What U.S. banks stand to lose in shunning open banking
While European banks have been forced to embrace open banking, U.S. institutions remain wary of embracing such plans — and that could turn out to be a big mistake.
That was the main takeaway from a recent study by MIT Technology Review, which concluded there is a first-mover advantage for banks that jump ahead with open bank initiatives.
“Not reacting rapidly enough to open banking could result in another party, either a competitor bank or fintech, innovating more quickly and eroding trust or relationships,” said Frank Tong, head of innovation and strategic investment at HSBC, in the report.
Ironically, the fear of losing customers to fintechs or other players is exactly what's keeping many U.S. banks from pursuing open banking.
“I have talked to bankers that are less keen on allowing data sharing because they don’t want competitors to have that kind of insight,” said John Piazza, the assistant vice president of digital innovation at MB Financial Bank.
“That is a very short-term view. If you take that position, you’re not looking out for the best interest of your customers, and if you’re not looking out for the best interest of your customers, you have another whole host of problems that manifest themselves in other ways.”
Yet they may be challenged either way, with customers abandoning institutions that do not make it easy to share data.
“Look at the huge adoption of Quicken and Mint,” said Mark Atherton, group vice president for the financial services global business unit at Oracle. “You don’t want to be that bank that says, hey, if you want to use one of those products, you can’t do it through us. That gives [consumers] reasons to change banks.”
That's not to say bankers don't have good reason to be afraid. In theory, a third-party that has access to a bank's data could take advantage of that position to market to the institution's customers.
“For example, if you open up all the data around a customers’ account, [a third party] may see a consumer getting a savings account with 1% APR,” Piazza said. “[That third party] can come in and cross sell with a 1.5% savings account. It’s a very simple example, but it’s one of the things that are possible.”
But Piazza said consumers gain an advantage when that kind of transparency exists with data — and banks should be willing to compare their products against those of other institutions.
“Inferior products and services get brought to light,” he said. “That means suboptimal products are eliminated from the marketplace, which is a good thing for consumers and a good thing for society. Ultimately, it means because there is more transparency, banks may have a hard time offering less competitive products, and if they do, they probably won’t have the same potential for market penetration as they have now.”
While banks risk losing their customers in an open banking environment, both Atherton and Piazza agreed data security will always be top-of-mind with executives. A bank’s reputation is at stake should something go awry, particularly at a time when consumers are more aware of how their data is being used.
“That’s probably one of the biggest [drawbacks] everyone is mindful of right now as banks open themselves up more and more,” Atherton said. “Banks are under constant barrage of [fraudsters] who are trying to find ways into banks. This just adds yet another path to do it.”
Banks are well aware of these security concerns, which is what prompted the creation of a new group, the Financial Data Exchange, comprised of big banks like JPMorgan Chase and Wells Fargo as well as data aggregators and fintechs. The group is designed to create a single standard to securely share information.
But a key question remains: who is responsible in a data breach's aftermath?
“It’s a very thorny legal issue,” Piazza said. “But what I can tell you regardless of who may be at fault, the bank is going to be seen as taking the reputation hit regardless of how it happens.
“The bank is ultimately the last provider of that data and the one that the customer trusted to maintain their data integrity.”
One data sharing initiative has already attempted to define liability. The “Secure Open Data Access” framework, supported by Envestnet’s Yodlee, Quovo and Morningstar's ByAllAccounts, stated the entity responsible for a consumer’s financial loss must make that consumer whole.
Ultimately, establishing a data sharing agreement could put U.S. banks more at ease with open banking. If not, they risk being left behind, according to the MIT report, which was done in partnership with Oracle.
“Our chairman has said there are about 20,000 banks in the world and they’ll be down to the hundreds and then maybe tens of banks in the future,” Derek White, the global head of customer solutions at BBVA, told MIT researchers.