Open banking – how its use is growing in the US

Still, regulation is preventing quicker uptake across the country

Open banking – how its use is growing in the US

Open banking – perhaps the next big thing in the global mortgage industry – is finally gaining traction in the United States.

Definitions vary and are often filled with jargon. But open banking essentially allows for the use of open application programming interfaces (APIs) to connect banks, third parties and technical/software providers so they can securely and simply exchange data to customers’ benefit.

The end result: products and services customers want or need to make their lives better and easier.

“It gives customers better control… [and] allows them to access more services,” said Desh Weragoda (pictured top), chief technology officer for MBANC, a specialized mortgage lender for self-employed business owners and investors. MBANC uses open banking technology to allow customers to share their financial data more easily.

Read more: Open banking – how it could transform the mortgage industry

Open banking is a system that is less pervasive in the US, however, compared to places such as the UK and Canada, which have taken strides toward enacting or supporting formal regulatory policies that would kickstart more widespread use.

Strides internationally

The UK’s Open Banking Implementation Entity (OBIE) notes on its website that open banking began to make serious strides there in 2016. That’s when the Competition and Markets Authority (CMA – the country’s regulatory body) issued a report on the UK retail banking market, noting that newer banks had a much harder time accessing the market to grow.

The CMA recommended open banking to tackle the problem. OBIE said on its website that the revised open banking system has helped customers and small businesses since 2018 share their account information securely with third-party providers. Third-party providers, in turn, “use that data to tailor apps and services to their customers’ specific financial situations.”

OBIE is helping that happen – its charge is to create software standards and industry guidelines in the UK to drive competition, industry and transparency with the concept.

The move has helped open banking become prolific in the UK. More than 5 million people there are now using open banking services, PYMTS.com reported in February.

Similar strides are underway in Canada.

As Canadian Mortgage Professional reported in October, the federal government has indicated support for a regulated open banking system in Canada. Meanwhile Canadian Prime Minister Justin Trudeau’s Liberal Party indicated the country would launch a regulatory model no later than early 2023.

Open banking in the US has made an early and growing impact in certain areas, particularly among younger and more tech-savvy customers, according to a late 2021 report from Finicity, a Mastercard-owned data aggregator.

More than 80% of US consumers, and 90% of younger consumers, already connect their bank accounts to technology apps, showing a wide-ranging receptiveness to the use of open banking for their digital financial transactions, including access to credit, personal financial management, digital wallets and payment services.

The report found that nine out of 10 consumers in the US and Canada use online and mobile financial applications to manage money. Additionally, just under 60% of consumers are using digital apps, products or services, with 36% in the US using the technology for the first time in the last year. Additionally, just under 30% of consumers have used digital transactions to secure or finance alone. 

Open banking is at the foundation of much of these applications, the report found.

Europe mostly ahead 

Starling Bank is a UK digital bank that started about six years ago. It is essentially a “fintech with a banking license” and has greatly benefited from elements of open banking technology and practices, said William Boocock, head of Marketplace and Banking Support for the company.

“We utilize elements of it that are really important for some of the functionality that we have,” Boocock said.

One of the bank’s key offerings is a tech-enabled digital banking account, with open banking technology and integrations with third parties for developments such as accountant industry software.

“For our business customers, we have a partnership with Xero and QuickBooks [and others] where we basically automatically sync [customers’] transactions to their accounting software in real time,” Boocock (pictured below) said. “So rather than having to manually enter it or doing your daily CSV upload, it automatically syncs in real time as you spend.”

William Boocock

Such innovations became possible in the UK in 2018, Boocock said, when UK regulations mandated the nine biggest UK banks adopt open banking APIs and grant other institutions access, giving the technology the fuel it needed to reach critical momentum.

Open banking was more prevalent in the UK and perhaps the European Union and parts of Asia, Boocock said, but he acknowledged that the concept has emerged in the US despite regulatory inconsistencies. Still, he said, the US has a long way to go for open banking to be ubiquitous.

“There’s quite a high level of technical proficiency in terms of the banking services offered [in the UK] compared to in the US,” Boocock said.

Part of that may be because banking is more regulated state by state in the US while in the UK it is more cohesive as a single regulatory entity with lots of different banks, he noted.

Trovata CEO Brett Turner (pictured below) agreed that Europe is ahead in some areas, but he pointed out that the US has staked its claim to open banking in a number of ways. The California-based company is a data platform that relies on open banking to help businesses source balances and transactions and other financial data from banks and other systems.

