The 'Open Banking' movement – described by Scarlett Sieber in
Forbes as “the plumbing and piping of your institution that acts as an enabler to allow you to partner with third parties like fintechs” – can be hard to define given its different approaches and elements in specific regions and countries across the globe.
Europeans point proudly, and rightly so, to how all the work around enabling consumer choice on that continent has led to many new options for financial services-beyond just traditional banking partners. Meanwhile, on the other side of the Atlantic, Plaid,
one of the pioneers in US open banking efforts and now a key intermediary between banks and financial technology companies providing enhanced financial applications and connections, points to how important those connections among various financial players
can be.
“More than 12,000 institutions” are considered data providers on their network, and “over 8,000 are traditional financial institutions like banks and credit unions,” says Plaid’s Moira Vahey, responsible for the San Francisco-headquartered company’s policy
communications.
Open banking has expanded rapidly since 2018
Most of the progress in opening new doors for alternative financial products has occurred over the past five years or so, with significant credit for these developments owed to not just innovators and new technology, but also to regulatory support, at least
in Europe. Not so much for the US though, where Open Banking advances have been far more driven by consumer demand. But now that’s about to change.
The US has for 20 years seen retail consumers using various ‘screen-scraping’ and other sometimes “clunky” if effective services to facilitate bill payments and consolidate balances and reporting from their main bank to another provider via personal financial
management software and portals. That said, Vahey pointed out that Plaid has long championed the adoption of automated access software (Application Programming Interfaces, or APIs) and that over 75% of Plaid's traffic is already on or committed to be on APIs.
In Europe, however, the European Commission’s Payment Systems Directives (PSD1 and especially PSD2) were introduced to stimulate competition and help reinvigorate the financial industry. More on these directives and other early initiatives can be found
here.
Open banking has expanded quickly in Europe and US
So, what are the results after around two decades of Open Banking promotion in Europe and consumer-driven adoption in the US?
Let us start with the worldwide volumes, which show the annual value of open banking transactions reaching
$57 billion in 2023 and projected to jump to almost six times this level by 2027. Meanwhile, API calls, which are part of the requirements of existing and pending compliance rules in both the US and Europe, provide standards for open banking data sharing,
have increased to
over 100 billion this year and are projected to grow more than five-fold to 580 billion in 2027. Finally, as reported in a recent MasterCard
report shared by Amazon Web Services, “more than 80% of consumers in the US and 90% of younger consumers” are already connecting their bank accounts to technology apps.
Consumer adoption trends are strong in the UK relative to most of its fellow European countries, at around six million users and 13% of those holding bank accounts, but nowhere near how open banking has been accepted and grown within the US. There’s much
less momentum for open banking connectivity thus far in other regions of Europe, where
estimates exist of approximately 5-7% of the collective population now using multiple financial institutions. Most consumers are aware of what open banking is, if not precisely what
it might do for them if they embraced it for their personal and small business use. But the numbers are growing on both sides, and that is a healthy trend for the movement which generally advocates greater financial choices for all.
Key differences between Europe and Us open banking practices
The contrasts between the two continents really surround different approaches and models. Open Banking is a concept that has been thriving in the US because it met evolving consumer needs. While statistics show its penetration of the marketplace is technically
much greater than in the UK and elsewhere, the scope of open banking development in America has been much different. In the US, thus far Open Banking expansion has not been as much about
mandating additional options for banking providers as it has been driven by utility value perceived by consumers for budgeting and money management connectivity. As fintechs have filled the bill with a burgeoning number of applications to deliver these
capabilities, regulatory bodies have refrained from placing major rules or restraints on them or banking institutions involved.
Consumer comfortability rises, much room still to grow in US
Global API management and integration software provider
Axway released a report recently that measured levels of US consumer familiarity with Open Banking as a concept. Their surveys of 1,001 Americans revealed that 55% had heard of Open Banking, and 32% had a decent understanding of the concept. That’s not
a huge share of the population, considering the large number of people who’ve given authority to one biller, bank, or other provider to share their login credentials to check balances, transfer funds, or pay monthly bills over the past 20+ years. Many of them
probably didn’t even know this was categorised as Open Banking – it was just a way to get transactions between separate financial providers done more easily online, and even if it had a somewhat harsh name – screen-scraping – it accomplished the task, albeit
a bit more crudely until recent moves to more elegant methods of providing cross-provider account access and services. This is where API standardisation comes in, and regulators on both sides see how it can help ‘move the ball’ more quickly for consumers and
the industry alike.
