Five Open Banking Trends US Financial Institutions Should Seize in 2024

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Natalia Cruz
January 24, 2024
min reading time

By Natalia Cruz, Head of Open Finance, Sensedia

When fintechs embrace open banking, open finance and secure data sharing, financial service delivery transforms. Open finance has created significant global opportunities, especially in regions where the subject has been discussed longer, like Brazil and Europe. These regions lead the adoption and implementation of open finance strategies. Regulators like the Consumer Financial Protection Bureau (CFPB) are considering new rules for data sharing that could impact banks and fintechs. It's time for the US to dive deeper into how these new opportunities can drive revenue, reimagine possibilities, and benefit businesses and customers to enhance their financial experience.

Welcome the Financial Evolution Revolution

The world thrives online, and we expect nearly every need to be met at the touch of a phone screen or click of a computer key, including our financial information and transactions. While the banking and financial services industry transforms slowly and cautiously to meet consumer demand, fintechs are finding ways to provide greater access and connectivity to financial data while adhering to compliance and safeguarding the right to its access. Together, they are reshaping service delivery for their businesses and customers.

US financial leaders can draw valuable lessons on open finance by analyzing successful implementations worldwide. Brazil, a frontrunner in open finance, has over 800 institutions embracing this strategy.

Brazil took a proactive approach to open banking, involving various industries in the dialogue and learning from the experiences of countries like the UK and Australia. In the US, regulators, fintechs, and consumer advocates are collaborating and fostering a cooperative environment to listen and learn from one another. It's critical for the US financial providers and partners to expand the dialogue beyond their borders to learn from the best examples and start implementing them.

Brazil has transformed open finance under a regulated environment. Take, for example, Banco Bmg. The Brazilian bank provides accounts, loans, insurance, and investment products to individual, corporate, and wholesale clients, along with retail management support. Banco BMG needed to align with Open Banking regulations and required its API infrastructure to effectively store consented data analyzing customer behavior. The bank also needed to establish secure communication channels with other banks while meeting compliance requirements. BMG effectively safeguarded customer data and leveraged Open APIs to develop innovative payment and credit solutions. The company grew 28.2% over 12 months and increased active account holders by an incredible 240.5% to 4.6 million. The bank opened its APIs to third parties, establishing a robust foundation for future Open Finance initiatives.

Open New Doors with APIs

APIs had already connected computers for decades when Salesforce introduced the first modern API in 2000. Amazon and eBay soon followed as data sharing became widely accessible and customizable for commerce. Fast forward to today, when APIs are everywhere and relied on to support our increasingly digital and interconnected world, including the financial sector. 

The rise of API-based solutions empowers banks and other fintechs to explore innovative business models, including BaaS and embedded finance. Collaboration between regulated financial institutions and fintechs is easier as new technology dismantles traditional barriers in the banking landscape. Banks and fintechs are discovering ways to adapt to this evolving BaaS landscape, expanding their roles beyond mere providers of borrowing and investment services. 

API strategies create endless possibilities in the banking industry and other sectors reliant on secure consumer data for business transactions. Financial institutions can no longer operate in silos. They must find ways to ensure security, compliance, and competitiveness as they collaborate with other banks and fintechs. Secure API strategy allows banks to maintain data security, regulatory compliance, and user accessibility while joining forces with fintechs and other partners to accelerate innovation and unlock new revenue streams.

FDX, a nonprofit dedicated to unifying the financial industry around a common, interoperable, royalty-free standard for secure and convenient consumer and business access to their financial data, has been instrumental in creating standards for API security. Sensedia believes these standards will influence CFPB’s new rulings. These rulings will ensure data quality and systems are securely integrated as data is shared. It also requires users the right to permit the sharing or revoke of the use of their data. Screen scraping, a less secure means of gathering data, will be replaced by a secure API strategy that will allow flexible, safe sharing of the right information to the right systems.

APIs will fuel rapid innovation by inspiring a new outlook on legacy systems and the creation of business capabilities designed to align with them. Many financial institutions are morphing into fintechs. This shift means their services will be consumed through APIs, similar to how fintechs operate. Traditional banks must evolve how they execute their strategy for future success, particularly as these institutions navigate the need to scale up or down according to market demands.

