Open Everything
min of reading
January 26, 2023

Experts Predict How Open Banking and Finance will Transform Fintech Service Delivery in 2023

Natalia Cruz
Head of Open Finance at Sensedia
Open Finance Specialist at Sensedia, helping business in the journey through Open Banking.
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We learned much from discussing open finance predictions and trends in 2023 with this expert panel of industry leaders. Thinking Outside the Vault - Why Open Finance Opens Doors to Opportunity explores how open banking, open finance, and secure data sharing are transforming financial service delivery for businesses and customers in North America. 

Panelists included Sensedia's Felipe Torqueto, Head of US Solutions; Natalia Cruz, Head of Open Finance; FDX's Managing Director, Don Cardinal; AWS's Worldwide Banking Industry Lead, Charith  Mendis; Chris Kennedy, SVP Strategic Initiatives, Technology & Operations at Regions Bank; Brandon Baines, VP, Relationship Manager Tech Enabled Banking at Customers Bank; and Industry Analyst, Randy Heffner. Paul Wilke, CEO of Upright Position Communications, moderated the discussion.

Finance is Evolving

As banking and financial services grow more open and connected, service delivery for businesses and customers is evolving. API-based solutions open the doors for banks and their partners to develop new business models, such as Banking as a Service (BaaS) and embedded finance. Regulated financial institutions can now share the playing field and collaborate with fintechs. Both are evolving to meet the changing landscape of BaaS. The days when banks were simply places to borrow and invest are over. Flexibility, innovation, and adaptability are required for success in the new open era.

Charith Mendis summed it up beautifully, stating, "Banks need to think of themselves as product companies and design their tech and business strategies in a way that's adaptive because business models are evolving. Until we know exactly what the right business model is, the ability to adapt using the architecture is going to be crucial." 

APIs Open Doors

API strategies are creating opportunities in the banking industry and many industries where secure consumer data is used to process business transactions. In the past, financial institutions remained siloed to stay secure, compliant, and competitive. Today, banks and fintechs need to work together to keep data safe and processes compliant while making information accessible to the end user. Collaboration with fintechs can speed up innovation and new revenue opportunities for traditional financial institutions.

Chris Kennedy shared, "I would say traditionally, banks aren't always the most innovative. There are innovative banks out there, but I do see open banking as an enabler for us to be much more innovative, or at a minimum, to partner with really innovative companies."

"APIs are the next new channel, so you're seeing banks become net data ingesters," said Don Cardinal. "You're seeing opportunities like Experien Boost where you can offer people who would have been subprime, near-prime - or near-prime, prime rates." Cardinal discussed how open finance and common standards allow banks to ping existing relationships and make correct lending decisions for customers such as recent immigrants who have a long career but are thin file or no file. It also helps verify that financial institutions deal only with real people with real history, not a bot created ten minutes ago.

Customers are Winners

As financial services become more open and connected, customers win. Industry evolution to a more open environment is already giving customers better experiences and more control over data in other countries, and it's time for financial institutions in North America to follow suit as customers demand greater access to their data. 

Brandon Baines explained, "Banks are stewards of consumer data. And open banking is just a small piece of the bigger picture of open finance and looking at the entire financial picture of the consumer. You can only get so much from one bank. Typically, whether you're a consumer, small business, or large business, you have multiple relationships with multiple financial institutions that are servicing multiple products. To be able to share that data cross-functionally between institutions presents a benefit for the consumer but presents added risk-inherent risk."

Mendis shifted the discussion to business customers and shared how banks are having new conversations about how they deliver services to their customers. "It's no longer about providing deposits and cash management accounts to a small business, but it's actually helping a small business be successful." He explained that the paradigm shift means using APIs and ISV solutions to help customers run their businesses and how the data sharing back and forth between the customer and the bank drives a much better and more cohesive experience. When customers provide consent, the bank can offer better insights to them.

Learning from Other Countries

Organizations can learn about open finance from successful experiences around the world. Brazil has led the charge in open finance. According to Natalia Cruz, more than 800 institutions have adopted an open finance strategy. Customers can make real-time transactions between accounts from different institutions using open finance and payment APIs.

Cardinal shared that Brazil jumped right into open banking, brought other industries into the discussion, and learned from the UK and Australia. Chris Kennedy added that he likes where the US is going with industry-led discussions with regulators and the inclusion of fintechs and consumer advocates to partner and listen to each other. He shares, "I see it all coming together, and I think, really, we have to look broader than just North America to pick the best learnings and bring them here."

Felipe Torqueto added, "It's very interesting to see the banks evolving the discussions within the central bank (Brazil), so it's not only about regulatory discussion. We see banks really trying to be innovative in the ecosystem with the central bank, not just working together from a regulatory perspective."

