Why do most U.S. banks shut the door on 'open banking'?
On Jan. 13, banks in the European Union will become the leaders of the so-called open banking movement, allowing access to customer account data for any third-party service provider their customers approve via a dedicated communication interface.
The move is the fruit of the second Payment Services Directive (PSD2), which the European Commission says will “facilitate innovation, competition and efficiency,” give consumers more and better choice in the EU retail payment market, and introduce higher security standards for online payments. (The security standards, which call for stronger authentication, take effect later.)
In the U.S., however, open banking is largely ad hoc and more of a workaround. Many data aggregators and fintechs screen-scrape customers’ account data without their bank’s approval or involvement. A few large banks, such as Wells Fargo and JPMorgan Chase, have made bilateral agreements with data aggregators and accounting software providers. And a small number of banks — Capital One, BBVA Compass, Silicon Valley Bank, Citi and CBW Bank in Weir, Kan. — have embraced open banking and offer APIs to almost anyone.
The rest have mostly opted out. Here’s why:
“There are fewer and fewer moats banks have to protect their legacy business,” said Lex Sokolin, global director of fintech strategy at Autonomous Research. “Those moats are regulatory access and capture, internal data on clients and client references, and customer acquisition — banks have spent millions on customer acquisition and it will take the SoFis [Social Finance] many more millions to scale up to that.”
All three of these advantages are being eroded by fintechs, the Office of the Comptroller of the Currency’s proposed fintech charter, and declining customer acquisition costs as customers adopt nonbank apps and voice assistants, he said.
To counteract these forces, some banks seek to mimic the business models of Google and Amazon, which use artificial intelligence to create personalized services based on customer data.
“The bank thinks if they have the data and it’s proprietary to them, then the solutions they can build on them are proprietary to the bank,” Sokolin said. That way, they can retain customers.
“The logic is right, but it’s not the right tactic for the chessboard that’s in play,” Sokolin said. “The chessboard is, the AI and big tech companies have already won the virtual assistant war, because they can infer your financial position without ever seeing your transactions.” They can analyze purchases and searches, for instance.
To be featured inside virtual assistants, banks have to be willing to integrate with the software of Amazon, Google and the like.
But they have little commercial incentive to “lower the barriers and the walls so that fintech startup No. 2,500 can build a mobile app,” Sokolin said. “That’s why in Europe this is mandated.”