The move towards open banking is one of the most fundamental changes in the banking system for years. A direct consequence of the process of digital transformation, its goal is to give customers and third-party financial institutions frictionless access to their financial data, enabling them to download, share, and action information about everything from account balances and transactions to investments.
Dima Kats, CEO, Clear Junction shares his thoughts on open banking, and the Biden administrations new regulations.
Fintech companies have been key enablers of the move towards open banking. Realtime payment processes, data gathering, the use of AI to automate query systems and more, have all enabled the acceleration in the flow of data within the industry which has allowed open banking to flourish.
A recent executive order from President Biden in the US will give open banking further momentum too. Part of a much broader directive looking at fostering competition across various industries, the Executive Order on Promoting Competition in the American Economy tasks the Consumer Financial Protection Bureau (CFPB) to create rules that would give banking customers the right to port their data from one bank to another.
In doing this, the Biden administration is making good on a decade-old promise contained in the 2010 Dodd-Frank Act regarding the portability of consumer financial transaction data. The technology has been in place to facilitate open banking for several years, and now the regulation is finally catching up, we are moving into an era of huge potential for the fintech industry.
Why open banking needs data
Open banking needs data to function – and for fintechs to make a difference to the banking user experience they need access to individuals’ and businesses’ financial data. Access will allow for the creation of new functionalities that will dramatically improve the way people interact with their finances; empowering, for example, AI-driven budgeting applications that can give customers insights into precisely where and when they can save money, what utilities offer them the best value, and more.
The US banking system has typically been far more closed than the European one, so the new Biden regulations will likely have a significant impact on the financial systems in the US market once they eventually come into force. Challenger banks and neobanks will have much more latitude to establish relationships with fintech companies, offering a connected ecosystem of digitally native financial services that eliminates gatekeepers and allows data to circulate between trusted parties.
This will not only stimulate competition in the US – it will also have a knock-on effect in other countries as both US fintech companies seek to expand their reach and native companies seek to emulate some of the new services that are forged in what will be a very active US open banking arena.
Countries such as the UK that are used to being at the centre of fintech developments may find themselves suddenly disadvantaged by local laws and regulations as progress accelerates. The industry therefore needs to be agile and responsive to the need for change as innovation creates new business opportunities.
Engines of growth
Fintechs also facilitate the growth of banking services by providing access to their digital infrastructures. For that growth to be maintained, the various different services within the shared digital infrastructures need to be sharing data constantly, optimising each other in turn and delivering a more effective service to customers.
The future role of regulation in ensuring those flows of data is therefore fundamental to continued business success in the areas of the world where open banking regulations have been enacted. For banks and financial organisations located outside economic areas with their own financial regulations, accessing that digital infrastructure can be difficult.
However, API-based financial systems are enabling open banking in more countries. A recent EIU report suggests that 87% of countries now have some form of open API in place and where the regulation stops, smart personalisation and corporate banking are driving initiatives to advance banking directives.
Of course, progress is easier where regulations are internationally aligned. But as we have seen from the US, lawmakers often find themselves in a position where they are having to play catch up with influential fintech applications. This scenario will likely play out in different territories several times over the coming years, with fintech innovation and neobank establishments typically running in advance of local regulations. They may even operate at the vanguard of bringing new countries into the increasingly globalised open banking system.
Two things remain clear though: fintech is firmly in the sights of the Biden administration’s regulators and the Executive Order has far-reaching implications beyond US borders. Allowing businesses and individuals to easily move their money and information between institutions will encourage other national regulatory bodies to evaluate what steps they should take to enable open banking in the future. But first, we will see domestic competition between neobanks and traditional institutions ramp up, as they both look to foster new partnerships with innovative fintechs.