The E.U.’s Payment Services Directive (PSD 2) was one of the most formative mandates toward open banking, opening up the payments industry to competition from non-banks (such as Stripe, Mint, and Apple Pay) and introducing collaboration and oversight. NewtonX conducted hour long interviews with senior executives from Stripe, Paypal, Mint, and Goldman Sachs about the future of open banking in Europe and in the U.S. These experts outlined a series of potential benefits including new revenue streams and a more cohesive customer experience, but also identified two primary barriers to open banking in the U.S.: data privacy regulation and a fragmented market.
Frictionless and Robust: the Future of Financial Products With Open Banking
In 2016, the U.K. issued a ruling requiring the nine biggest banks in the country to allow licensed startups direct access to their data, including current accounts with customer consent. Before this, the quality of data and analytics that banks had was a key differentiator; they used data to do cross-marketing for new products and to run credit analytics, among other things. Open banking fundamentally changed this, opening the door to disruptive payments startups, but also introducing heavy competition to previously largely untouchable institutions.
The U.S. banking sector is much larger and more fragmented than the U.K. system, but because of this, the benefits to be reaped from open banking would be even more pronounced in the U.S. Currently, many financial services companies rely on web scraping to gather customer data, which is bad both for the customer experience and for data and bank security. Because financial services companies need robust customer data in order to grow and succeed, if they were able to abandon screen scraping in favor of secure APIs with banks, that would both improve security and promote a more cohesive customer experience.
For instance, customers could access various financial services — such as finance/debt management and advice — as integrated fully with their bank accounts. Indeed, the Experian Connect API gives customers the ability to see their credit score in real-time through their existing bank account. By integrating services with banking data, either the banks themselves or the third party payments companies can offer more robust real-time services. Other banks/financial services that are already investing in open banking initiatives for this reason include Paypal, Wells Fargo, and Visa.
Amazon.com has also embedded several credit card APIs into its website including American Express, Chase, Citi, Discover, and Hilton Honors, in order to enable customers to pay for purchases without having to log into the credit card’s site to redeem points. The experience becomes frictionless for the consumer, which gives both providers (Amazon and its partner banks) a competitive advantage.
A Brave New World: From Closed Doors to Collaborative Ecosystems
In order for open banking to be truly effective, there needs to be a paradigm shift in the banking industry away from exclusive control over customer data by large banks to diverse partnerships that widen the scope of products and services. Open banking isn’t just about banks anymore; it’s about Fintech, software developers, ecommerce retailers, and other non-financial third parties. The former executive with Stripe noted that those large banks that fully embrace and use open banking to their advantage now, will have a significant leg up in advance of any regulatory measures as well. The PSD2 is part of a global trend, and while some countries such as the U.S. currently have no open banking legislature, it’s very likely that they will soon.
Global open banking will introduce a new financial services ecosystem in which the role of the bank becomes less monolithic and powerful on its own. While some banks may balk at this, open banking stands to benefit end users and foster market competition in ways that will create new opportunities for innovative banks and payments providers.