“Open banking” may evoke various interpretations, but it doesn’t refer to unsecured vaults or branch operating hours. Instead, it describes a system that enables broad access to consumer financial information. One definition is a system that provides third-party financial service providers open access to consumer banking, transactional, and other financial data from banks and non-bank financial institutions through the use of secure application programming interfaces (APIs). This serves two key purposes. It empowers consumers by giving them greater control over their financial information, and crucially, it has the potential to spark significant innovation across the financial services sector.
The Current State of Open Banking
Open banking has gained global momentum. The EU’s Revised Payment Services Directive (PSD2) mandates that banks must allow third-party providers access to customer data with their consent. The Competition and Markets Authority (CMA) has mandated the largest banks in the UK to implement open banking standards and has created new financial services and applications as a result, like Emma and Revolut.
Australia has integrated open banking into its Consumer Data Right (CDR), and various regions in Asia are developing their own frameworks. In contrast, the US approach has been market-led rather than regulatory-driven. While a comprehensive US regulatory framework is still absent, it may emerge in the near future. Rohit Chopra, the director of the Consumer Financial Protection Bureau (CFPB), said in late 2023:
“With the right consumer protections in place, a shift toward open and decentralized banking can supercharge competition, improve financial products and services, and discourage junk fees. Today, we are proposing a rule to give consumers the power to walk away from bad service and choose the financial institutions that offer the best products and prices.”
As open banking gains momentum in the US, financial institutions face increasing pressure to attract and keep customers. To thrive in this new era, banks and credit unions must innovate and provide compelling value. Those that invest effort in adapting to this changing landscape are likely to be the ones that survive.
The Client Retention Struggle
Open banking will create a renewed client retention struggle for financial institutions, primarily for three reasons: enhanced transparency, greater knowledge of financial products and services, and heightened competition from market newcomers. As open banking allows customers to gain deeper insights into their current bank’s offerings and fee structures, while simultaneously enabling them to explore superior alternatives from new market players, switching banks will only become more attractive and straightforward.
- Enhanced transparency: Open banking will empower customers with transparency into their financial institution’s product and service pricing, removing hidden charges. It will also expand customers’ access to their own financial and spending information. This improved access allows customers more control over data sharing, especially with third-party providers like Rocket Money. These providers can leverage advanced technologies to analyze customers’ transaction records, spending habits, and other financial metrics. This analysis will give customers an in-depth understanding of their financial practices, helping them clearly identify their most pressing financial needs.
- Greater knowledge of financial products and services: Open banking will enhance customers’ awareness of available financial products and services. Platforms under open banking typically offer comparison tools, enabling customers to evaluate various offerings such as loans, deposit accounts, and credit cards in parallel, focusing on interest rates, fees, and other crucial terms. The ease of identifying banks with superior rates and rewards will incentivize customers to switch to more advantageous options. Moreover, standardized data sharing in open banking will produce clearer, more transparent information, simplifying comparisons for customers.Finally, AI technology is set to advance continuously. In the future, customers may only need to input a single sentence into an AI chatbot to receive comprehensive information about the financial landscape. These advanced AI systems can quickly analyze vast amounts of online data to present customers with the most rewarding options, streamlining the research process significantly.
- Heightened competition: As previously mentioned, open banking allows third-party financial service providers to access customers’ banking data with their consent. This enables the entry of fintech companies and other non-traditional financial institutions, offering more choices and personalized services. With more choices available to them and armed with the knowledge of what types of services can best suit their financial needs, customers will be empowered to select the firm(s) that offer the best value and meet their specific needs.
Several new fintechs, like Moneybox, an app that uses open banking to round up spare change from purchases and invest it, and OakNorth, a bank that uses open banking data to offer tailored business solutions, have cropped up in places like the UK and Europe. These fintech providers are leveraging customer data through open banking to provide them with innovative financial products and services. If banks are to survive during the era of open banking, they will need to constantly innovate to keep up with these agile fintech companies. Otherwise, customers may grow dissatisfied and make the switch to companies that move quickly.
Open Banking in the United States: What Now?
As open banking continues to evolve and gain traction globally, it presents both opportunities and challenges for traditional financial institutions. The struggle for client retention will intensify due to enhanced transparency, greater knowledge of financial products, and heightened competition. To thrive in this new landscape, banks and credit unions must adapt quickly, innovate continuously, and focus on providing exceptional value to their customers. The financial institutions that succeed will be those that embrace the change, leverage the opportunities presented by open banking, and prioritize meeting their customers’ evolving financial needs.
In this rapidly evolving time, it is crucial to partner with those who understand the challenges, opportunities, and strategies of the financial services landscape. Corporate Insight can provide you and your team with valuable insights into customer behavior, market trends, and best practices of the digital experience. Contact us today to see how we can help you best meet your customers’ needs, thrive in the new era of open banking, and stay ahead of the competition.
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Devan Grant
Devan Grant is a Project Manager on CI's projects team.