By Tony Azzara
The main goal of open banking is to accelerate the pace of innovation in payment and other banking services by broadening the spectrum of companies that participate in that innovation. Until now, U.S. open banking initiatives have lagged behind similar efforts in many other areas of the world.
However, open banking services will soon be widely available for U.S. SMEs, according to a 2018 Ovum report1 and open banking advocates. The report notes that 82 percent of banks in the Americas are actively pursuing open banking strategies (the report did not separate out U.S. results). Open banking services are expected to accelerate development of creative, new financial and payment services, while reducing cost and inconvenience for businesses and consumers.
In the U.S., one of the main drivers of open banking application programming interface (API) standards is Afinis, a unit of the National Automated Clearing House Association (NACHA), the financial industry association that administers and facilitates private-sector operating rules for ACH payments. According to the Association for Financial Professionals (AFP), the first three APIs under development by Afinis are:
NACHA previously said it is developing 16 APIs in three major categories: Fraud and Risk Reduction, Data Sharing, and Payment Access.3
Among U.S. regulatory bodies, the Consumer Financial Protection Bureau (CFPB) and the Financial Services Information Sharing and Analysis Center (FS-ISAC) have both weighed on open banking. CFPC released a set of data sharing principles outlining non-binding guidelines “for protecting consumers when they authorize third party companies to access their financial data,”4 and FS-ISAC published a free open API to support the secure transfer of data through tokenization.5
But U.S. open banking initiatives have “a lot of catching up to do,” according to American Banker.6 The publication notes that a key reason the U.S. lags its overseas counterparts is because of a complex regulatory regime—the U.S. has at least eight financial services regulatory bodies, some or all of which would have to weigh in on open banking initiatives. That compares with just two in the U.K. and one in Australia. The Federal Reserve Bank of St. Louis has noted that this regulatory complexity “reflects the diversity of U.S. financial institutions and a number of legislative responses to banking crises that have occurred over time.”7
Consequently, APIs that allow third-party access to bank account data—the essence of open banking—is up to each financial institution to decide for itself. In mid 2018, a U.S. Treasury Department report called for “key upgrades to the regulatory system” to make sure the country doesn’t continue to fall behind in open banking by “updating rules for financial services in the digital economy, assuring the existence of secure and open access to financial data.”8
Another reason the U.S. lags behind in open banking is that the movement is usually traced back to the European Union’s second Payment Services Directive (PSD2), signed into law in November 2015. “Open Banking” is the term used by the U.K. for its implementation of PSD2, which goes a little further than the EU’s regulation. PSD2 mandates that banks open up data to third parties, but the U.K. version requires them to do so using standard formats.9
Meanwhile, in Germany, The Open Bank Project “provides an open-code API for banks to access and an app store that brings banks’ applications and service offerings to customers” and is being led by financial industry firms, according to PwC. Similar projects are in the works in countries across the EU.10 In Asia, the Monetary Authority of Singapore is working to provide a public API architecture and Korea is building a public API to allow Fintech companies to download and leverage technical specifications required for development of products and services, PwC noted.
Despite a fragmented U.S. regulatory regime, open banking initiatives may soon catch up with their counterparts in Europe and Asia. Organizations like NACHA and various regulatory bodies are working to standardize Open Banking APIs for widespread adoption. Accelerating payment systems innovation may be on the horizon for U.S. SMEs.
Tony Azzara is a business technology writer and researcher based in Queens, NY, whose work focuses primarily on financial services technology.
1. 2018 Ovum Global Payment Insight Survey: Retail Banks, Ovum; https://www.aciworldwide.com/-/media/files/collateral/trends/2018-global-payments-insight-retail-banking.pdf
2. APIs: The Search for Ubiquity and Standardization, Association for Financial Professionals; https://www.afponline.org/docs/default-source/default-document-library/2019paymentsguide-api-final.pdf?sfvrsn=2
3. “NACHA’s API Standardization Industry Group Names First Five APIs to Develop to Support Payments Industry Advancement,” NACHA; https://www.nacha.org/news/nachas-api-standardization-industry-group-names-first-five-apis-develop-support-payments
4. “CFPB Outlines Principles For Consumer-Authorized Financial Data Sharing and Aggregation,” Consumer Financial Protection Bureau; https://www.consumerfinance.gov/about-us/newsroom/cfpb-outlines-principles-consumer-authorized-financial-data-sharing-and-aggregation/
5. “FS-ISAC Enables Safer Financial Data Sharing with API,” FS-ISAC; https://www.fsisac.com/article/fs-isac-enables-safer-financial-data-sharing-api
6. “US Way Behind Curve on Open Banking,” American Banker; https://www.americanbanker.com/opinion/us-way-behind-the-curve-on-open-banking
7. “Why Are There So Many Bank Regulators?,” Federal Reserve Bank of St. Louis; https://www.stlouisfed.org/on-the-economy/2017/april/why-many-bank-regulators
8. A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation, U.S. Department of the Treasury; https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation_0.pdf
9. “What is Open Banking and PSD2? WIRED explains,” WIRED UK; https://www.wired.co.uk/article/open-banking-cma-psd2-explained
10. Open banking: US is next, PwC; https://www.pwc.com/us/en/financial-services/financial-crimes/publications/assets/pwc-open-banking.pdf