Banking regulation is once again a hot topic for 2023. This latest debate centers on the relevance and efficacy of The Consumer Financial Protection Bureau (or TCFB).
Proponents of deregulation argue that our current approach to consumer protection is broken. Regulatory supporters, on the other hand, view deregulation as a dangerous prospect that could leave millions of consumers at the mercy of profiteering banks and corporations.
In my opinion, both arguments have a point. Current regulations provide some necessary safeguards. However, they’re clearly leaving certain problems unaddressed or underserved. Open data sharing, however, could be the stop-gap solution we’re all looking for.
What is Open-Data Sharing?
Open banking is essentially the process of banks and other financial institutions opening up data to regulated merchants service providers for review, use, and sharing. While this sounds like an unsecured process, banks are building a stable infrastructure for customers to choose where and how their data is stored and shared.
A good example of this would be the instant transfer features built into a customer’s banking applications. Open banking allows customers to link their accounts with other regulated agencies and banks, and transfer funds between them, process requests, and even file disputes.
In some ways, PayPal has pioneered open banking by promoting open data sharing between institutions for years. Customers are encouraged to connect accounts via the PayPal cross-border platform, including personal bank accounts and cryptocurrency accounts.
The intention isn’t to collect and sell user data. The point is to allow better connectivity and communication between regulators, institutions, and agencies. The end purpose is to improve the customer experience, and maintain the integrity of processed transactions.
Open-data sharing breaks down like this:
- Customers get to customize, streamline, and centralize their financial resources. In turn, this increases the means by which they can track, invest, borrow, and spend their funds.
- Banks and their providers are consistently motivated to innovate and improve their products and services. Also, they are better able to respond to and manage disputes with inter-agency communication.
- Merchants and retailers of every size can benefit from open-data sharing between financial institutions in a variety of ways, including faster transaction authentication and approval and quicker resolution processes.
Open Banking as a Strategy
Open-data sharing between financial entities is already available in the US, and is in wider use across the U.K. and EU, where legal mandates relating to open banking have already been imposed with success.
During a 2022 interview, Pinar Ozcan of Oxford University explained the benefits of open banking. “If you are trying to boost innovation by getting new players in and giving them a chance, there’s naturally going to be resistance at the beginning,” she said. “That’s why it’s important to be regulatory-led because the data resides in large financial institutions that may not have the incentives to open up their data.”
She does warn that getting large institutions on board is likely to be a challenge, since many have historically been slow to adapt to change. However, given the acceptance and swiftly enacted regulation of open banking systems, it seems they are beginning to come around.
“We are starting to see that open banking is being used by important entities, be it government or large institutions are starting to realize that open banking has a lot to offer. I expect usage will keep going up,” Ozcan observed. “However, we are not there yet, and we need another few years for the frictions to go away. Slowly, we’re going to open up the data.”
Embedded finance is one area that is seeing substantial interest from the financial sector. Through this method, larger banks and institutions can offer credit through non-financial retail sectors, which could improve integration between banks, merchants, and consumers.
According to McKinsey and Company, “The types of businesses well placed to offer embedded finance include retailers, business-software firms, online marketplaces, platforms, telecom companies, and original equipment manufacturers (OEMs). All these categories have seen high levels of activity and innovation in embedded finance during the past year or two.”
Open-Data Sharing Benefits
Open-data sharing between financial institutions, providers, and merchants can improve the customer experience, decrease friction and fees, and streamline communication between parties. If offers:
Faster Acceptance Rates
Since open-banking’s adoption in Europe, eCommerce companies can accept direct payments from anywhere in Europe, which naturally boosts acceptance rates. For instance, payment gateway provider Kevin is capable of serving nearly 400 million consumers throughout Europe, which could improve merchant scalability and market shares.
The speed of cross-border payments has always been an issue in finance. Open banking may potentially solve this issue, with more direct contact between banks and consumers during the payment process.
Conversion through CX
Consider how much open-data sharing could improve the user experience. When consumers are empowered to move their money around as they see fit, through supporting and regulated agencies that foster confidence and security, conversion is a natural side-effect.
For instance, third-party banking application Chime uses open-banking platform Plaid to connect user accounts and transfers. The company’s “pay by account” feature reduces cart abandonment because funds can be transferred without use of a credit or debit card, increasing consumer options.
Fewer Fees
Interchange fees are generally the realm of card networks. If those networks are essentially removed from the equation, or at least the option to remove them is made available— the fewer fees consumers and merchants would pay.
Another benefit here for merchants is that they could ostensibly search for and compare service providers with lower overall fees, as open banking allows more payment gateways into the market.
Open Banking as a Solution
Open banking isn’t out to solve just one problem. Rather, the goal is to systematically address nimbleness and innovation in the banking sector. In turn, this should improve communication and spark competition between agencies and businesses.
What I’m implying here is that pitching this conversation as “regulation vs. deregulation” is the wrong focus. Instead, innovation could alleviate many stressors that have thus far prevented certain financial institutions from remaining competitive.
As I have often said, neither regulation nor technology should be viewed as the enemy. Both are components of a better solution.
Open banking and data-sharing may:
- Encourage consumer trust in banking
- Reduce friction caused by outdated data processing
- Bring needed innovations in banking services and products
- Help reestablish control over financial trends
- Improve consumer financial knowledge and wellness
- Reduce overdraft fees and penalties
- Improve customer service and experience
- Grant greater control over personal data
The conversation around innovation and regulation really shouldn’t be a question of pitting one party against another. There is a way to balance the scales and protect everyone.
To my mind, the solution is to facilitate more data sharing and collaboration between parties. Banks can share data with card networks and vice versa. Banks can also share data with merchants to help them develop safer and more effective tactics.
Open-data sharing will not solve every problem. However, given the success rates and benefits mentioned above… the conversation is warranted, at the very least.