Rethink Banking Products and Partnerships

Banking as a Service (BaaS) is rising and changing how individuals and businesses manage their finances. Banks and fintechs must prepare to work together in the best interest of their customers. New regulations like those proposed by CFPB are creating concerns from financial providers about the cost and impact on their business. While these concerns are real, Sensedia believes these new rules bring tremendous opportunity. Moving from screen scraping, which puts sensitive data at risk, to secure APIs brings businesses and their customers enhanced security, simpler innovation and faster time to market.

Thriving in the era of openness requires embracing flexibility, driving innovation, and nurturing adaptability as core attributes. Financial institution Qista saw the need for a product-centric strategy and implemented these attributes. The company offers loans, investments, and corporate governance to individuals and businesses. Qista was challenged with strategically integrating its services with other fintech partners to enable a broader portfolio of customer offerings. By leveraging a robust API Management platform, the company quickly established five key partnerships in the credit market, solidifying its market maturity. Today, Qista collaborates with numerous integrated partners through a robust API management platform, streamlining governance and ensuring greater competitiveness in the credit market by offering unique options to its end users. Enhancing services through open partnerships saved Qista costs and increased operational efficiency while ensuring greater competitiveness in the credit market by offering unique options to its clients.

Make Your Customers the Winners

Innovations in openness and connectivity in the financial services industry are driving positive outcomes for customers. Customers are demanding greater access and more control over their finances, and with CFPB’s new rule, they may soon have the final say over how their financial data is shared. Customers are already benefiting from the industry's shift, finding easier ways to access and manage their data. North American financial institutions are starting to respond to customer demands and taking steps toward more open digital transformation as they comply with new data security, sharing, and access standards.

Data sharing between customers and banks drives a much smoother and more cohesive experience. By obtaining customer consent, financial institutions can offer their customers better insights and more personalized recommendations. Through open finance and payment processing APIs, customers can seamlessly conduct real-time transactions between accounts held at different institutions, revolutionizing how financial transactions are conducted.

Financial institutions are engaging in new conversations regarding service delivery to meet the evolving needs of individuals. Business customers also present unique needs for more open finances. The paradigm is shifting to leverage APIs and ISV solutions that empower all customers to control access to their data.

Regulation and Governance Are Your New Best Friends

Transitioning to a more open financial system involves marrying the financial institutions that have the data with the technology companies to work together to open opportunities. Soon, US businesses will be required to create these integrations under stricter guidelines such as those proposed by the CFPB. Tech companies move faster and work with APIs, AI, and machine learning. Banks and financial service providers traditionally move slower. How the two sectors merge in a safe and compliant way will be the key to progress. And it's complex.

Sound architecture and APIs that revolve around key capability points and data flows play a crucial role in addressing regulatory requirements and enabling efficient analysis of downstream data in a transparent and adaptable manner. The API-based infrastructure serves the unpredictable regulatory demands, helping to create a more flexible and open-ended business that can respond faster to new rules and regulations. 

In line with compliance comes governance. Financial providers face challenges as they integrate legacy data and systems with modern infrastructure. Effective governance is crucial, and banks and fintechs must strive for improvement. API security is superior to simple login and password access methods. Guidance provided by FDX, CFPB and other entities will continue to help financial institutions prioritize security and in turn, create new opportunities. Strong governance practices are crucial for protecting customers, ensuring their privacy is safeguarded, and governance should be considered and implemented throughout the new tech and API strategy implementation. 

Accept the Unknown

Finally, it’s essential to realize that in this rapidly changing industry, we don’t know what we don’t know. When banks think about open finance, they need to understand that where they start is probably not where they will end up. Business models are evolving. Regulations are changing. Until institutions know the right business model for them, their ability to adapt to new tech and modern architecture will be crucial.

Expect innovation from unexpected places. Technology now allows organizations to be able to experiment at a reduced cost. Open API standards provide the mechanisms to communicate globally, and that common standard makes it easier for new entrants to experiment and integrate more easily with others. Having a common standard increases the ability to collaborate and reduces development time. That puts the financial industry in an exciting place. 

We can’t know exactly what the future will bring, but we do know it will be more open, and banks and fintechs will invent new ways to do new things we haven't thought of yet. APIs will play a critical role in architecture, governance, compliance and imagination. Sensedia is excited about where the US and the world are headed with open finance, and we’ll be here to offer solutions that transform the industry.

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