Open Banking: Coming to America

Written by Lindsay Whyte · January 3rd, 2019

America always moves either too slow or too fast for its own good.

On the one hand, state/federal banking power struggles haze any projections of sweeping technical adoption.

On the other, playful innovation in Silicon Valley’s software houses creates much needed fintech products at lightning speed, almost by accident.

Now that Google has been approved to conduct e-money activities in Europe, the tortoises and hares of US fintech will begin to realise the status quo is unsustainable. It’s no secret Google’s AI and big data already gives access to rich transaction data, and getting the keys to user vaults themselves would give them unrivalled power in smart money. They want a piece of the pie — no surprise. Fundamental change is necessary for banks to survive.

Enter open banking.

Distant voices

In the past, hopes of a serious movement towards ‘chartering’ the US fintech market were a little dashed after the crash of 2007–8, and sweeping federal liberalisation was brought to an abrupt halt. In 2010, a wave of financial regulation was implemented in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

However, one crumb was left for open banking enthusiasts. The now notorious Section 1033 of that Act.

It states that banks must:

make available to a consumer, upon request…information relating to any transaction, series of transactions, or to the account…in an electronic form that can be used by computer applications.

All very well, but why has the last ten years been so uneventful then?

Developments in the world of interbank transfers have been distracting enough for the industry. The bulk move towards efficient, head-less bank transfers is looking increasingly optimistic thanks to the efforts of an A2A payments market (think Dwolla, Paypal, Stripe). Breaking free from the customary ACH and wires, payments over EFT, SEPA, FPS and IACH are now possible for merchants wanting easy access to federal then international markets.

Since March 2018, same day ACH payments (Faster Payments, roughly translated…) have been available for both credits and debits in the US. The Federal Reserve is by far the largest faster payments operator (FedACH). This coupled with SWIFT’s faster GPI in 2017 (and its Fedwire integration) illustrates what’s possible when government sponsorship and private sector innovation operate in harmony.

Moving closer

Where open banking is concerned, it will come down to the push and pull of trade body standards and market incentives, with the OCC’s stamp of approval for good measure.

Data sharing is the hot topic worldwide. Although old private partnerships may be good advertising for the benefits of data sharing, they hinder the development of an ecosystem built on standards and seamless technology. APIs are the natural successor in the US financial system.

Inertia and privacy concerns (thanks to the ghosts of a subprime mortgage crisis and the Facebook scandal echoing in the halls of the Senate) won’t budge the mindsets of legislators overnight, however.

That said, significant EU-wide adoption of open banking (especially adoption at major banks) is enough to mobilise the US market…and that isn’t an exaggeration. Sometimes you just want to wait and see: The Consumer Financial Protection Bureau (CFPB)’s Consumer Protection Principles of 2017 that set out guidance on financial data transparency, access, portability and security were heavily influenced by an earlier EU directive, GDPR. Not only is there greater (if not binding) guidance on data access, but the very fact that market forces and muscular influence of an EU directive could bring about change is encouraging.

Today

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The US is fast approaching a critical mass of necessary entities required for widescale open banking adoption - and what’s more - a lot of it actually happened in the last 24 months:

Financial Services Information Sharing and Analysis Center (FS-ISAC)

In February last year, the FS-ISAC’s Data Aggregation Work Group, made up of banks, fintechs and financial data aggregators, released a free of charge API to thaw national interbank data channels. Specifically, a new version of its technical recommendations for data sharing: the improved Durable Data API. The difference being? This one was PSD2 compliant. Some banks, including Wells Fargo, Citi and Bank of America, already use the Durable Data API spec to share data with third parties such as accounting software providers.

Senate Banking Committee

On September 18th 2018, they discussed the nature of fintechs’ access to consumer credentials, alternative methods and security in their first hearing on the specific subject of data portability and open financial data. Credit accessibility and data aggregation were among the topics.

The Treasury Department

To quote directly from the July 2018 Report:

A number of foreign jurisdictions have opted to promote access through APIs, in part due to security concerns. The United Kingdom, through its open banking initiative, has specified regulatory standards for data sharing through APIs.

The European Union has adopted the Revised Payment Service Directive (PSD2), which requires banks to grant licensed third-party payment service providers access to bank infrastructure and account data. PSD2 also contemplates the standardization of APIs…

Elsewhere it describes screen scraping as a ‘highly risky practice’ and efforts by industry players to restrict data aggregators’ access to user financial data (an interpretation of Section 1033) has been completely rejected.

The Electronic Payments Association (NACHA)

They recently created the API Standardization Industry Group, with over 100 banking institutions, associations and consultants, with the primary goal of defining an API standard for sharing account information, payment initiation and using anti-fraud techniques. This is a market-driven, voluntary initiative which will provide easier channels of data exchange between fintechs and banks, however unlike PSD2 and CMA regulations NACHA APIs are not mandatory.

Office of the Comptroller of the Currency (OCC)

In July 2018, they eased the process for fintechs wishing to become banks in their own right, at the national level. Varo bank is an example of a US challenger bank to get early approval.

Banks themselves

In addition to those already mentioned, banks like JPMorgan Chase have made bilateral agreements with data aggregators to consume their APIs, for the purpose of mass consumption. Capital One and BBVA Compass have actively embraced open banking. Even more banks like these are stakeholders in FDX (Charles Schwab, USAA etc.), a FS-ISAC body responsible for building the Durable Data API standard. The move towards greater integration at all these banks is inevitable.

GAFA & co.

With the advent of Facebook Messenger payments, WhatsApp Pay experimentation in India and Gmail payments, it comes as no surprise BigTech will be lobbying over the next 12 months for regulatory loosening. With fears of WeChat’s warpath in Asia, it’s clear people want effortless access to their finances, and they will, one way or another. Efforts to ‘open’ banking will accelerate.

BizDev 2.0

This all marks a shift at banks from treating APIs like any other value added derivative to a new chapter in modern business models, namely ‘BizDev 2.0’.

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Like so many globally, US banks are beginning to see how Google dominated its market by giving away its technology to any company that threatened building a competitor — the Google Maps API & Uber is the obvious case study for this.

As the the founder of Flickr Caterina Fake succinctly explained, the old way of developing partnership business models is redundant:

…spending a lot of money on dry cleaning, animating your powerpoint, drinking stale coffee in windowless conference rooms and scouring the thesaurus looking for synonyms for “synergy”. Not to mention trying to get hopelessly overbooked people to return your email. And then after the deal was done, squabbling over who dealt with the customer service.

Now the strategy is to flood the market with data; fintechs are so busy building exciting apps on top of you there’s no giant justification in your customers’ minds for having their salaries or business income paid to anyone else.

US banks, as we’ve seen in Europe, can use this as an opportunity rather than a threat.

We can learn from America, too

It’s not all one-way where open banking is concerned.

The american banking system teaches us something: Monopolistic behaviour has a hard ceiling, in law and in people’s hearts.

As much as open banking will benefit non-banks like GAFA, financial monopolies are subject to muscular antitrust laws, and culturally Americans have maintained a great deal of trust in smaller, regional banks (the top ten UK banks cover 96% of UK deposits, the top ten US banks hold roughly 45%).

In the end, the diversity of the American people and what they want is so dependent state-level, social and cultural variables we’re brought back to the central maxim:

Customer experience is what matters, and no one has a competitive advantage in social nuances.

For the country that houses GAFA and banks too big to fail, it’s actually the last place you’d find technological, social or financial uniformity…this is why 2019 is going to be so exciting, on both sides of the pond. Big or small, it’s all to play for ⚾

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