As I’ve discussed a few times on this blog, the pursuit of industry collaboration in recent years is a positive development. This is especially true given that United States regulation around open banking will make it a necessity, sooner or later.
Last October, the Consumer Financial Protection Bureau (CFPB) unveiled a new open banking framework. It will have far-reaching consequences for fintech companies and banks when it eventually goes into effect, potentially in 2024.
The CFPB’s framework mandates that banks provide qualified third parties with access to consumer financial data. This includes settled and unsettled transaction and deposit data, consumers’ personal information, and other miscellaneous information. This must all be done through the use of application programming interfaces (APIs), much as Europe has been doing for years now.
The specifics may change by the time the rules go into effect. However, banks and fintechs will need to rely on each other to ensure compliance.
Cooperation is Key to Compliance
The proposed rules will require banks to make certain information available via two API-accessible portals: consumer-facing and third-party access. Currently, however, many banks cannot comply with the CFPB’s requirements.
The majority of banks are using legacy backend systems that do not easily support such capabilities. Even outside the context of open banking, banks have had API difficulties. According to one study, 81% of surveyed banks cited a lack of API experience as a challenge.
Fortunately, tech can help.
Fintech companies primarily use cloud-based systems that are far more dynamic and customizable. As a result, they do not have the same challenges as banks in implementing APIs to make the most of open banking. Banks can thus leverage fintech’s agile systems and technological expertise to comply with the CFPB’s forthcoming rules. At the same time, they can expand their customer bases and tailor products and services to consumers’ individual needs.
One Hand Feeds the Other
The bank-tech relationship is a two-way street. As banks benefit, fintech companies also stand to benefit from closer ties to banks when U.S. open banking is instituted.
Firms have the technology capabilities to meet open banking requirements, but banks can help them in the areas of data security and compliance. Unlike fintech companies, banks have spent decades implementing data security measures. As regulated financial entities, they must comply with rigorous privacy and safety rules.
Banks are advocating for third parties to ultimately be held liable for misuses and abuses of sensitive data. In that case, fintech will be on the hook for ensuring that customer data is safe and secure. Banks can help them implement best data security practices to limit potential risks.
Challenges to Overcome
This article isn’t intended to sing flat praise. Open banking is still a ways off yet, and there’s certainly potential room for improvement.
Open banking holds promise in terms of streamlining costs for institutions and offering convenient access to consumers’ financial data. However, it also carries significant privacy and security risks, including data breaches due to subpar security, hacking, or insider threats. In more extreme cases, malicious third-party apps could potentially exploit open banking APIs to access and misuse a customer’s account.
Moreover, open banking could redefine the financial services landscape, fostering increased competition but also potentially triggering industry consolidation. This could result in market concentration, undermining the cost benefits for consumers and leading to potential misuse of customer data by dominant entities. Such a pattern has been seen and criticized in sectors like eCommerce and social media, and with personal financial data at stake, the concerns could be even greater.
Naturally, the outcome could negate any cost benefits open banking might provide to consumers. This pattern of market consolidation has already been observed and criticized in sectors such as eCommerce, search engines, and social media. It can lead to the exploitation of customer data by tech behemoths for their gain.
Embracing Collaboration & Customer-Centricity
So, with all the benefits of open banking being rather difficult to ignore, how can banks and fintech companies limit potential risk and get the most out of the new technology?
First, I think it’s important to highlight the role of collaboration.
The financial landscape is constantly in flux. This is further accelerated by the global pandemic’s seismic impact on attitudes toward banking and money management. Where there was once competition between entrenched financial institutions and emerging tech, collaboration is now considered a strategic pathway to maintain customer engagement.
Traditional banks opting for this collaborative approach gain a distinct advantage. They increase their ability to keep pace with appealing, user-friendly solutions developed by innovative fintech companies.
Then, there’s the matter of relations with customers. Competition should not be perceived as a negative force, but rather as a catalyst for innovation. Driven by groundbreaking developments in the financial sector, numerous traditional banks have upgraded their digital engagement platforms, launching user-friendly mobile apps and enhancing online banking experiences.
As a fintech executive, I firmly believe that digital transformation anchored by a customer-centric approach is key to enhancing customer engagement and meeting the evolving needs of our user base.
Innovation Breeds Success
Open banking has democratized a market that was once monopolized by legacy banks, spurring a wave of innovation. This was a direct response to agile fintech companies that were rapidly ideating and integrating advanced financial solutions.
By sharing pertinent financial data with third parties, we enhance our collective decision-making abilities, resulting in more robust predictive models and impactful strategic decisions. This is a benefit that is shared by traditional banks and tech firms alike.
In light of these insights, the transformative potential of open banking for the financial markets and the larger economy is undeniable. Recent global events have irrevocably changed the way we approach finance. As a key player in this evolution, fintech has emerged as a viable alternative powered by digital innovation. It’s pushing traditional banks to seize the opportunity to expand and enrich their services through open banking technology.
The ongoing evolution in traditional banking is undoubtedly a change for the better. I, for one, am pleased to see growing consumer trust and a rising number of institutions adopting open banking, all contributing to sustainable growth in the financial sector.