What’s coming for open banking in US and abroad?
In October, the Consumer Financial Protection Bureau (CPFB), formed as part of the wide-ranging US landmark Dodd-Frank legislation following the financial crisis of 2008, invited public comments on a long-awaited expansion of the legislation. That comment
period will extend to the end of 2023, and thereafter the agency will consider all feedback and is expected to proceed with further decisions and implementation of agreed provisions in the US marketplace over the next three years.
Section 1033 of the Consumer Financial Protection Act, according to the CFPB, would accelerate a shift toward
Open Banking to give consumers more control over data concerning their financial “lives” and provide new protections against companies misusing their data. The proposed Personal Financial Data Rights rule activates a dormant provision of law enacted by Congress
more than a decade ago. It would jumpstart competition by forbidding financial institutions from hoarding a person’s data and by requiring companies to share data at the person’s direction with other companies offering better products. The proposed rule would
allow people to “break up” with banks that provide bad service and would forbid companies that receive data from misusing or wrongfully monetising the sensitive personal financial data.
According to the CFPB’s press release announcing the proposed new rules, US consumers would be empowered to “share data about their use of checking and prepaid accounts, credit cards, and digital wallets” among competing providers without worrying that their
data might be collected, used, or retained to serve commercial interests over their own. “Importantly” the agency asserted, “people could be certain that their data would be used only for their own preferred purpose—and not for financial institutions or tech
companies to surveil and manipulate.”
Other stipulations of Rule 1033 recommend abolishing so-called “junk fees” and encouraging current financial services companies in the space to adopt standards for “fair, open, and inclusive” data-sharing between providers in the sector. According to Plaid
and several other established industry players, the codification of standards and practices to level the playing field are long overdue in the US market.
How industry players view the new open banking landscape
Originally formed in 2013 with intentions to be a consumer financial management provider, focused on budgeting and bookkeeping software, Plaid morphed into a super-API creator, becoming the ‘middleman’ for many other financial services applications and services
to and from established banking institutions.
Finextra asked Plaid’s Vahey to share a bit on what the company views as the most promising developments consumers and business users may see in the coming months and years, and some of the key differences to be aware of when doing business internationally
vs. domestically. Somewhat surprisingly, Plaid and other fintech leaders operating beyond their own borders actually welcome new standards for the industry and see much growth on the horizon as the models for open banking products coalesce a bit between the
US and European versions.
Explaining Plaid’s position on the new regulations, Vahey said, “Open Banking enables obviously a huge range of use cases, so I think we view the rule (1033) a good thing for consumers, and a good thing for our industry.” Noting that consumers under the
rule will have clearer authority over their information, she added, “Their financial data is theirs and they have the ability to more easily and securely port it to whatever app or service they want to use. So, reaffirming that (principle) in the law and providing
clear ‘rules of the road’ will promote consumer trust as well as continued innovation across the digital finance ecosystem.” Finally, observing how different Open Banking motivations and regulatory approaches from Europe to the United States have begun to
merge toward each other, Vahey concluded, “I think in the US, Open Banking has been driven by consumer demand while abroad it has been driven more-so by regulators. Now, introducing appropriate rules and policies here is an opportunity to build trust and provide reassurances
to industry - both banks and fintechs - and to consumers."
As for those fintechs, it is expected they will be looking to expand offerings concurrent with the rise of new open banking rules in the US. Plaid is one that is already doing it. In early November, the company
announced they’d be entering a new arena by forming an entity to provide solutions for customers seeking “ready-made credit risk insights from consumer-permissioned cash flow data.” According to the company’s
announcement, the new entity will venture beyond its past core activities to “operate as a consumer reporting agency” to help its customers “make smarter risk decisions” as they move through the lending process.
Other non-financial technology and service providers will increasingly offer more products aimed beyond current applications and into the Open Finance sector. Over time, the proposed US rules and practices outlined in Rule 1033 are expected to be further
expanded in scope beyond present use cases into credit and debit services, digital wallets, mortgages, student loan products, and possibly even cryptocurrency management.