While open banking is already a reality in the U.K. and much of Europe, in other parts of the world including the U.S., it is still an emerging trend. Articles touting the benefits of open banking and the underlying need to embrace APIs are widespread, so U.S. financial institutions are feeling the pressure to enable open banking.
But why would any institution want to explore open banking voluntarily, rather than by government requirement — as it was in the U.K.? It’s a reasonable question.
As new technologies continue to advance digital capabilities of today’s banking providers, consumers increasingly expect that the third-party apps they use such as those for budgeting can easily access to their account data. Additionally, bigtech companies like Google, Amazon, Facebook and Apple are innovating rapidly, with their eyes set on breaking into the financial services, thereby increasing the pressure felt by U.S. institutions.
In the past, traditional financial institutions have relied on the practice of collecting information from consumers for one purpose then translating them for another — a process rife with security loopholes. Open banking offers a better way.
Application Programming Interfaces (APIs) allow the traditional institution, with the customer’s consent, to provide access to specific and protected data to multiple entities. These APIs can also be used by the institution to hasten the internal adoption of new core platforms and cloud-based applications.
Nevertheless, before jumping on the open banking bandwagon, institutions must consider a few key issues.
What Comes Ahead of an Open Banking Decision
As the Internet of Things economy emerges, with consumers owning multiple devices connected to the internet, digital banking and its distant cousin “omni-channel” have become the largest drivers of technology. API platforms enabling open banking provide the key element of a banking institution’s digital agenda. Additionally, technology innovations are occurring at lightning speed. Institutions are transitioning from their slow and steady approach to the mantra of agile development and innovation.
Before deciding on the model or the underlying technology to build an API platform, banks need to answer the following questions: What are we trying to accomplish? And, what is the primary objective for this initiative?
Addressing these questions should be in the context of the financial institution’s overall mission, strategy and objectives and its information technology plan. Even if the planning process has changed to focus on the shorter term or needs to be adjusted more frequently, it is still essential to drive the institution towards its mission.
What Potential Benefits Could Your Institution Get?
The benefits to adoption are many, but tend to align to three key value propositions:
- New revenue streams from third parties for commissions, fees, subscriptions, advertising, and sale of data.
- Cost reductions via improved processes from allowing third parties to provide technology innovations as opposed to doing internally.
- Valuation through market share from customer retention and new customer acquisition.
Each of these potential benefits have different objectives and must also align with the high-priority goals set forth in the plan. Is the primary purpose to reduce costs, add new revenue streams or grab/protect market share? The API model and design could vary according to these value propositions.
For example, TD Bank’s mantra of “If it Matters to You, Matters to Us” was recently reinforced by its new “Unexpectedly Human” marketing campaign.
A bank with highly personalized branding such as TD Bank’s would deploy open banking as a value play to grow market share. By enabling enriched functionalities and optimal use of analytics, including customization through third-party augmentation of data and applications, the financial institution can provide more targeted communication as well as more relevant products and services to its customers.
Conversely, many smaller institutions may not have the technical workforce and ability to rapidly innovate. These smaller players are often established community pillars which provide trusted and safe financial products. To leverage this position and support a mission of serving the community with a full line of banking products, open banking offers them a way to partner with fintechs to fill in the gaps in their financial offerings.
In those instances, open banking could provide cost savings, as it shifts the innovation to third parties to build applications on top of the bank’s interface to offer enhanced functionality to their customers.
Identifying key objectives of open banking and ensuring consistency with brand promise will help banks assess and crystallize their business needs, values, and goals. This, in turn, will give them the ability to prioritize use cases for roadmaps and/or minimum viable product for implementation. Additionally, having clear objectives for implementing open banking initiatives leads to proper measures of success.
Find a Target Before Embracing Open Banking
Without proper assessment, U.S. banking institutions are in danger of investing in the wrong initiatives and ending up behind the eight ball in enabling open banking.
Moreover, it is possible that their API platform — despite being superior from the design perspective – may not help them achieve their desired business goals. Think blockchain — it has a lot of potential but still has not been widely adopted for lack of business need.
Providing open banking via APIs will most likely become a reality in the US, as it supports innovation and rapid iterative deployments, especially as regulatory pressures materialize.
Therefore, institutions must realize that the primary driver in developing an open banking platform should be to focus on meeting business goals, and not be for the sake of tech modernization.
The first and most critical step is to formulate the strategy and identify key objectives before embarking on the open banking journey. To do this, leaders must start by weighing their overall strategy and mission. Based on the pain points that open banking will address, objectives for this project should be outlined and vetted to ensure they will contribute to the overall execution. Additionally, these objectives for an open banking initiative must be prepared and agreed to by all of the major business unit leaders.
After all, it is no longer a matter of technology strategy alone, but a key part of business strategy. Thus, the open banking strategy and implementation must reside with the business unit, not the Information Technology department. Without customers, there is no need for technology.