Open banking gives third-party financial service providers open access to consumer banking, transactions, and other financial data through application programming interfaces (APIs). It allows for the networking of accounts and data across institutions for use by consumers, FIs, and third-party service providers, according to Investopedia.
It is a source of innovation and is poised to reshape the industry. Thus it should be a focus for banks and credit unions as they navigate this new year and ever-changing technology and expectations.
Utilizing modern API managers and ecosystems, growth-minded FIs can move forward with an open banking practice. Doing so will provide new opportunities, particularly with real-time payments.
Those real-time payments will gain more attention and traction later this year when the Federal Reserve fully rolls out its long-anticipated FedNow platform.
At the same time, the Consumer Financial Protection Bureau (CFPB) plans to accelerate a market shift toward open banking by drawing attention to a section of the Consumer Financial Protection Act that requires service providers to make specific data available to consumers. The CFPB also created an office to encourage innovation and competition among FIs.
That being said, FIs must carefully consider their strategy before entering into open banking partnerships. Two worth considering are:
Embedded finance involves integrating financial services into a non-financial company’s products or services. This can take the form of adding financial features, such as the ability to make payments or borrow money, or it can involve partnering with an FI to offer financial services to customers.
Embedded finance offers FIs a chance to serve retailers that want to incorporate payment capabilities into their apps and websites. Doing so allows customers to complete transactions using embedded financial services without leaving a retailer’s platform. This makes the overall experience seamless for the customer and can help drive sales for the business.
Embedded fintech integrates a fintech’s product and service into the bank or credit union’s online banking, mobile app, or back-office workflows. Doing so can help create new revenue streams to offset the FI’s loss of overdraft revenue and other fee income. This helps to retain an FI’s relationships and often improves wallet share.
Of course, other considerations exist before exploring open banking. Legacy technology will make it challenging for some FIs looking to implement solutions. Some banks and credit unions will partner with and/or acquire fintech companies to move forward. Others will turn to more modern core systems, shifting data between modern and legacy cores for reporting.
Additionally, data portability naturally raises privacy concerns. How can FIs determine if a request to share or transfer data is legitimate or whether a consumer fully understands the rights they are conferring? Will FIs face penalties for sharing data with parties found to have ill intentions? Given the potential regulatory and reputational risk, FIs need to carefully vet third parties to make sure those partners have strong security measures to protect said data.
Strategy always matters. This will be critical as FIs identify potential partners, discuss their plans with regulators, and build an ecosystem that leverages open banking.
The Bottom Line
Early adopters have already engaged with vendors and are reviewing their tech stacks. Others will rely on large fintech firms to help them begin the process.
Open banking can bring significant benefits to both consumers and businesses. Still, it is important for all parties involved to be mindful of the potential risks and to take steps to protect their data. SRM can help you assess your situation and evaluate the right open banking strategy for your financial institution.