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Open Banking Services in the U.S.: Emerging Solutions & Considerations

By Bill Camarda

Open banking hasn’t been mandated in the U.S. yet, but banking here is indeed becoming more “open” than it was before. It’s not too early for small and midsized enterprises (SMEs) and other businesses to begin thinking about how they’ll choose and leverage the open banking services that are beginning to arrive.

APIs Underlie and Enable U.S. Open Banking Services

 

In continental Europe and the U.K., open banking involves specific laws and regulations that require financial institutions to securely share customers’ financial information when customers request it. These requirements are intended to increase both competition and innovation.

 

No such laws or regulations exist in the U.S. But open banking services typically involve the development of application programming interfaces (APIs) that securely connect established financial institutions and fintech startups so that they can share and deliver valuable new applications. And that is already happening in the U.S., as major financial institutions start viewing themselves as providers of “banking as a service” and as platform owners that nurture third-party ecosystems.

 

In 2018, just 1 percent of U.S. banking revenue was being generated by open platforms, according to Accenture.1 But it’s growing.

 

Sandboxes, Experimentation, and Beyond

 

Within the U.S., several major financial institutions have created developer portals where potential partners can build experimental open banking services in a safe “sandbox” environment. In these sandboxes, developers get comfortable with the new APIs, learn how to manage security and other business issues, and prepare to launch live applications that integrate the bank’s services.

 

This isn’t open banking in the European sense. U.S. financial institutions aren’t required to share data, and their APIs don’t necessarily interoperate to support cross-bank services.2 That said, banking interoperability initiatives are underway in the U.S., notably from Afinis and the Financial Data Exchange.3 And several third parties are building open platforms and tools for financial institutions that can’t or don’t want to create their own.

 

Planning to Leverage or Build Innovative Open Banking Services

 

The current infrastructure is already promoting bank-fintech partnerships that are leading to innovative open banking services. Business decision-makers can begin to think about how they might take advantage of the American flavor of open banking.

 

In Europe and elsewhere, ubiquitous open banking may offer companies new ways to reduce online payment costs by letting them receive and make payments directly to the bank accounts of their transaction partners, such as card providers. New “account information service providers” will offer to aggregate up-to-date information from all of a company’s accounts.4 Analogous services are also appearing in the U.S., even in the absence of standards, as providers use APIs to build new integrations with key financial institutions.5

 

On both sides of the Atlantic, analytics, dashboards, and visualization technology are expected to help companies gain at-a-glance insight into their finances, make better cash management decisions, improve risk management, and help their financial teams play a more strategic role.6

 

Businesses might also take note of innovative work in integrating financial services with customer apps, including ways to:

 

  • Leverage a bank’s authentication and identity verification systems to manage access to their own services.
  • Securely integrate a financial institution’s credit card, checking/savings, and loan data into their own services, for better advice or credit decisions.
  • Offer virtual cards to customers, potentially simplifying online commerce and reducing payment decline rates associated with reissued cards.
  • Add money transfer capabilities that make it easier for customers to pay or get paid.7,8

Of course, many SMEs will want to use banking-as-a-service apps rather than build them. For example, there are human resources apps that streamline the delivery of instant or scheduled payments to employees, and new real estate apps that simplify rent and utility payments for both tenants and landlords.9

 

Considerations for Planning

 

The Association for Financial Professionals recommends a three-step approach for evaluating open banking solutions:10

 

  1. Identify and define needs and opportunities. Will a solution reduce costs, accelerate execution, improve management effectiveness, strengthen customer relationships, or solve some other problem?
  2. Assess the strength of competitive solutions in all the regions where the business operates, based on regulation and security, software, and service-level agreements.
  3. Consider total usage costs, including training and ongoing support.

Finally, it may make sense for those SMEs considering developing consumer-facing open banking services to carefully assess where they can add meaningful value by integrating a financial institution’s capabilities, whether their customers will be comfortable with this linkage and information sharing, and how they can deliver services securely.

 

The

Takeaway:

The U.S. version of open banking is taking the form of voluntary APIs, “banking as a service,” and banks as platforms for third-party app ecosystems. It’s not the same as Europe’s regulatory mandate, but it still offers businesses opportunities to drive substantial value.

Bill Camarda

The Author

Bill Camarda

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.

Sources

1. “Cultivate Your Bank to Compete in Open Banking Ecosystems,” Accenture; https://bankingblog.accenture.com/cultivate-your-bank-to-compete-in-open-banking-ecosystems?lang=en_US
2. “Understanding APIs,” American Bankers Association; https://www.aba.com/Tools/Function/Technology/Documents/understanding-apis.pdf
3. “Digital intelligence: Did the US just take the lead in financial data sharing?” PwC; https://www.pwc.com/us/en/industries/financial-services/library/fdx-data-sharing.html
4. “AFP Payment Perspectives: The New Generation of Third Party Providers,” Association for Financial Professionals; https://www.afponline.org/docs/default-source/registered/2019paymentsperspectives-psd2v1-4-1.pdf?sfvrsn=2&_n=8513
5. “Open Banking Adds Intelligence to Treasury Management,” PYMNTS.com; https://www.pymnts.com/news/b2b-payments/2018/trovata-open-banking-treasury/
6. “Business Benefits from Open Banking,” Global Finance; https://www.gfmag.com/magazine/september-2018/business-benefits-open-banking
7. “Let’s Get Started,” Capital One DevExchange; https://developer.capitalone.com/products/
8. “The BaaS platform for financial innovation,” BBVA Open Platform; https://bbvaopenplatform.com/content/home
9. “Banking-as-a-Service is Revolutionizing Three Unexpected Industries,” BBVA; https://blog.bbvaopenplatform.com/banking-as-a-service-is-revolutionizing-three-unexpected-industries/
10. “AFP Payment Perspectives: The New Generation of Third Party Providers,” Association for Financial Professionals; https://www.afponline.org/docs/default-source/registered/2019paymentsperspectives-psd2v1-4-1.pdf?sfvrsn=2&_n=8513

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