By: Elizabeth Rowe, Financial Services Strategist
What Is Open Banking and Why It Matters
As a term, Open Banking references the open APIs that allow third parties to build their applications around a financial institution. Its success depends on collaboration between FIs and fintechs, and to some observers of the small bank/credit union space, it can seem a Herculean redesign challenge principally benefiting large retailers and billers.
In the U.S., there appears to be a growing acceptance that some iteration of PSD2’s Open Banking requirements will find their way into our financial regulations. Among many concerns U.S.-based FIs have about Open Banking is the change in their relationships with third-party APIs that would occur. FIs have worked with APIs for years, as they’ve allowed personal finance management (PFM) APIs to present billing details through the FI’s web site, and FIs themselves use APIs to connect their developers to the card networks. “To date, however, these connections have been used primarily to share information rather than to transfer monetary balances,” according to McKinsey and Company in a September 2017 report.
Impact on the U.S. Payments Industry
For banks and credit unions, differentiation will be increasingly difficult in an environment where consumer touch points are built on top of FIs. At the point of sale, online merchants can eliminate redirection to another service (like PayPal, Visa, Mastercard or American Express).
There has already been an uptick in the number of U.S. FIs opening their APIs to developers in an effort either to sidestep Open Banking regulations or to capture additional value in their customer/member relationships while they still own that customer interface. They are striking up partnerships with fintechs, and building and promoting their own customer-centric products while they can.
In fact, a new ACI Worldwide survey finds that 66% of U.S. banks are willing to open up their APIs to third-party developers, and that 70% of our banks plan to encourage the use of their own APIs.
Where Open Banking Stands in the U.S.
The creation of PSD2 is Euro-centric, and is driven by a need to create a single Euro Zone banking system in which consumers and businesses can move commerce across the continent, and encounter no peculiarities or discrete regulations in individual countries/markets.
However, the secondary intention of PSD2 is to provide transparency and full-control of payments to users, and is solidly in the realm of consideration here. The CFPB is considering the consumer benefits of a similar standard, and the American Bankers Association is both encouraging its members to deflect regulation by adopting open APIs. Additionally, they are spending lavishly in lobbying against any sort of similar U.S. initiative.
What Does This Mean for Credit Unions?
Per McKinsey and Co, over the next 18 to 24 months, financial institutions should capitalize on their incumbent advantages by taking the following actions:
- Explore data-sharing agreements with fintech and non-financial services firms to stay ahead of the curve.
- Develop a perspective on APIs and their benefit to the credit union’s service model, both in leveraging mandated third-party access and potentially extending access beyond statutory requirements.
- Fully understand both existing data privacy mandates and likely changes, and determine their institution’s appetite for a less conventional approach. Examine how customer messaging would best facilitate any such change.
- Credit unions and banks will need to address the potential loss of revenue from existing payments revenue streams resulting from the lowered barriers to competition. Change is rarely comfortable, but as market evolution in the United States and other countries illustrates, the forces of change are inevitable. Financial institutions are better served getting ahead of and defining the trend, rather than waging a futile battle to repel it.
So, should you view Open Banking as a key, strategic opportunity? You bet! As power of choice continues to pick up consumer momentum, competitive threats are everywhere. When it’s all said and done, credit unions’ preparedness for open banking will help ensure relevancy with members and deliver better value for the next generation of members to come.
Open banking is both an opportunity and a threat to traditional financial services intermediaries. And the only way to succeed as third-party vendors crowd into a member’s account is to leverage the messages those members are receiving. If credit unions are becoming gateways, then the intersection of members, credit unions and third-parties creates a huge opportunity to convey what the credit union offers. And not just products and services, but additionally, the steps the credit union is taking to prevent fraud, to honor the fiduciary relationship between institution and member and generally position the credit union in its traditional role: As the trusted member partner.