Open Banking is taking shape in different ways across North America. From driving the development of new providers to enabling existing institutions to keep pace with a fast changing industry, the impact on financial services is significant. As the current crisis demonstrates, the swift change in the economic outlook and the situation of consumers and business alike, not to mention a rapid move to digital channels, the ability to understand, pivot and serve customers is so crucial and can be supported by open access to vital market data.
Open Banking is coming to North America but is taking shape in different ways across the continent. From driving the development of new providers to enabling existing institutions to keep pace with a changing industry, the impact on financial services will continue to grow in significance. That impact and the innovations that open banking initiatives support and catalyse, no doubt, will vary depending on the structure and regulatory framework of the financial services sector and the needs of economies/communities. It both opens the gateway to opportunity and flags challenges and jobs to be done.
Open Banking in the US differs greatly, for example, from the European approach which was propelled by technology trends and solidified through regulatory initiatives (PSD2, The Open Banking rules in the UK). There is no single regulatory framework in the US compelling existing institutions to share data through an open API standard and no broad-based accompanying rules protecting consumer data or mandating security standards. According to a 2018 report by the US Treasury, although there is a will to avoid fragmentation and remove regulatory/legal uncertainty, a mandated and coordinated approach is not supported or deemed feasible.
As the report notes, “There are significant differences between the United States and the United Kingdom with respect to the size, nature, and diversity of the financial services sector and regulatory mandates. Given those differences, an equivalent Open Banking regime for the U.S. market is not readily applicable.”
“While open finance in North America will not look like it does in the UK or Australia, the need for it here is not unique,” said Steve Boms, executive director of FDATA North America. “And with millions of families and small businesses struggling to keep afloat, there is no time to waste. Consumers will have improved access to capital, financial tools, and sound retirement options once they gain full control of their own data. North American economies simply will not be able to build back until open finance is a reality.”
Open banking is coming to America but it will be driven by the private sector and State and Federal regulators will get involved as required rather than being in the driving seat. That may well be the American-way but market forces will continue to drive the adoption of Open Banking.
“The Financial Data Exchange (FDX) is a prime example of how the financial industry has come together rapidly around a common, interoperable and royalty-free API standard to make the open finance concept a reality regardless what type of regulatory framework may be in place,” said Don Cardinal, Managing Director of the Financial Data Exchange. “FDX is a big tent with financial institutions, consumer groups, fintechs, financial data aggregators, payment networks, financial industry groups and other permissioned stakeholders of all sizes at the table and working to ensure that consumers have secure and reliable access to their own data,” added Cardinal.
New entrants will seek access to key troves of consumer data held by banks and other financial institutions and those very same institutions will need to keep pace with the rapidly evolving technological landscape and equally fast changing customer expectations and needs.
According to Alex Yang, Director, CashPro API and Global Open Banking Strategy Bank of America Merrill Lynch, “Absent the ‘letter’ of open banking, organizations like Afinis, SWIFT, and FDX have stepped in to help lead conversations on behalf of the North American corporations who seek access to commercial or retail data and services in the ‘spirit’ of collaboration and innovation. It is this spirit that will help improve the financial lives of businesses and consumers alike.”
Looking North and South from the large US market. Canada and Mexico are also seeking to create more competitive, responsive and inclusive financial services sectors through exploring/supporting government-led initiatives. The Department of Finance Canada established an Advisory Committee in 2018 and published an initial consultation into whether a UK Style approach should be adopted.
Further plans have been delayed due to the Covid-19 pandemic and progress has been stalled. Whilst the lack of a mandated open API may not block innovation, it may well make a concentrated banking sector slower to move and create barriers to faster innovation.
The current crisis is illustrative as the swift change in economic outlook and the situation of consumers and business alike, not to mention a rapid move to digital channels, further highlights the extent to which the ability to understand, pivot and serve customers is so crucial and can be supported by open access to vital market data.
Looking South to Mexico where there are perhaps more pressing needs around basic access to financial products and financial inclusion and the need to bring the ‘informal’ economy into regulated institutions. The 2018 Law to Regulate Financial Technology Institutions – aka the Fintech Law – required the creation of APIs but included a limited set of data. It does, however, apply to a broader range of financial institutions (not just banks).
In a country where an estimated 44% of the adult population has no financial products whatsoever, the potential for fintech, supported by open banking frameworks, to deliver better outcomes is vast. Given that it also will apply to a broader range of financial institutions creates a real opportunity for Mexico to be a real leader among the 22 jurisdictions around the world with open banking initiatives. There is still a way to travel and there are concerns that the real ‘juicy’ ie transactional data is not included in the most recent regulations but the potential is clear.
The ways in which open banking is driving innovation will be an important topic of discussion at FTT Virtual North America. From the small financial institutions and start-ups up to the largest financial institutions in the world, the future is most certainly more open.
“At the core of open banking is data responsibility. And the utmost security, said Steve Smith, CEO of Finicity. Future innovation relies on trust, putting control back in the hands of consumers, and providing data insights to help improve people’s lives. This boils down to the fact that consumers own their data. So they should control its use and benefit from it.”
Even where the current crisis has delayed progress in the development of supporting rules and regulation, it has also highlighted not just the need for further digitisation but also the responsiveness that enables. Whether mandated by the regulator or spearheaded by innovators across the private sector, we will be exploring the key drivers of open banking and the challenges that remain.