applications by pre-filling information and automatic identity verification.
Regulation Should Start With
Where The Consumer Is Located
U.S. regulators can go to school on many of the open banking programs that have proliferated worldwide, but to achieve buy-in from the industry and consumers, they’ll need to think local.
Chris Holmes is a peer in the UK’s House of Lords who has helped shape several laws that consider technology’s impact on financial services. “It’s imperative to look at international examples to understand what’s happening,” says Lord Holmes, “but the mistake would be then to take something and impose it on the different social political economic and legal contexts that we have in the U.K.”
But at both the state and federal level in the U.S., data sharing and definitions around liabilities have become sensitive issues, while rules for third parties, data aggregators, and tech firms are naturally as unique to the country as they are elsewhere. Considering these differences, it’s essential that regulators, FIs and tech providers work in partnership to communicate clearly what the open banking sets out to accomplish and how. Adds Lord Holmes, “It doesn’t matter how good the technology is: if people aren’t convinced by it, then they’re not going to use it.” So, clearly, for people to use open banking, the industry will have to make it easy for them.
But as API linking continues to proliferate, Curinos research often finds broken links, instability, and lengthier journeys when logging into an account while in another provider’s ecosystem. And we’ve observed many payments-initiation journeys to be no better – often requiring way too many screens to make a third-party payment.
The potential for all parties to benefit from open banking is clear and immense, but it will be realized only if the end user is front of mind. As open banking matures, continuing to prioritize competitive, responsive and pleasing digital experiences will be a prerequisite to its success.
