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Open banking represents an opportunity for financial institutions to co-innovate and collaborate with fintechs to provide their customers with embedded, personalized, and protected banking experiences. Embracing the concept of banking-as-a-service positions banks and credit unions to offer an almost limitless array of differentiated experiences and highly personalized touchpoints that enable consumers to move and manage money when, where and how they choose.
What ‘Open Banking’ Means to U.S. Institutions
Open banking encompasses any strategy by a financial institution to open its APIs (application programming interfaces) to third parties and give those third parties access to data (data-as-a-service) or access to functionality (banking-as-a-service). Purists may want to preserve a distinction between open banking and banking-as-a-service, but they can be seen as a continuum.
This broader definition of open banking increasingly reflects the reality of what’s happening, especially in the U.S. And what really matters is what banks and fintechs are doing when they partner, not what we call it.
The original definition of open banking based on the European Union’s revised Payment Services Directive (PSD2) centers around providing consent-based access to data, specifically an accountholder’s existing data, so consumers have more control and can securely and effortlessly move and manage money. But this definition leaves out access to functionality, which is a key part of open banking as it is developing in the U.S.
In the U.S., open banking is not driven by regulatory mandate but rather by banks’ need to remain competitive. In this model of open banking, financial institutions embed financial services into customers’ everyday lives, delivering banking functionality through novel, non-bank-owned channels to make tasks such as buying groceries, renting a rideshare, managing finances or redeeming a loyalty voucher simple and painless.
Implications of the ‘As-a-Service’ Platform Trend
By providing data or banking “as a service,” financial institutions are following a larger trend that has had a profound impact on other industries as well. Take the example of Airbnb, for instance. Whereas starting a hotel involves considerable infrastructure, capital and operational costs, Airbnb has launched lodging-as-a-service, avoiding those start-up costs.
“Open banking-as-a-service will not necessarily disrupt financial institutions’ existing strategy, rather, it can extend that strategy.”
— Niranjan Ramaswamy, Fiserv
Airbnb is an intermediary distributor — a platform — that connects hosts and guests, distributing stays in existing homes “as a service.” Those who use Airbnb don’t necessarily embrace the solution because they prefer it over hotels. Sometimes, it’s the only feasible option when there is limited or no room availability during peak seasons. In other words, a booking gained by Airbnb doesn’t always equal a booking lost by the hotel.
Similarly, open banking-as-a-service will not necessarily disrupt financial institutions’ existing strategy for distributing financial services, rather, it can extend that strategy, capitalizing on new market conditions and fueling growth.
Financial Institutions Can Leverage Their Infrastructure
Creating a bank — even a digital-only bank — requires significant investment in infrastructure. It requires a technology stack to support functions across the back office (core operations), middle office (risk, insights, compliance and performance management) and front office (customer engagement). Like the hotelier who launches a new hotel, the banker has to invest a lot of time and money before any service or value can be extracted.
But unlike hotels, banks and credit unions can leverage their infrastructure and provide banking-as-a-service in partnership with fintechs. Why? Because fintechs do not want to rebuild that banking technology infrastructure from scratch. Fintechs are focused on creating experiences, and while they may need functions such as the ability to manage or process accounts, payments, cards, fraud protection, identity theft protection and loans, many would prefer to avoid the burden of start-up costs, compliance and regulatory reporting.
Financial institutions can become custodians or sponsors, delivering their core competencies “as a service” to any industry that needs to move or manage money. They can leverage their data and primary capabilities to enable frictionless financial services experiences through new channels and business strategies, accelerating distribution of integrated value chains.
Let’s consider some examples:
- Digital apps — created by fintechs and offering consumers and businesses digital banking services optimized to their specific market such as millennials, sole proprietors, local communities, small businesses and so forth.
- Payroll apps — apps that serve the growing gig economy. According to the U.S. Bureau of Labor Statistics, the percentage of the U.S. workforce who are gig workers was projected to increase to 43% in 2020.
- On-demand service apps — this fast-growing market, including ride share, grocery, food delivery, digital insurers, travel, vacation and other industries that require the ability to move money.
- Digital marketplaces — online marketplaces that match buyers and suppliers to sell or trade goods or services.
- Enterprise disbursements — serving companies that need real-time disbursements such as insurance claims payments, merchant rebates, loyalty rewards, employee bonuses, expense reimbursements, loan payouts, refunds and so forth.
- Financial wellness — apps that provide wealth management, debt and liquidity management, investing, money transfers or predictive algorithms for automated payments and savings.
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New Meaning for ‘Trust Management’
The partnerships between financial institutions and fintechs, and the open APIs that make these collaborations possible, must be bounded by a “circle of trust.” Consent management and its governance are gaining importance and enable customers to decide to what extent they want fintechs to access their data.
“Banks are in the trust business. The focus of trust is shifting from preventing access to data to protecting that data from abuse.”
If you asked bankers what business they are in or what their business does, you might hear that they are in the business of offering accounts or loans or managing payments. But consider this definition: banking is the business of providing trusted services around a customer’s money. Banks are in the trust business. Without trust, there are no bankers and no banks.
Partnerships between financial institutions and fintechs will have significant bearing on how customer trust in the financial institution is managed and safeguarded. Sharing accountholder data is a sensitive topic, with significant potential for reputational harm.
The reality is that a lot of customer data is already out there on the internet, especially if the customer uses social media or free email services. They have consented to share it when they hit the “I agree” button. Data such as name, address, date of birth, net worth and mortgage are often already accessible. Given this reality, and given also that data sharing may be essential to providing an exceptional customer experience, the focus of trust management is shifting from preventing access to data to protecting that data from abuse such as theft or fraud.
At a Transformational Crossroads
Giving third parties access to existing customers’ bank data is key to offering beautiful customer experiences, but providing third parties access to banking functionality through banking-as-a-service will create revolutionary customer experiences across industry verticals.
Banking is at a transformational point. Open banking is not going to change the fundamentals of banking, but it will extend financial data and services in ways that can solve customer problems, create compelling experiences and drive revenue growth.