This story is the first installment in Credit Union Journal’s ongoing special report on fintech, which will run throughout the month of August.
Some credit unions are considering an open banking model despite the financial framework’s preliminary stages.
The open banking framework allows third-party service providers access to financial transaction data. The ultimate purpose is to make it easier for consumers to manage their financial lives.
As open banking becomes more widespread throughout the United States, credit unions who are early adopters will find greater returns for growth strategies, experts said.
“I think open banking is a major catalyst for rapid change for banks and credit unions at the level of what the internet was in the late ‘90s,” said Chris Catliff, CEO and president of BlueShore Financial Credit Union based in North Vancouver in Canada.
Open banking can speed up processes for members that may be seen as tedious. For example, a couple could be curious about how they need to adjust their spending habits to save enough money to purchase a home.
A fintech could help the couple examine and consolidate their transaction history and provide insight into the couple’s spending through application programming interfaces, or APIs. APIs are a set of functions that allow the creation of applications, which companies can use to access and analyze data through an operating system.
But the couple needs to opt in to having their data shared, and their financial institution would need to partner with the fintech.
“Open banking has the possibility to give our members greater control, flexibility, and insight into their financial lives. It might also help us attract members we might not otherwise,” said Joey Rudisill, chief information officer at Central Willamette Credit Union in Albany, Ore.
A 2019 survey from Finastra found that the top three drivers of the adoption of open banking were the need to stay relevant to new and existing customers, the need to compete at a global level and the need to compete with neobanks and emerging fintechs.
Many compare the open banking model and the potential disruption it could cause to companies like Uber, which transformed the taxi industry by placing a user’s experience first rather than focusing on the new technology.
As financial institutions evolve to meet changing consumer preferences, Vincent Pugliese, general manager of U.S. retail and lending at Finastra, sees an opportunity for credit unions to jump in by meeting the “ability to deliver connected user experiences across all channels, from branch to digital, is how open banking is meeting the expectations of the modern credit union member.”
Some credit unions like BlueShore Financial have already begun discussing how they can use open banking.
Catliff started talking about open banking with his colleagues in 2016 when BlueShore Financial was changing some of its technology. One of the first steps was to upgrade its core technology, since it can take years to gear up for an open banking disruption, Catlif said. The more nimble core system should allow them to more easily partner with others using open banking in the future.
“Many CUs will be left behind because they won't have the digital capability or literacy to do it,” he said.
That’s especially the case for smaller credit unions, which may lack the manpower and resources to easily utilize open banking.
But open banking still has been slow to enter the United States due to regulatory concerns around data privacy since personal data is involved. Without a standard, data privacy and protection requirements vary across state lines. That can be problematic for financial institutions with operations in multiple states.
Instead, open banking has gained more momentum in other countries such as the United Kingdom, Australia and Canada. The implementation of the United Kingdom’s revised Payment Services Directive in 2018, otherwise known as PSD2, catalyzed awareness there. PSD2's allowed bank consumers to use third-party providers to manage their personal finances.
The Finastra survey found that 63% of respondents were calling on regulators to settle on standards for open banking.
“Unlike in Europe, where open banking is being driven by regulation, it is taking off in the U.S. out of necessity,” Pugliese said. “Financial institutions are realizing they need to provide customers with improved experiences or risk losing them to competing financial institutions or even industry disruptor non-banks fighting for deposits and loans.”
Credit unions will likely continue to be wary given the uncertainty around data security and privacy standards. And many CUs are still cautious given that open banking remains in its preliminary stages.
“My CU, for the time being, will be watching closely and speaking to fintechs, potentially looking at partnerships,” Rudisill said. “I think it will be a couple of years until we make any significant move toward an open banking model.”
