An Open Road For Open Banking?
Increasingly, open banking will underpin that collaboration.
Nearly three years after the introduction of the second Payment Services Directive (PSD2) in the U.K., there are indications that the opening of data flows between financial services companies has led to strong innovation (and demand for that innovation), and more regulation may loom.
Open banking at its basic level refers to parties sharing financial data — between banks and FinTechs or other third parties — through digital means with the account holders’ explicit consent.
The mechanic of digital conduits, and the consent, open the door to digitization and data aggregation, simplifying and streamlining daily financial life.
The consumer with a range of bank and other financial accounts spanning several firms can have all that data collected at a single point of access. That unified view, conceivably, can leverage FinTech services that help end consumers (for example) see how they are managing their budgets, their investments and reach various financial goals.
Access for the consumer though means access to that far-flung data is paramount for the banks and third parties. To that end, traditional financial institutions (FIs) need to open up their own data streams to other companies.
In Europe, PSD2, which debuted at the beginning of 2018, mandated that banks share that data through application programming interfaces (APIs) that allow for data to be exchanged. The APIs need to be open so that third parties can engage with them, which in turn fosters partnerships between banks and FinTechs.
A paper by the Emerging Payments Association EU found that “In the opinion of all observers, open banking on the one hand and instant payment on the other is the recipe for all tomorrow’s payment solutions.”
The Banks And The FinTechs
There’s an important wrinkle here for the banks, which allows them to wrap the FinTech’s services and products into their own interactions with consumers and thus — through convenience, of course — create stickier relationships with clients.
In this way, the ecosystem grows ever more tightly knit and ever more digital.
Some estimates, such as from Simon Torrance, finance adviser at the World Economic Forum, peg the movement to “distributed banking” as one that is worth trillions of dollars — growing from $3.6 trillion to $7.2 trillion.
But, as always, the shift is not monolithic. Depending on where you look, open banking has taken root in different ways in different countries as initiatives evolve. As noted by Platformable in its quarterly report on the state of open banking, in the second quarter of 2020, roughly 21 percent of European and U.K. FinTechs are accredited to build across more than 20 countries, and 59 percent are accredited to offer their services in just one country.
European and U.K. FinTech providers getting accreditation to use open banking APIs grew 9.2 percent over the first quarter in the U.K. and 13 percent over the first quarter in Europe.
The U.K. is arguably ground zero for open banking and, if investment flows are an indicator of where the FinTech-driven innovation will be, then the U.K. leads the pack with more than 80 percent of FinTech funding in Europe last year alone. In another example, the Emerging Payments Association EU found that digital-only challenger banks, including N26 and TransferWise are entering Spain. Australia debuted its open banking framework in July of this year.
Emerging Demand In The U.S.
As noted in a PYMNTS Deep Dive into the state of open banking — and with an eye on the U.S. — the economic headwinds and rising fraud trends wrought by the pandemic have caused consumers to scrutinize the trust they have tied to FIs and their own financial data. In the U.S., 56 percent of consumers would like more control over their own digital data, according to studies.
The shift to increased transacting online means people are becoming more interested and comfortable with online banking.
In June, Maha El Dimachki, then-head of Payments for the U.K. Financial Conduct Authority (FCA), said in an interview with PYMNTS that the pandemic has helped shine a spotlight on the infrastructure underpinning the great digital shift toward online and contactless transactions.
“The development of open banking has continued … during the pandemic, although the speed of development may have slowed a little,” she told PYMNTS. “That being said, we have also seen open banking being used to help consumers and businesses during the crisis, for instance, to facilitate evidencing revenues for self-employed [individuals]. In addition, a number of these firms have lifted fees to help their customers or facilitated the use of open banking, such as payment initiation, for making donations to charities.”
In its March brief “Developments in Open Banking and APIs: Where Does the U.S. Stand?” the Federal Reserve Bank of Boston said, “To date, U.S. regulators have taken a more hands-off approach by issuing non-binding guidelines, thus allowing industry stakeholders to pave the way forward. U.S. regulators acknowledge that although there is a market and demand for open banking, the current regulatory structure prioritizes consumer protection.”
The open access to APIs allows merchants to give consumers additional payment options. In a separate interview with PYMNTS earlier this month, Arjun Kakkar, vice president of Strategy and Operations for Ekata, said the flexibility “is merely the tip of the iceberg — merchants can offer checkout options way beyond our imagination that could optimize customer value creation.”
The Data Sharing
To get to that value creation, the data sharing between banks and FinTechs must begin with agreements to how that data can be shared.
In an interview with PYMNTS at the end of last year, Dave Fortney, executive vice president of Product Management and Strategy at The Clearing House (TCH), said that historically, only the largest banks have had the resources — and the time — to develop and deploy APIs. Smaller FIs have been left at a competitive disadvantage.
So, there have been other avenues through which banks might link with FinTechs. Late last year, TCH released a template known as the Model Data Access Agreement, which gives a foundation of contractual terms and technical components that can standardize and streamline the FI/FinTech interactions (and it helps shift away from screen scraping, which as a practice that has raised concerns within financial services about security and data access).
In other examples, Envestnet | Yodlee inked a data sharing agreement with J.P. Morgan Chase. Under the terms of that deal, the bank’s customers are able to send financial data to more than 1,200 third-party apps across the Envestnet | Yodlee platform.
In a PYMNTS interview at the time of that announcement, Envestnet | Yodlee CEO Stuart DePina said, “the financial institutions have turned 180 degrees in the way that they view aggregators — and I say that in the context that, ultimately, they want to support and please their own consumers: the depositors.”
But regulators may have to take a more hands-on approach as data sharing comes into focus.
Earlier this month, the Consumer Financial Protection Bureau (CFPB) said it will look to issue advance notice of proposed rulemaking on “open banking” by the end of this year. That signals more rules on the horizon.
The CFPB specifically targets the implementation of Section 1033 of the Dodd-Frank Act. That section ties into information (and authorization) that a consumer financial services provider must make available to consumers about the data accessed, maintained and used about those consumers.
“This type of consumer-authorized data access and use holds the promise of improved and innovative consumer financial products and services, enhanced control for consumers over their financial lives, and increased competition in the provision of financial services to consumers,” said the CFPB, which stated too that “although data users may access consumer data from data holders without the use of any intermediaries, the Bureau understands that currently most authorized data access is effected via data aggregators.”
Although comments are due 90 days after the publication of the advance notice — and the road to regulation is a winding one — the data aggregators will draw more examination from the agencies that can ultimately shape how they operate. Plaid connects more than 11,000 banks and other firms to more than 200 million consumer accounts.
We’re coming into the third year of open banking in Europe, and the journey here in the states is in its earliest (and formative) stages.