Open Banking: Balancing the Risks and Rewards

As conversations about how to regulate open banking practices in the U.S. have progressed, concerns from banks about whether or not these practices should be allowed have progressed alongside them. These concerns are valid, considering that open banking enables greater access to consumer financial data, and banks have an obligation to protect their customers’ data. But the reality of the matter is that open banking is happening in the U.S. whether regulations are in place or not.

Similarly to the adoption of digital currencies, the U.S. typically follows a market-led approach when it comes to new financial experiences — meaning that companies will find ways to introduce these experiences regardless of regulations, as long as consumer demand is there.

Open banking is no different. Screen scraping and other unregulated, unsecure techniques have already made it possible for third-parties to extract consumers’ financial data from their providers and share it with others. While open banking regulations will make data sharing practices more secure, they will also give consumers greater control over their financial data and who they share it with, making it significantly easier for them to switch banks at their discretion.

Instead of viewing open banking solely through its risks, however, banks would be remiss to overlook the unique position they’re in to define the trajectory of open banking in the U.S., and how they can make it better than current unregulated workarounds.

Here are some of the ways that the rewards outweigh the risks.

Banks can take the lead on how consumers access and share their financial data.

As it stands now, the process of sharing data between financial organizations is a bit messy. In order to instantly link a bank account to an external savings account, for example, consumers have to consent to sharing their mobile banking username and password with a third-party provider, which then uses screen scraping to extract the consumer’s financial data and history from that bank.

This process poses several security risks, such as data breaches and limited visibility into how consumer data can then be used by the third-party provider. In many cases, these third-parties are not required to comply with the same federal regulations as banks, meaning that they also can’t offer consumers the same level of protection over their data in the instance of a breach.

Banks have an opportunity to improve these practices by working alongside regulators to introduce new open banking standards. For example, by developing new consent management tools, banks will be able to give their customers the option to determine which data they would like to share, with whom, and for how long.

This can include any combination of data across checking, savings, loans, credit and more, as well as provide the ability for consumers to determine when they would like to start and end sharing their data. Perhaps even more importantly, banks will have to be in compliance with specific security requirements that ensure their customers’ data is protected no matter where it’s going.

Compared to existing data sharing processes that come with significant ambiguity, these new guardrails can provide tremendous benefits to both banks and their customers.

New data will provide new opportunities for banks to strengthen their customer relationships.

Historically, the process of opening a new checking or savings account has been a headache for consumers, requiring manual data entry and extended wait times for things like credit and identity checks. Open banking will streamline this experience by enabling banks to instantly share their customers’ personal data with any other financial institution that has the customer’s consent to request it.

While this new dynamic will make it easier than ever for consumers to change who they bank with, it will also make it easier than ever for banks to entice them to stay. This is a critical development for the 58% of U.S. consumers who, according to our research, believe that banks can be doing more to ensure their complete satisfaction.

Open banking will give banks access to data from other organizations in the financial ecosystem. These organizations can include those in different lines of business, such as savings, loans and credit, but also competing banks. This gives banks a new vantage point to leverage these insights to strengthen their customer relationships.

For example, with new visibility into their customers’ loan rates with another provider, financial institutions can extend competing loan offerings with better interest rates.

Banks can not only compete with data aggregators, but become data aggregators themselves.

Because banks are not currently required to share their customers’ data with other organizations, consumers have become dependent on third-party data aggregators such as Plaid. Using screen scraping, these organizations are able to pull financial data from one organization to another when prompted by the consumer for something like linking their bank account to Venmo.

By regulating the way that financial organizations are able to share data with one another, banks will gain the ability to complete these data transfers themselves without third-party intermediaries. As this happens, they’ll also gain the ability to aggregate consumers’ data from external sources into one place.

This will give banks a new role in their customers’ lives, enabling them to provide a holistic view of all of their customers’ financial accounts and activities at any organization. For consumers, this eliminates the need for additional personal finance and budgeting tools that are also dependent on unregulated screen scraping practices to consolidate financial data — a win-win for banks and their customers.

Even without regulations in place, banks are at a pivotal point in their histories with the opportunity to anticipate and prepare for the future implications of open banking. This will not only put them a step ahead of their customers, but their competitors, once open banking (finally) makes its way into the U.S. in a safe, secure and mutually-beneficial way.