In a fairly short space of time, thinking about open banking in the U.S. has moved from “head-shaker” to “We need to figure out how we’ll play in this space … now.”
Even so, for many banks and credit unions going about the day-to-day job of growing loans and deposits, the application of open banking remains an abstraction, especially because the term covers a lot of ground from third-party data sharing to so-called “embedded banking.”
The fact that Frost Bank — the largest independent bank in Texas, at $51 billion in assets — has embraced open banking, and taken a very concrete step in putting it into practice, offers key insight into the “why” of open banking.
San Antonio-based Frost Bank in many ways is a bellwether for much of the U.S. banking industry. Very traditional and unswerving in its focus on customer needs and customer experience, on the one hand, yet also very much aware of the forces reshaping banking.
One such force is open banking — in particular, the growing desire of consumers to easily and safely link fintech mobile apps to their checking accounts.
Winds of Change:
Frost Bank had to rethink its open banking stance because customers wanted to easily connect fintech apps.
Early in 2022, Frost completed a deal with data aggregator Plaid to use Plaid’s open finance API platform called Plaid Exchange. It allows Frost’s approximately 400,000 customers to connect their Frost accounts to other financial accounts they have set up. It also lets Frost customers control what access they grant and change it at any time, all within the bank’s mobile app.
There were three primary reasons Frost entered into this arrangement, according to Jimmy Stead, Chief Consumer Banking and Technology Officer for Frost: Customer demand, technology, and changed attitudes on the part of both vendor and bank. In an interview with The Financial Brand Stead explained each point.
Customer Demand Created a Changed Viewpoint
Like many banks and credit unions, Frost was well aware of developments in open banking and specifically in the area of data sharing. Plaid and other data aggregators built their business on helping fintech apps to access the bank account data of fintech users via the technique of “screen scraping” — using the credentials provided by consumers to access their bank accounts.
From Clunky to Integrated:
The bank never blocked screen scraping, but realized the practice was not the way to improve the institution's value to customers.
Financial institutions disliked this approach for a variety of reasons, including security and privacy. Some even blocked access to accounts by aggregators.
Frost left the screen scraping decision to its customers. “Our clients would have been really frustrated with us if we had blocked access to what they were doing,” says Stead. But the bank knew it was not the best solution to the situation.
The truth is that screen scraping is clunky, prone to problems and raises questions about data security. As a result, Frost kept hearing from its customers — in call center conversations, on social media and in research it conducted — that “We want to be able to easily and safely connect these different fintech apps we use to our bank account,” Stead relates.
“That was something we were really intent on enabling for them,” says Stead. At the same time, however, part of the bank’s value proposition is to keep customer data secure and give customers privacy and transparency. And so the bank didn’t act immediately because it felt that data sharing technology wasn’t sufficiently developed.
That has now changed.
Technology: API Access Plus Control
The “API” (for application programming interface) has been a key enabler of change in the world of banking.
Plaid and others have developed this capability, which permits the secure exchange of data between banks and third parties without the need for screen scraping. Plaid states that it has API data connections with Wells Fargo, Chase, Capital One and U.S. Bank plus about 500 smaller institutions via technology vendor platforms.
Access and Control:
Secure access to customer data is important, but so is the ability of customers to easily turn that access on and off.
Stead says Frost became confident that data sharing technology was now secure. It also felt that Plaid’s technology platform allowed Frost to put its customers in control. “Plaid never sees our customers’ user ID and password,” he notes.
The “control” Stead refers to is a new feature called Manage Connections that sits within the bank’s mobile app. “It lists any connection the customer has made, through Plaid, to different fintech providers,” Stead explains. It also lets consumers disconnect that access at any time. “That transparency and control we’re enabling is a big part of the value proposition for our customers,” says Stead.
Attitude Adjustment on Both Sides
An earlier article on The Financial Brand, described Plaid’s transformation from “bank antagonist” to partner. Ginger Baker, Plaid’s Head of Financial Access, said, “The company decided that there was a bigger opportunity out there by moving from ‘cooperation when needed’ to full-on collaboration.”
Stead acknowledged this change. “Their outlook and perspective has evolved to an understanding that banks are critical partners,” the banker observes.
On the banks’ side — at least in the case of Frost Bank — the fear of losing customers through facilitating easier connectivity to fintechs has diminished. It has been replaced, as noted earlier, by the attitude that providing an easy integration with security, privacy and control enhances the bank’s own value proposition. “We’re giving the customer what they want,” says Stead.
He likens the process of getting to this more enlightened place to what computer companies went through many years ago. The original personal computers — PCs and Macs — were closed systems. “That created so much friction for people,” says Stead, “that it became a losing proposition.” Eventually the tech companies got smarter and made their platforms compatible.
“That’s how I see where we are now with open banking,” Stead maintains. “Banks have to enable that connectivity, remove the barriers. It’s in favor of the customer. It’s what we need to do.”