Open banking’s success in the United States — as with any ecosystem — will hinge on several factors, none guaranteed.
But, with lessons learned from abroad, and with an incrementally clearer picture of regulation and what consumers want, a few guideposts can be set along the way.
The goal is to make it easier for consumers to essentially own their financial data, allow that data to be shared with third parties, and ostensibly reward the companies that serve their needs, while refusing permissioned data to move toward the companies that don’t meet those needs.
The Personal Financial Data Rights rule sets the stage for that data portability and allows consumers to stay within the relationship forged with their banks. It also takes an almost a la carte approach, enabled by API connectivity, to financial products and services on offer from other providers, including FinTechs.
One Framework, Many Voices
Many aspects are still being hammered out, especially on the regulatory front. The buildout of the regulatory framework governing some of the technical details and best practices for data protection and privacy remain under discussion and are somewhat in flux. Whereas the United Kingdom’s launch of open banking in 2017 was largely a top-down approach, the standards and industry guidelines are being done in the U.S. via a consensus approach.
The Consumer Financial Protection Bureau said the process on standard settings should be “open to all interested parties, including public interest groups, app developers, and a broad range of financial firms with a stake in open banking.” The pool of interested parties also can, and will, include consumers, and the CFPB can revoke the recognition of standard setters, with a maximum tenure of five years.
It remains to be seen if the consensus approach results in fruitful dialogue and agreement on some of the key tenets of open banking, or if this may be a case of too many cooks in the kitchen, delaying the actual emergence of standards.
Trust Will Be the Glue That Binds the Ecosystem
The PYMNTS Intelligence report “Consumer Sentiment About Open Banking Payments” revealed that roughly half of consumers are willing to use open banking payments for at least one type of expense, including monthly bills, groceries or subscriptions.
Only about 11% of consumers have used open banking payments in the past year. Of those consumers who have experience using open banking payments, 82% said they have been satisfied with their initial forays into the open banking realm.
But for the consumers who have not used open banking, or have no interest in doing so, 56% said that they have concerns about data security and trust. That trust hinges on knowing that their data is being used for explicitly stated purposes and that permission can be revoked successfully.
Market-Driven Momentum Could Benefit Banks Most Immediately
Considering the trust factors, it may be the banks that are the early beneficiaries of open banking’s evolution in the U.S.
The data showed that 43% of consumers trust their banks or credit unions to provide open banking services and related products. About 30% trust their primary financial institutions to deliver the goods.
Pay-by-bank, where money is moved directly between accounts at different banks without intermediaries, may be an early use case favored by consumers as they gain a holistic view of their day-to-day finances. This option allows customers to pay for goods and services directly without additional charges in the mix.
Instant Payments Hold Promise, but Security Concerns Linger
APIs made available through open banking allow greater connectivity to instant payments conduits. The direct-to-account payments can be made directly from a consumer’s bank to a merchant’s bank, typically using real-time rails.
Look for the banks to get increasingly on board here, as they use artificial intelligence and advanced analytics (with FinTechs) to help battle the fraudsters. PYMNTS Intelligence data showed that 46% of financial institutions said the risks of open banking outweigh the benefits, tied chiefly to fraud. However, 81% of banks said they can offer secure real-time payments.
What Might Be Learned From Abroad
The U.K. may be among the most instructive markets here, giving some indication of what’s to come in the U.S. There have been some indications that open banking has been slower to take root than many had expected. Authorized push payment fraud remains a threat, equal to 239 million British pounds (about $306 million) through the first half of last year.
The growth rates in the roster of open banking providers slowed from 131% in 2020, to 1% in 2022, and declined 6% through the midpoint of 2023.
However, Stripe last month debuted an open banking-powered payment method and faster manual payouts in the U.K. Businesses on Stripe will be the first to access the payment method, Pay by Bank.
In March, Swedish payments FinTech Klarna began offering open banking-powered settlements in the U.K. Through that initiative, consumers can pay Klarna directly from their bank account instead of using a debit card.
The lessons here are that caution reigns among at least some banks and FinTechs, but use cases will win out.
