By Bill Camarda
Traditionally, account and transaction data has been fully controlled by the financial institution where the account is held. If a customer wanted to share that data, she had to provide printed statements or her online account login credentials. Control over data has arguably given the incumbent financial institution a powerful advantage in protecting its customer base against competitors, including new market entrants seeking to offer innovative payment services based on that data.
In an open banking environment, a national regulator or other authority requires financial institutions to share specific data at the customer's request, with another financial institution that has met appropriate regulatory standards and earned authorization to receive it. For example, a customer might direct a bank to share several months of deposit data with a competitive mortgage provider to help that firm offer the best rate. Rules and processes are established to define how the data will be shared and secured, and how customer privacy will be safeguarded.4
Advocates say open banking will encourage the development of creative new financial and payment services, while reducing cost and eliminating much of the inconvenience businesses and consumers have traditionally faced when switching banks or other providers.
Notably, the approach usually encourages or requires the use of standardized open banking application programming interfaces (APIs) that formalize how the technical aspects of data exchange will occur.
In a simple example, a bank might provide an app that shows a customer her accounts from all banks and payment services, not just the accounts that it holds. Since the data is transferred through an industry-standard API, customers can easily add services from other providers, such as investments, insurance policies, or payment services, and manage everything through one screen. This is sometimes described as "banking as a platform."5
Open banking could also facilitate more advanced applications, proponents say. A third-party payment services app might automatically move money between banks or request credit lines to help customers avoid the impending risk of an overdraft.6 An "intelligent cash flow engine" might apply machine learning to a company's past transactions in order to project its financial future.7
According to a recent U.K. study by the Centre for Economics and Business Research (Cebr), open banking could help to reduce interest payments because wider access to account data could lead to a clearer understanding of a customer's credit risk, which in turn could lead to a reduction in the risk premium factored into loans. According to the study, that could free up money for more productive use, potentially increasing GDP and supporting thousands of new jobs.8
While open banking is often viewed as a way for new financial services providers to attract customers, experts envision that the APIs could provide major opportunities for existing banks, too, noting that some major internet companies already generate much of their revenue through APIs.9
The potential benefits of open banking cannot be realized until open banking standards are defined and customers begin using the new financial and payment services. And open banking is still at an early stage in several countries, including the U.K.
In January 2018, nine of the U.K.'s most prominent banks became subject to open banking rules established by the country's Competition and Markets Authority (CMA). These rules stipulate that banks must share account data with other authorized providers at customers' direction, via standard APIs. Some banks were ready at launch, but five banks requested short-term delays.10 Over 80 financial and payment services providers have applied for authorization to connect, and money management apps are starting to use the open banking APIs to access data from multiple accounts, experts say.11
The U.K.'s open banking rules currently operate within the broader legal framework of the EU's Payment Services Directive (PSD2) open banking initiative. In some cases, PSD2 limits the scope of the U.K. rules.12 In other cases, PSD2 goes further; for example, it currently encompasses more types of accounts, including corporate and credit card accounts.13 Experts say that the relationships between these standards are not always straightforward, and that regulators are still resolving potential differences in areas such as security and authentication.14 In addition, according to McKinsey & Co., many transactions in Europe will be subject to the privacy requirements imposed by the EU General Data Protection Regulation (GDPR), due to take effect in May 2018.15
In Australia, the government released a long-planned review of the country's open banking requirements in December 2017.16 In the review, independent expert Scott Farrell made 50 detailed recommendations covering who should regulate open banking, which data should be included, how privacy and security should be safeguarded, how data should be transferred, and how quickly open banking should roll out. The Australian government expects to specify final rules this summer, and deploy open banking in 2019, with mandates for Australia's four largest banks expected first.17
With over 9,000 banks and credit unions, U.S. banking industry is much more fragmented than in some other countries, increasing the potential complexity of open banking.18 As American Banker noted recently, banking data linkages in the United States have been largely ad hoc,19 although in late 2017 the U.S. Consumer Financial Protection Bureau (CFPB) proposed high-level non-binding guidelines for data sharing between financial institutions.20 Some companies have used customer login permissions to access account data via "screen scraping" or file downloads. A few large banks have contracted with individual data aggregators and accounting software providers to provide access, and others have built their own APIs and made them widely available.21
In January 2018, NACHA – operators of the U.S. automated clearing house system – partnered with the Interactive Financial eXchange (IFX) Forum on work towards creating a standardized API that could eventually be used for open banking payment services.22 The resulting API would make it easier for financial institutions to connect – either individually or pursuant to a broader U.S. regulatory initiative, if one emerges.