Regulation is Moving in a Positive Direction

The panel discussed regulations in the US. Chris Kennedy commented, "There's been really good discussion with the regulators. You've seen proposed regulations in Congress around this, around GLBA, Gramm-Leach-Bliley Act. There's the proposal for third-party risk management which actually refers to open banking… The principles from the CBP have been around since 2017." He added, "Banks are taking action even without those regulations being finalized… I think it's very positive in the US and North America as to how it's progressing."

Baines continued the discussion on challenges ahead, "We're working with tech companies because they have the technology, whereas the banks bring the data to the table. The tech companies are much faster, and they use buzzwords like APIs, AI, and machine learning, but how we merge all that together in a safe and sound compliant manner to better serve the end user, I think, is the biggest question."

From a developer perspective, Torqueto added, "You don't want to slow down the innovation, but at the same time, we need to keep things protected well enough. This is a very complex scenario."

Governance is Critical

Banks struggle to incorporate legacy data and systems with modern infrastructure. Governance remains key, and banks and fintechs need to do better. API security, when done correctly, is more secure than simple login and password access. 

"We're getting to a much better place by default with some basic secure APIs," said Kennedy. "I do want to celebrate that," he added about banks incorporating or learning to incorporate APIs securely. He shared that guidance from FDX and others around security is front and center and stressed the importance of having strong governance, protecting customers, and safeguarding their privacy.

Evolution is Accepting We Don't Know Everything

According to Mendis, APIs allow for speedy innovation and require looking at legacy systems and designing business capabilities around them rather than trying to bolt them to legacy stacks. Banks can expect to evolve from providing technology within the current business model to becoming a software provider to the industry and being consumed by the API. Banks are becoming more like fintechs, and how they execute strategy will be crucial in the future as they need to scale up or down.

Mendis added that when banks think about open finance, they need to understand that where they start is probably not where they're going to end up. He makes two points, "One, you do need to think of yourself as a different firm, just providing IT infrastructure to banking. You need to think of yourself as a product company. And two, you need to think how the design of your tech strategy enables your business strategy in a way that's adaptive. Business models are evolving. Until we know exactly what the right business model is, your ability to adapt using the architecture is going to be crucial."

Hefner added that good architecture and APIs, built around capability points where decisions are made, and data flows, are instrumental in doing much of the regulation or pulling downstream data to analyze your siphon-off data transparently in a very flexible way. He shared a bit about the unknown in the regulatory area, "The API-based infrastructure is serving the regulatory, and the unpredictable regulatory demands as well, so the platform is not only helping you be flexible for open-ended business, it's helping you respond to anything that your government happens to throw at you."

Innovation Comes at its Own Pace and from Unexpected Places

Don Cardinal shared, "By having common standards and laying down common rails, and I give the metaphor, when I hooked my modem up to my Commodore 64 using CTM basic, I never envisioned YouTube, but we got IP addresses. We eventually ended up with DNS. We eventually ended up with HTTP and HTTPS. And so, laying common foundations and common standards to build on that have principles of security, sustainability, scalability that work well with other standards. I'm always waiting to see what's going to come next… We've started fraud APIs. No one in the world has those except FDX because our members said. 'Hey, we need to share this data.' We have these rails that are secure. Why aren't we doing this? And so it's the innovations you're going to see on top of these rails that is, I think, really exciting."

Mendis added, "I think the imagination has always been there. The technology has caught up to allow organizations to be able to experiment at a reduced cost." He continues, "Open API standards are actually providing the mechanisms to communicate globally, or at least within each country, and that common standard makes it easier for new entrants to experiment because you're not redefining a point-to-point integration with every single organization you need to work with. You're plugging into a common standard, and therefore, the development time to achieve that has actually been reduced."

And Baines concluded that banks need time to innovate. He shared, "Banks don't like to jump in headfirst. We like to dip our toe in the water and test it out, see performance models for six months to a year improving track records and model validation. So it is a very slow process, and the key part to being successful is just making sure we keep that imagination alive as an industry."

What's Next?

Panelists shared hopes for more collaboration between banks and fintechs and more partnerships between banks. They envision more payment integration, broadening BaaS and embedded finance, and increased investments in these capabilities globally.  

Kennedy predicted, "I'm expecting open finance to really drive consolidation of banks through both M&A activity and account portability." He added that it would be easier for consumers to switch banks and more straightforward for banks to onboard other banks with streamlined data.

Hefner's vision summed up the discussion, "2023 will be unpredictable, and we have to be ready for anything. But fundamentally, the combination of architecture, governance, imagination, and a broad definition of what business we're in - almost defining we don't know what business we're going to be in tomorrow - is the outlook and perspective that will allow a bank or other financial institution to find an opportunity to invent whole new ways of doing things that that we hadn't thought of before."

Want more? Watch the entire discussion here. And to learn how Sensedia can help your business develop APIs to take you to the next level, contact us.

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