US Open Banking Outlook: Adoption, Benefits & Implications

4 min read
Jan 18, 2024 9:42:33 AM

One of the trending topics of 2024 is "open banking," an idea that promises to transform the way financial institutions operate. What is open banking? In general terms, it opens channels of financial data exchange, connecting finance, science, and government to optimize how financial services are delivered.

Open banking solutions have already made inroads in the UK and several European countries, but what about the US? Today, we tell you everything you need to know about this topic: the implications, adoption, benefits, and more.

Here's an outline of the questions this article answers: 

 

What is open banking?

Open Banking is a financial practice in the United Kingdom that promotes open and secure access to customers' banking data to third parties through application programming interfaces (APIs). The first question that arises from this definition is what kind of data? This includes transactions, payments, consumption, and other financial data. 

What is the objective of this system? It promises to revolutionize and innovate the way the banking industry works and make it more accessible, with APIs creating a single central repository of financial data, which can be accessed, controlled, and used by third-party providers to offer better products and services to customers, such as payment platforms, P2P lending options, etc. 

How promising is banking? According to Statista, the value of open banking transactions worldwide reached US$57 billion in 2023 and is expected to increase

Let's see how it works!

How do Open banking APIs work?

Open banking APIs allow users to associate their bank accounts with different financial services, establishing a secure connection authorized by the client through an application. 

There are two types of APIs: "read access," which allows FinTech access to certain parts of the customer's account information, and "write access," which allows greater access, even allowing payments. 

In this way, banking institutions create endpoints that allow providers or developers of these applications to have authorized access to consumer data. However, this is encrypted access, ensuring it is only granted with the customer's authorization. This makes it easier for the customer to carry out everyday activities, such as checking balances, charging money, checking their transaction history, etc. 

Let us try to illustrate how this triangular relationship works:

  • The customer provides his information to the financial institution. 

  • Then, the bank connects that information to the data aggregator.

  • Fintech developers connect to the data aggregator.

  • Providers create services for consumers based on that data. 

What is the global acceptance of APIs? It is a promising market with an expected growth of 580 billion by 2027.

How do the US banking approach the transformation?

In the American landscape, the adoption of open banking solutions has been timid compared to Australia and the United Kingdom; in the latter, the number of active open banking users in the United Kingdom reached the milestone of seven million users. So far, the idea of open banking is in its early stages; for many, the main concern is the need for more data access and use regulation. Consumers are aware of the value of their data and demand security, as sharing their data is still sensitive after the Facebook and Cambridge Analytics scandals. 

However, a survey of 3,000 consumers conducted by Deloitte shows that 48% of 18-21-year-olds are willing to embark on technological innovation but recognize the need for regulation to achieve implementation. 

Is there a regulatory proposal? Yes, the Consumer Financial Protection Bureau (CFPB) proposed in October 2023 a law on the protection of financial data rights; the idea is to create a regulatory framework that would allow the opening of bank account information to stimulate innovation. The proposal focuses on setting standards and mechanisms for securing and using consumer data rather than micro-managing banking.

The text, however, is still in draft form.

What are the challenges for banks to overcome in 2024?

There are certain obstacles to overcome to make open banking solutions a reality in the US. Here are some of the most important ones. 

Ensuring data privacy: the exchange of data over the internet represents a risk, and cybercriminals can exploit those entry points that banking creates for FinTech to deceive customers by impersonating a provider. Even if FinTech has weak security measures, it could be an open door for hackers.

The balance between security and innovation: It is vital that in leveraging data, consumer security is not compromised, and vetting processes need to be defined to determine where responsibility lies. The use of sandboxes or regulatory testing environments could be essential.

Building consumer trust: opening financial data to third parties is an idea that at first glance meets with disapproval because of the need for privacy; even in pioneering countries such as the UK, a whopping 84% of UK consumers do not believe open banking is secure, and 58% do not understand it.

The accelerated pace of innovation: regulators are behind the innovation curve, designing regulatory frameworks around new technologies is complex, and AI and machine learning algorithms have demonstrated this.

What are the benefits of open banking solutions for customers?

So far, when we have referred to consumers sacrificing some of their privacy for the growth of financial technology, however, it has significant benefits. 

Here we list the main ones:

  • Securely share their data with other financial institutions.
  • Facilitate account affiliation processes.
  • Facilitate payment methods.
  • Analyze customer transactions to identify the best financial products (a savings account with higher interest rates or a credit card with a lower interest rate).
  • Lenders get a clearer picture of the financial situation and level of risk to offer more cost-effective options.
  • Clients can better understand their financial situation and automatically calculate how much they can afford to buy a car or a house and whether it is viable to get into debt.

Open Banking undoubtedly opens up a more competitive and innovative landscape for the financial services industry. It helps consumers obtain a more attractive offer of products and services that are better adapted to their needs since they are the ones who nurture and give life to the new products. The trend is towards expansion and consolidation in the American market once minimum parameters of use and data protection are established to ensure consumer rights. 

References

 

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