The United States has long had a reputation as a banking and financial juggernaut and leader of innovation. But unless American banks embrace open banking, they will lose the title.
While there is still no larger market, the U.S. has already begun to fall behind other countries when it comes to consumer finance. For example, even though payment app services like Venmo are catching on fast in the U.S., widespread adoption of instant, real-time payments is still trailing that of other countries, where many citizens may have never seen a paper check before. That is something still foreign to many Americans.
American banks’ slow adoption of application programming interfaces is one reason the world’s largest economy has stumbled in advancing digital banking. Other countries, like the U.K., India and Australia have been actively pushing open banking systems for some time. In the U.K., Britain's Open Data Institute estimates that each British bank has spent around £1 million ($1.7 million) to create open APIs, for instance. U.S. banking, meanwhile, does not inherently support API integration. Integrating parties into the bank technology infrastructure is a slower process that ultimately hampers progress.
When we look back at the financial industry’s peaks and valleys of progress, we tend to forget some time has passed — roughly three decades — since many financial institutions put a lot of enterprise legacy infrastructure into place. At the time, the lack of solutions available on the market and demand for IT infrastructure led to banks relying on proprietary software — in-house legacy software created by one company, only for that company. At one point, the in-house technology allowed each bank to operate to the best of its ability. However, with the advancements and abundance of financial technology, original IT solutions have now created a “walled garden” for each of the banking ecosystems.
Somewhat ironically, the forces and infrastructure that made American banking the shining jewel of the world nearly half a century ago have now left us woefully unprepared to embrace the modern world of APIs and third-party integration.
It’s well past time for American banks to break down those walls and embrace APIs. Other countries’ adoption of APIs demonstrates there is more to be gained than lost when embracing third-party technology and open standards. APIs, after all, often complement and improve each institution’s existing technology as opposed to leaving any one company with the responsibility of “ripping and replacing” software to improve operations and, in some cases, global payments. Furthermore, financial institutions that adopt more consumer-friendly and advanced technologies grow. The success of services like Venmo and PayPal — payment providers that rely on open APIs — proves that consumers want affordable and easy solutions.
Bottom line: Unless U.S. financial institutions pick up the pace and adopt more agile, connected APIs to expand their reach and capabilities, they risk falling behind and losing customers to interconnected competitors.