Open banking's early adopters bet on 'tremendous gains in value'
For most U.S. banks, the idea of acting as a kind of app store — wherein they would approve and license services and products from third parties to offer their own customers — still is a hypothetical at this stage. Many are apprehensive about sharing data with fintechs via application programming interfaces.
Only a few banks have embraced open banking and offer APIs to almost anyone. But they are betting on having a head start on competitors, as trends in the industry, such as increased bank-fintech partnership and evolving regulation, will push the banking-as-a-platform movement toward reality.
“If you look at the way technology has developed, there have been closed systems that gained scale and when you see those closed systems open up and become platforms then you see a tremendous gain in value,” said Robert Sears, an executive vice president and the head of open platform at the new digital business unit of the Spanish bank BBVA.
Operating as BBVA Compass in the U.S. in Birmingham, Ala., in 2016 it named a head of open APIs, and has engaged in several data-sharing agreements with fintechs. It is one of a handful of U.S. banks engaged in open banking — Capital One, Silicon Valley Bank, Citi and CBW Bank in Weir, Kan., also have such programs.
Last May, BBVA opened up its API Marketplace and made commercially available eight APIs so companies, startups and developers would be able to build new products and services by accessing and integrating customer’s banking data — with their permission — into their applications.
BBVA continues to experiment despite Sears acknowledging the concept is “harder to do in the banking space” because of security concerns and regulatory issues regarding customer data — hence the general apprehension among U.S. banks.
“When you’re dealing with people’s money, then there’s much less tolerance” for any kind of customer data breach, Sears said. “I think each individual bank has to look at in their own way and see where their strengths lie. There’s not a one-size-fits-all approach.”
Banks may never become platforms in the same way as, say, Amazon, Sears noted. But he still sees a landscape where “it’s not a complete free-for-all, but banks will carefully curate different third-party services.”
A model where banks have control over the distribution of third-party products and the end-to-end customer experience but only themselves manufacture a small number of products “seems like the best model for banks in a digital age,” said Ben Robinson, head of strategy, marketing and innovation at Temenos.
Temenos is trying to deliver such a model to its clients with Temenos Marketplace, a platform launched in 2016 and built on the Microsoft Azure cloud where its core banking customers can tap into fintech services.
Other vendors are nudging their clients down this path as well. The London-based core provider Misys (now known as Finastra after a merger with D+H) unveiled its Platform-as-a-Service (PaaS) strategy, which saw the company open up its FusionFabric platform and core systems to third parties. The goal was to enable banks, fintechs, consultants and even students to develop, deploy and operate apps in the Misys cloud or on-site.
While vendor nudges help, the conversation about open banking needs to begin with authority inside a bank, said Kristin Moyer, research vice president and distinguished analyst at Gartner.
“Regardless of where a bank is today [on open banking], the key for CIOs is to get their bank to take the next step,” Moyer said. “If the bank is not planning, then convince other leaders that planning is a needed next step. The biggest hurdle to overcome is to go from planning to production. If a CIO gets stuck, this is where they will get stuck. The key to moving past this stage is to create a small user group of developers, usually both internally and externally, to help test and refine alpha and beta prototypes.”
Even for institutions that have started down this path, it’s important to keep evolving, Moyer added.
“What is differentiating today will not be in six months; the key will be to expand and build upon early success in order to stay ahead of the market,” she said.
A trend that will add momentum to open banking is the thawing of relationships between banks and fintechs, as more partnerships soften the industry stance on data sharing.
Last month, BB&T made a big commitment to fintech partnerships. In an effort to lower operating costs and improve the customer experience, it plans to earmark $50 million to invest in or acquire emerging financial technology companies.
“Whether it’s new partnerships through fintech accelerators, investing in emerging technologies, or the potential to acquire a solution that will differentiate our services, we’re open to all of the possibilities ahead,” said BB&T's chief digital officer, Bennett Bradley.
Even though they do not face the immediate prospect of regulation requiring an open-banking policy, American banks should act as if they do.
Banks' embrace of open-source development could eventually go beyond creating tools and apps — to something far more radical.
“Making smart investments into fintech puts BB&T on an aggressive pace to more quickly navigate our digital road map. We think it’s also a great way to inject innovation and an entrepreneurial mindset into our organization.”
Bradley noted that the Winston-Salem, N.C., bank is also looking at APIs “as perhaps one more way we might connect with fintech partners and others to develop more unique features within our digital platforms.”
“For us, it’s about building an experience around the way our clients prefer to conduct their financial transactions,” he added. “That’s why BB&T already allows clients to import their financial data from other accounts. Our digital banking platform, U, offers account aggregation and other features such as dashboard customization, budgeting tools and the ability to set spending limits.”
Whether they like it or not, banks may be nudged into more data sharing and open banking concepts by regulatory pressures too.
In Europe last month, the second Payment Services Directive (commonly known as PSD2) came into effect. The new EU directive allows individuals to share account data with third parties they authorize, thus putting banks in a position where they are not the sole owner of customer account and transaction data. While there is no such statute in the U.S., regulatory and government oversight bodies such as the Consumer Financial Protection Bureau are already looking at how consumers might share financial data.
“In the U.S., the push towards open banking is moving much more slowly and mainly has to do with making data more transparent and shared, for example with personal financial management applications like Intuit or small-business accounting packages like Xero,” Moyer said.
Regulators will likely play a key role working closely with banks to determine the parameters of data sharing and how “open” open banking will be, said BBVA’s Sears.
“You can’t open up everything, but specific kinds of capabilities,” he said. “Regulators and banks have to work together [to come up with a method] to share data that doesn’t damage users. But when you consider the possibilities, this is an amazing, transformative time.”