Can Open Banking really reshape and rejuvenate financial use cases?
- Open Banking represents a shift from screen scraping-dependent practices of the past and banks may stand to gain from its adoption.
- Use cases like account opening, lending and personal finance management can all be improved if data is more easily accessible without depending upon practices that may compromise consumer's privacy or security.
The origin story of open banking has been different in America than in Europe. Led-by regulators in Europe, Open Banking has established a foothold in the banking industry across the pond. But in America, the change in approach has been primarily market-led and does not have a stringent regulatory framework around it.
At its core Open Banking has four key stakeholders that individually benefit from and participate in the system. FIs which hold consumer data can utilize data aggregators to share consumer information safely with fintechs. Third parties like digital marketplaces and wallets can continue to deliver their services relying on information that is comprehensive and granular. Lastly, consumers can share their data from each of their financial institutions without losing control of who is using it and why.
Companies like Akoya, which build the pipelines for data sharing, go through multiple banking systems and adapt their data into a single API that can connect to all other stakeholders in the Open Banking ecosystem. This connection takes away the inefficiency of a system that would otherwise depend upon one-to-one connections between each stakeholder.
Traditionally banking data is locked inside a bank’s own digital environment. This means that FIs don't have a full and granular understanding of a customer’s financial relationship with other banks and lenders beyond the credit report. And newer payment options like BNPL can show up in a credit report with a lag, making the overall picture of a consumer’s finances murky.
Having the ability to draw data from all of the financial relationships a customer has can enable better credit underwriting, and even improve wealth management use cases by improving client reporting. Similarly processes like onboarding can be improved because KYC checks don't have to depend upon the current online session to determine the authenticity of a customer’s request.
“But open banking can allow the consumer to log into an OAuth process in their bank account, link the bank account, and show ownership of the amount all in one session,” said Vijay Krishna, Chief Product Officer of Akoya at the recent Tearsheet Power of Payments Conference.
Similarly, other use cases also benefit from the implementation of open banking:
- Personal Finance Management: It's a lot easier to manage and budget expenses when all the information about savings and spending is in one place. For example, the unavailability of a sophisticated open banking system may have locked subscription management into the banking app environment. If data on subscription expenditure across multiple banks could be housed under one roof, consumers only need to access a single interface to keep on top of their subscription spend.
- Lending: “Open banking can pull the transaction history from a customer’s bank account and provide banks with underwriting solutions which take a much more nuanced decision, beyond the credit score,” said Krishna. For example, transaction data from Brazil’s real time payments ecosystem PIX can be used by lenders to create an alternative credit score.
- Payments: Open Banking can also catalyze the implementation of real time payment services by making bank data available to fintechs and payment providers through APIs. For businesses and individual consumers, real time payments offer accuracy and speed, because the snapshot of cash flow data doesn't have to wait for a check to clear or deposits to reach the receiver’s bank account. In the UK, real time payments enabled by open banking are gaining popularity, reaching 6.6 million payment initiation requests in September last year.
Consumers at the center
One important principle in Open Banking is consumer permissioning and autonomy. “It's not the banks, it's not the Googles of the world. It is consumers who own the data,” said Krishna.
Centering customers in a data sharing environment is a shift in perspective: when third parties needed access to customer data inside banks, they historically utilized screen scraping.
The practice of screen scraping depends upon credential sharing. With a consumer’s credentials, third parties can log into a banking app and “scrape” the data needed on a consumer. This methodology reduces the control a consumer has on who has access to their data and opens them up to security concerns. It also waylays the principle of data minimization which asserts that only the data that is needed to complete a specific process or request by the consumer should be collected.
Hence, Open Banking solves for consumer consent as well as data minimization. Akoya, for example, ensures that consumers can opt out of sharing their data with a company as well as limit its access to only the information that is needed. These guardrails help ensure that consumer data is not used beyond the purpose it was collected for and nor is it sold to third parties without their knowledge.
Open Banking shifts the balance of power in the consumer’s favor, assuaging regulatory fears about abusive data sharing practices. Practically, it makes provision of services easier as well as opening up the possibility of increasing the sheer amount of consumers that financial services cater to. And finally, now that the White House has greenlighted development of regulations around Open Banking systems, the path to Open Banking should be better lit than it was before.