Brett Turner

Read next: Half of brokers expect positive Open Banking impact

“Europe got off to a little bit of a faster start on the small business side, but then the US is now really leading and driving more on the enterprise mid-market side,” Turner said.

Turner said the US is leading on the wholesale and small business open banking side with an expected tipping point toward widespread use in the US in about year. Globally, he added, open banking technology should expand considerably within two years.

Boocock, meanwhile, said that the UK’s early start with a hardcore open banking legal and regulatory infrastructure has helped make the country a world leader. The job isn’t finished yet, however.

“There’s definitely elements that can be taken as lessons learned, of what people are trying to achieve,” he said. “There’s a long way to go, really, in terms of meeting what the potential was set out to be.”

Regulation and speed

The current US regulatory environment has slowed down the rate of adoption of open banking concepts, Turner said.

“Banks are run by regulation, right? So everything they do has to be in that light,” Turner explained. “They’re dealing with mainframe computing and older technology, [and] they have to get the data out and build some of these pieces, but it also has to be done to meet the regulatory requirements [they’re] under. It just takes a little longer.”

Technology innovations in the mortgage business in the US are even slower to advance due to regulatory processes, Turner added.

While a few financial institutions have turned to open banking practices since 2018, others have been slow to the party, he admitted. Part of it, he said, has been the slow embrace by other banks of APIs, which enable open banking practices.

“They don’t have an API strategy and they’re slowly building that up with more and more APIs that make that data accessible to the fintech community and then directly to their customers,” Turner said.

Weragoda, of MBANC, said that regulation and creating standardization for open banking is a slippery slope.

“It is a difficult aspect,” Weragoda said, because regulations would cover standards, consumer controls, how the data is used, where it’s housed and how it’s controlled.

Upside

Turning to open banking technology is a relatively inexpensive proposition, with many benefits, Turner said.

“Every CFO or controller or treasure, they have to get their data to manage their cash. That’s their job so they have to get it somehow,” Turner said. “So they’re getting it right now through the bank portal, or through files that have to be set up by the bank that comes to them. These are very archaic means of getting the data.”

Open banking would make vital data more accessible in a faster and more dynamic way, Turner said, which would help drive down costs in the end and make the user experience more seamless.

“Data now allows for a company like Trovata to really build these experiences, and delivery of that data and delivery of these experiences is driving costs down massively for companies, [bringing] massive time savings,” Turner said.

Open banking technology is also beneficial because it has boosted standards for the kind of financial experience people expect when using apps, Boocock said.

“There are entities in the UK that are using open banking, basically, rather than having to retrieve manual paper statements or CSV statements from the customers,” he said. “You can link your bank account, apply open banking and you can basically share your data with your bank account with your bank, via secure digital APIs that can then be automated, so it basically saves time.”

Downside

One drawback with open banking is it has become something it initially wasn’t intended to be, Boocock argued.

The original goal, he said, was to improve competition in the banking sector – but that hasn’t happened, at least in the UK.

“We haven’t found open banking has materially improved competition in the banking sector,” he said. “What actually improves competition is newer banks like ourselves, basically offering a better customer experience, rather than just allowing customers to link up different bank accounts.”

Another risk, Boocock said, is that new open banking companies could lead to consolidation, particularly among those focused on open banking infrastructure. Consolidation could concentrate the technology in the hands of fewer players, he said.

Security – particularly cybersecurity – is a big point of concern, Turner said, with both customers and companies alike.

“Security is always and will continue to be at the front of the line in terms of risks,” Turner said.

Solvable risks

Obstacles to overcome to make open banking more ubiquitous in the US go well beyond regulatory advances, however. There is also an ongoing data security risk.

Weragoda agreed.

“All of a sudden you have access to large volumes of data instantaneously, and so that can create a possible security risk from both the consumer and business side,” he said.

Both sides, he pointed out, could potentially leave themselves vulnerable to trouble.

On the business side, “if they get hacked… that data can be easily taken from the consumer, and all of a sudden, the hacker has access to a complete consumer financial profile,” he noted.

Weragoda said that security risks are solvable, however, with implementation of things like biometrics and multi-factor authentication.

“We have multiple levels of authentication to really assess who you are and confirm that this is truly you,” he said. “There have been a lot of studies that show [multi-factor authentication) has worked a lot.”

Still, multi-factor authentication can frustrate consumers due to the time delay it creates. Weragoda said that it is a risk worth taking, even with the extra time involved.

“It’s driving the adoption of open banking,” Weragoda said. “As we try to make the process seamless, putting a little bit of security in upfront to protect [customers] will still save them a significant amount of time.”

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