Advances in the U.K. and Australia are bringing those two large financial markets closer to open banking. Their experiences may provide greater insights into whether open banking delivers on the promise of greater innovation in financial and payment services.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Open Banking, one month on – a significant change in the UK landscape,” PaymentEye; http://www.paymenteye.com/2018/02/21/open-banking-one-month-on-a-significant-change-in-the-uk-landscape/
2. Review Into Open Banking: giving customers choice, convenience and confidence, Commonwealth of Australia; https://static.treasury.gov.au/uploads/sites/1/2018/02/Review-into-Open-Banking-_For-web-1.pdf
3. “Open Banking starts next week. Meet the man making it happen,” Wired UK; http://www.wired.co.uk/article/open-banking-market-problems-fintech-expert
4. “‘Open banking’: radical shake-up, or a threat to your private data?” The Guardian;https://www.theguardian.com/money/2018/jan/08/open-banking-bank
5. “What is open banking? What does it mean for banks, fintech startups & consumers?” Computerworld UK;https://www.computerworlduk.com/applications/is-2018-year-that-open-banking-becomes-reality-in-uk-3653824/
6. “To change how you use money, Open Banking must break banks,” Wired UK;http://www.wired.co.uk/article/psd2-future-of-banking
7. “Open Banking is a month away. Here's a big clue what it will do,” Wired UK;http://www.wired.co.uk/article/open-banking-nesta-open-up-challenge-finalists
8. “Open Banking expected to contribute over £1 Billion annually to UK economy supporting 17,000 new jobs Company announcements,” Trustpilot; http://press.trustpilot.com/news/2018/2/26/open-banking-expected-to-contribute-over-1-billion-annually-to-uk-economy-supporting-17000-new-jobs
9. Open Banking, one month on – a significant change in the UK landscape, PaymentEye; http://www.paymenteye.com/2018/02/21/open-banking-one-month-on-a-significant-change-in-the-uk-landscape/
10. “UK banks get deadline extensions for ‘open banking’ reforms,” Financial Times;https://www.ft.com/content/0919723f-e4c6-3d02-b4a8-08b1ccfad4ac
11. “Open Banking, one month on – a significant change in the UK landscape,” PaymentEye; http://www.paymenteye.com/2018/02/21/open-banking-one-month-on-a-significant-change-in-the-uk-landscape/
12. “Open Banking and PSD2: clarifying the differences,” Payments UK; https://www.paymentsuk.org.uk/news-events/news/open-banking-and-psd2-clarifying-differences
14. “EBA Rules out Secure Open Banking?” KuppingerCole Analysts; https://www.kuppingercole.com/blog/small/eba-rules-out-secure-open-banking
15. “Data sharing and open banking,” McKinsey; https://www.mckinsey.com/industries/financial-services/our-insights/data-sharing-and-open-banking
16. Review Into Open Banking: giving customers choice, convenience and confidence, Commonwealth of Australia; https://static.treasury.gov.au/uploads/sites/1/2018/02/Review-into-Open-Banking-_For-web-1.pdf
17. “Australia: Review Into Open Banking – Farrell Report Released,” DLA Piper; https://blogs.dlapiper.com/privacymatters/australia-review-into-open-banking-farrell-report-released/
18. “Open banking movement gains momentum internationally,” Fin; https://fin.plaid.com/articles/international-open-banking-us-takeaways
19. “Why do most U.S. banks shut the door on 'open banking'?,” American Banker;https://www.americanbanker.com/list/why-do-most-us-banks-shut-the-door-on-psd2-style-open-banking
20. “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/
21. “Why do most U.S. banks shut the door on 'open banking'?,” American Banker;https://www.americanbanker.com/list/why-do-most-us-banks-shut-the-door-on-psd2-style-open-banking
22. “Open Banking boost in N America as Canada announces review & NACHA-IFX combine ,” Instapay; https://www.instapay.today/article/open-banking-boost-n-america-canada-announces-review-nacha-ifx-combine/