Open Banking Is Heading Stateside

The Biden Executive Order on promoting competition contains a number of very interesting provisions. Some of them, such as the initiative to require airlines to refund fees to passengers who get bad wifi or whose baggage is lost, seem unlikely (from my inexpert perspective, at least) to strike a blow against sclerotic corporatism and re-energise late state capitalism to the benefit of all throughout society. On the other hand, some provisions, such as the “right to repair”, might have very signification implications for everything from tractors to iPhones.

The main reason I am interested in the bill, though, it is that is contains a very specific provision on banking that could mean structural change in the US’ financial services sector. This is the provision that calls for the Director of the Consumer Financial Protection Bureau (CFPB) to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new and innovative products in ways “consistent with the pro-competition objectives stated in section 1021 of the Dodd-Frank Act”.

The Biden Executive Order calls for the portability of consumer financial transaction data. Good. Click To Tweet

(The decade old Dodd-Frank law actually gave consumers the right to access their own financial data but the CFPB has not yet defined that standards that would enable, although it did start the rule making process last year.)

Now, the US already has a form of open banking. There are companies such as Plaid and Yodlee who share customer data with banks and fintechs. But these are through bilateral agreements. For example, Plaid just reached an agreement with Capital One to stop screen scraping and use Capital One’s APIs. But this is by agreement. Under the new provisions, the banks will be required to provide mandatory API access. Now, this means all sorts of standards and such like because the CFPB will have to balance competing requirements from the various stakeholders to make sure that it gets it right on (eg) privacy. This will take some time, but it is coming, and it a good thing.

I could not agree more with the economist Tyler Cowen who commented plainly that the portability of bank account information is of significant benefit to the stakeholders and I am sympathetic to those (generally more progressive) voices calling for a maximalist interpretation of the data portability provisions. If you could move from one bank to another at the press of a button, and take all of your data with you, that would certainly encourage competition from new players.

Tinder
Swiping.
NFT available direct from the artist at TheOfficeMuse (CC-BY-ND 4.0)

But how to achieve this? The obvious way forward would be to introduce open banking along the lines now familiar in many other jurisdictions: mandate that all financial institutions about a certain size implement a common set of APIs with a prescribed set of basic functions so that consumers can give permission to other regulated organisations to have access to their data.

The API Opportunity

Banks should respond to this challenge by seeing it as an opportunity to provide new products and services that are not simply a passthrough of the current financial products and services. If we use the simple layering of manufacturing, packaging and distribution of financial services to look at dynamics while assuming that banks want something more than low-margin manufacturing (but will find it hard to compete with distributors as the embedded finance bandwagon rolls on) then we must conclude that they should take packaging seriously.

To do this, they could focus on the APIs themselves and opt to invest in this layer to find new sources of revenue, better returns than pure manufacturing and, and this should not be underestimated, ways to remain relevant to the spectrum of distributors in the new economy. I’ll give an example of this later, but first let us resort to the traditional tool of the jobbing consultant and make a two-by-two matrix.

On the horizontal axis we distinguish between the APIs that are mandatory (in a regulated open banking regime, or table stakes in a market-driven regime) and non-mandatory or optional APIs that might be the basis of a more competitive approach.

On the vertical access we distinguish between APIs that are related to making transactions (these are what are generally referred to as “write” APIs) and APIs that are related to information gathering (these are what are generally referred to as “read” APIs).

Api 2x2

It doesn’t take a very detailed analysis to realise that focusing on the quality and grade of service for the mandatory APIs (in order to make the bank platform more attractive to distributors) makes more sense than trying to invent new ones and then trying to persuade regulators to make them mandatory. When it comes to non-mandatory APIs, on the other hand, it makes sense to invest in creating new APIs that customers will want to the point whether they will even pay for them.

If we focus our efforts on the APIs that relate to information that is not directly related to the financial products, I think we can see the outlines of competitive strategy around those non-mandatory read APIs and an obvious element of that strategy rests on identity, authentication and authorisation services. In other words, a digital identity strategy might provide a means for banks to stay part of transactions in the modern economy.

The UK Lesson

Just to illustrate how the open banking sector might evolve, take a look at the trajectory in the UK, where although only the largest banks were required to implement open banking (the “CMA9”, as they are called, because it was the Competition and Markets Authority that set the mandate) there are now some .

Investment is flowing in. Yapily (who I use almost daily, because they connect my Quickbooks to my bank accounts and credit cards) just raised $51m for European expansion and another of the main open banking “packagers”, TrueLayer raised a $70 million Series D earlier this year. At the time, the CEO of TrueLayer observed that they were redefining how people transact online, saying that “We’re building an Open Banking network that brings together payments, data and identity” and (my emphasis).

Incidentally, I note with interest that in the UK what we used to refer to as the non-mandatory APIs have now been labelled “premium” APIs in recognition of the underlying strategic drive. Thus while I agree with the point often made by banks that open banking does not present them with a level playing field (whether they deserve a level playing field or not is another topic entirely), I seems to me that it also presents them with a great opportunities.

Finally, another area where the lessons learned from the UK can be very valuable in America is the scope of the provisions themselves. The UK’s “mid-term” report on “Consumer Priorities for Open Banking” set out just why it is that open banking by itself delivers quite limited benefits for consumers. What is needed is open finance, a view expressed by the US Center for Financial Services Innovation (now the Financial Health Network) in their report on “How Industry Executives View Financial Health”. Again, to use a UK example, open banking is a first step. Nationwide (one of the CMA9) has partnered with another of the packagers, OpenWrks, to pull together information from different accounts and sources to build a more complete picture of the financial circumstances of customers facing financial hardship and therefore find better ways to support them.

The US should take on board these positive visions in response to the Biden executive order to create a financial sector that takes a more complete view of a customer’s situation and provides services that increase the overall financial health customers. I’ve written here in Forbes before about the strong narrative that this can provide for a next generation of fintechs: to stop providing financial services and start providing financial health, to force banks and other manufacturers and to innovate and compete, and to give an accessible vision to the pro-competition drive in the administration.

(This is an edited version of an article that first appeared on Forbes, 20th July 2021.)

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