U.S. FIs Pursue Open Banking Without Europe-style Regulatory Nudge

The U.S. is making a more organic shift toward open banking concepts than what is seen in Europe, where the Revised Payment Service Directive, or PSD2, is outright requiring it.

Innovation, collaboration, and competition are rapidly shaping the open banking ecosystem in the U.S., according to Ernst and Young’s Open Banking Opportunity Index, released in January. The U.S. placed fourth overall out of 10 geographies in the index despite low marks for regulation, where it ranked ninth, and consumer adoption, where it ranked sixth. However, the U.S. stood apart when it came to innovation, where it ranked first, and consumer sentiment, where it ranked second.

Sean Viergutz, EY’s North America Financial Services Payments Leader, told Bank Innovation that many U.S. institutions have already taken steps toward implementing open banking-friendly products and services, but leading the charge is tough.

“I think everyone is still trying to figure out a few different things,” Viergutz said. “For one thing, how do you offer or how do you monetize something like direct API access in a way that aligns with the bank’s strategy? And monetization isn’t just about creating new revenue streams, it’s about being smart and not giving away revenue streams as well.”

But what’s driving the adoption of open banking concepts in the U.S. in the absence of regulation?

Viergutz said consumers and corporate clients are simply demanding more bespoke solutions.

“We’re a country of convenience in everything we do,” he said. “To the extent that we can get bespoke solutions offered to us that allow us to transact seamlessly and frictionlessly, that’ll drive a ton of adoption.”

Ironically enough, the index found that while the U.K.’s regulatory approach may nudge more banks into fintech partnerships to design and build open banking solutions, the “light touch” of U.S. regulators may allow the industry to create an ecosystem that can “react more precisely to customers and be more conducive to meeting needs.”

Matthias Kröner, founder and CEO of German fintech Fidor, told Bank Innovation that regulation, and regulation alone, is driving innovation in European banking.

“A banker, a traditional incumbent banker, is only moving once he’s scared to death,” he said. “And the only person who is scaring the banker to death is definitely not the customer, it’s the regulator.”

Customer experience is not a currency to incumbent bankers in Europe, Kröner said, adding that he does not put himself in that category, of course.

“They have no idea,” he said. “They often do not suffer the processes they are offering to their own customers, so they simply do not know.”

Kröner said bankers also fear losing something by driving innovation and being the first out the gate with a technology that other banks then mimic and improve on at a reduced cost.“They’re more inclined to protect the status quo than innovate,” he added.

PSD2, he said, will ultimately be a positive but regulatory driver for market development. He pointed to India, where he said regulation is actually changing the incumbent financial system over the course of just 3-4 years. “I predict PSD2 will do something like that to the European landscape as well,” he said.

Jake Tyler, CEO of Vancouver-based startup Finn AI, which recently built a chatbot for Fidor’s “bank-in-a-box” product, told Bank Innovation that digital transformation is a major agenda item in North American banking, especially with platforms like Plaid offering better access to financial data, and it’s changing the nature of the market. He said the recent BB&T-SunTrust merger, for example, could be a symptom of that.

Still, Tyler said PSD2 in Europe has been a driver for change in North America, as larger incumbent institutions might anticipate regulatory changes coming.

But why is open banking regulation lagging in the U.S.?

Viergutz said regulation tends to be a byproduct or a function of the administration in charge. “With our current administration, more regulation, or any push to force privatized businesses or even the marketplace to adopt European regulation, is probably unlikely,” he said.

He also said regulators have an opportunity to see how PSD2 affects banking in Europe, and how the adoption of open banking practices there affects the marketplace, before proceeding with regulations of their own.

It’s worth noting U.S. regulators haven’t been entirely hands-off. A Treasury report released in July advised the Consumer Financial Protection Bureau to affirm that third parties like data aggregators and other fintechs, authorized by consumers, would be entitled to access certain financial data under the Dodd-Frank Act. The department also wants firms to move away from screen scraping to more secure methods of data access, but it has left that task for the private sector to sort out.

Proceeding without regulation may pose as many challenges as opportunities.

Steve Smith, CEO of financial data aggregator Finicity, told Bank Innovation that the more progressive U.S. firms are investing significantly in fintech and open banking solutions, through partnerships, acquisitions, and internal development. Others, he said, are just hoping things will never change.

“We’re going to see a major shakeup in the financial services industry over the next 10 to 15 years and there are probably a lot of businesses in this space that won’t be here,” Smith said. “Then you’re going to have some you wouldn’t, perhaps, perceive as leaders today, but they’re investing significantly into these change agents and could kind of erupt to be fairly significant players in the industry.”

Smith said those best prepared for the open banking era are already thinking about how to leverage data and engage in direct relationships through channels such as APIs, rather than having others simply plug in and pull data from them.

“For banks that typically take a walled-garden approach to their data, moving them into a world where they view open banking as not a threat but an opportunity, is a big cultural shift,” he said. “If you have not already done that work, culturally, within the bank, then you’ve got some really tough days coming.”

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