Why U.S. financial institutions won’t shy away from the promise of open banking

Finastra recently conducted a study exploring the attitudes and pursuits of open banking across the industry. We learned that eighty-six percent of financial institutions plan to use APIs to enable open banking capabilities over the next twelve months, but face challenges when it comes to envisioning the landscape, identifying opportunities and achieving individual goals.ⁱ

For one thing, the move to open banking is dependent upon the financial institution’s ability to innovate. At present, nearly half of banks and credit unions believe that regulations are too tight to foster innovation and that governments should do more to encourage technological exploration.ⁱⁱ

In countries where open banking is already underway, the economic benefits have begun pouring in. Based on an analysis of outcomes to date, McKinsey predicts that openly sharing data through a digitally connected ecosystem could boost economies in the European Union, the United Kingdom and the United States as much 1.5 percent of GDP in 2030. India could realize as much as a 5 percent gain.ⁱⁱⁱ

Open banking ecosystems can deliver value across the entire banking chain, from banking service providers to the financial institutions and their customers. Much of the benefit is realized through the seamless access of digital products and services. For example, a growing number of consumers today are utilizing third-party apps for managing finances. This is particularly evident in the payments market where revenue from mobile payment services is projected to reach $4,600 billion by 2025.^iv

On the surface, third-party services like these create a seamless interface between banking data and the consumer front end, allowing for fast and efficient payments that often occur in real time. However, it’s what’s happening on the back end that’s really key.

In most cases, payment platforms and other digital third-party tools use a process called screen scraping to access consumer banking data. The customer provides their banking login information, essentially allowing the digital application to login, pull information and make transactions on their behalf.

While screen scraping offered a valid solution prior to today’s more robust APIs, security has been a long-standing question.

“It’s like giving your house key to a painter and saying, ‘Just paint that one wall. That’s all I want’,” said Lila Fakharaie, SVP for digital banking APIs at Wells Fargo, at a symposium sponsored by the Consumer Financial Protection Bureau. “And now the house painter has your key forever. They come and go as they please and take things if they want.”

Open platforms and the API connection layers that make-up the open banking environment, offer greater security to third-party products and make it simple for financial institutions to adopt new capabilities, integrate them with their own data, and easily offer access through the bank’s or credit union’s online portal or financial app.

It’s an environment where everyone wins. Consumers gain secure access to the products and services they need for easier financial management; banks and credit unions build long-term relationships and grow revenue by offering the range of products their customers and members want to use; and financial institution service providers add to the ecosystem by easily connecting to banking cores.

Building the Open Banking Ecosystem

A platform-based ecosystem of third-party products and services offers financial institutions the means to adopt the benefits of open banking now by partnering with fintech providers. In this new world order, financial institutions no longer need to fund the cost of research and development or software maintenance and upkeep. Fintech APIs offer Banking-as-a-service, allowing financial institutions to consume the products and capabilities they need without making system upgrades or overhauls.

As a result, leading financial institutions are reducing costs while also gaining ground as a front-runner in open banking adoption. By joining a flexible open ecosystem, they can seamlessly connect a world of products and services behind a single interface for expanded customer ease and banking efficiencies.

Beacon Credit Union is one of several recent examples of industry front-runners seizing the promise of open banking. Beacon recently established a central hub for all its lending activities with Finastra’s Fusion LaserPro and Fusion DecisionPro.

According to the credit union, the integration with Finastra’s Fusion products has reduced the time it takes to process an application to just thirty minutes while significantly increasing its consumer lending base.^v

It’s a small sampling of the benefits early front-runners to open banking are realizing, but it’s a powerful reminder of how open banking is destined to reshape bank and credit union operations in the near future. By ultimately uniting the disparate data from multiple core systems with both proprietary and third-party offerings, financial institutions will have the power to meet more of the consumer’s needs, generating greater loyalty while improving profitability from expanded revenue streams.

_{ⁱ “Open Banking and Collaboration: State of the Nation Survey 2020.” Finastra. Retrieved from https://www.finastra.com/sites/default/files/2020-05/market-insights_open-banking-collaboration-survey-2020-report.pdf.}

_{ⁱⁱ “Open Banking and Collaboration: State of the Nation Survey 2020.” Finastra. Retrieved from https://www.finastra.com/sites/default/files/2020-05/market-insights_open-banking-collaboration-survey-2020-report.pdf.}

_{ⁱⁱⁱ “Financial Data Unbound: The value of Open Data for Individuals and Institutions.” McKinsey Global Institute, Jun. 2021. Web.}

_{^iv David Curry. “Fintech App Revenue and Usage Statistics (2021).” Business of Apps, Apr. 29, 2021. Web.}

_{^v “Beacon Credit Union Attracts New Members with Attractive Consumer Loans Case Study.” Finastra, Jul 25, 2019. Web.}