Open finance is the future of banking

The global COVID-19 pandemic has shed light on the financial vulnerabilities and the stress they cause on families. A recent survey shows that only 22% of Americans give themselves high scores on their own financial well-being. This is a failing grade for the financial services industry and a call to action: providers need to start competing on customer outcomes.

Enter open finance, which is based on a simple idea: making financial data accessible to everyone. In practice, open finance describes networks of secure connections, primarily application programming interfaces (APIs), that allow data and services authorized by customers to flow between banks and third-party providers. People benefit from the access, portability and optionality and the advantages of the industry too.

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Financial institutions that partner with fintechs and other third parties can access data and services across different verticals, adding more value to customers. Fintechs and other non-banks benefit from safer and more reliable access to consumer financial data. Both parties can take advantage of each other’s abilities.

As we look to the future, regulators such as the Consumer Financial Protection Bureau play a critical role. Until now, access to consumer data, as well as technical standards, disclosures and security processes related to data, have been mostly left to affected parties, including end users (often meaning fintech apps) , data aggregators (such as MX) and data holders (often financial institutions). While this system has provided a foundation for the innovations we’ve seen, the data access ecosystem is at a critical juncture.

A clear, cross-agency regulatory framework is needed to move the industry forward in the face of three challenges: 1) integration with legacy systems that are incompatible with new innovations, 2) true data control and transparency for the consumer, including the ability to revoke consent to data sharing and 3) direct regulatory oversight of open finance standardization across the financial ecosystem.

A 2021 Deloitte survey found that nearly 70% of consumers said financial institutions need to put more emphasis on data protection. Moreover, a recent survey we ordered from MX showed that 60% of people want to see advanced identity protection from their financial institutions.

The fact is that accessing and managing the sharing of financial data through legacy technology can lead to security vulnerabilities, and the methods deployed by every organization in the past are no longer adequate.

This first challenge requires the infrastructure to support a new kind of authorized, tokenized, credential-less data sharing. Modern connections (open APIs) are more reliable, receiving data 10 to 20 times faster — in most cases under five seconds — with a 99% success rate. It also creates a better experience for account holders by creating more reliable connections, reducing the number of account holders likely to call in the event of a problem, and reducing the impact on operations, call centers and computing resources.

Many people have accelerated their use of digital tools to manage their money; in fact, more than 80% of consumers in North America are connecting their bank accounts to fintech apps and 90% of consumers are using online and mobile financial apps to manage their money. However, 80% largely unaware that apps use third-party vendors to collect their financial data.

While many consumers are asking their financial institutions for enhanced security measures, we are still in the early stages of transferring our data and consent. This is the second challenge. For example, consumers may be unaware that when they authorize a single transaction, third parties may store their information indefinitely and continually collect information unrelated to that transaction. We’re at step 101 of educating consumers that they can get their data in the first place, let alone share it with a third party indefinitely when getting a mortgage or setting up a budgeting application. Working to educate consumers is essential as we grow and improve financial resources for all.

Before open banking, data was only hosted by financial institutions, but today it is hosted by fintechs and payment initiation service providers. In this digital age where credentials are leaving people’s hands and spreading throughout the ecosystem, here is the third challenge: there must be a regulatory framework to determine the parameters of access.

This can be led by the CFPB, which has a mandate under the Dodd-Frank Act to ensure customers can access their financial data. To do this, we propose three things. First, the creation of a consumer data right that clearly assigns ownership of financial data to the consumer. Second, minimum data standards defining what data companies must share upon authorisation, based on the Financial Data Exchange (FDX) standard, with clear guidelines on exceptions. And finally, regulatory oversight of data aggregators and intermediaries such as MX, to ensure consistency across the ecosystem.

Financial data connectivity has a massive surface and aggregating many types of data for a variety of use cases is a challenge for fintechs. But it’s an exciting time for all organizations to use financial data to grow their business. In a recent survey, 90% of people says it would be helpful to see their finances in one place; however, only 40% said they could currently do so. Open finance enables the entire ecosystem to deliver intelligent, automated, and personalized experiences that drive positive outcomes for their customers.

People need to have access to their data. Data authorization provides choice. Choice for the customer to make informed decisions based on the data they choose to share between their financial institutions and preferred fintechs. This will improve the customer experience and ensure people own their data, have secure access, and can make informed financial decisions.