“Data is a proxy for money. You don't have a pile of money to bank anymore. All you have is ones and zeros…The idea of open banking, open data, is just the idea that people should be able to access and share that data wherever they want.” -Jane Barratt

Anyone who works in banking or finance has probably heard the buzz about open banking. Along with open finance and open data, open banking is a trend that’s reshaping the financial industry - at least, for those who embrace it.

Where does your organization stand on open banking? Does your management team even understand what it is and what kinds of opportunities it holds?

Jane Barratt, chief advocacy officer at open finance company MX and Anne Legg, founder of the data education firm THRIVE Strategic Services joined the Banking on Digital Growth Podcast to share their expert insight.

Open Data: The Basics

Open data is a relatively new concept that many people in the financial world find confusing at first, so we'll start with the basics.

Open data refers to the fact that banking transactions are almost entirely conducted in digital dollars, not physical dollars. There’s no longer a need to physically visit a bank branch, fill out a form, and request a movement of money. It’s all handled in the “open” digital world.

The term “open data” also broadly encompasses big data, which is high-volume/high-velocity data collection, and it involves open banking and open finance, which stores and moves money digitally. The concept of open data even incorporates consumer-friendly money management tools like budgeting apps, online loan application portals, and so forth.

While some people might approach open data with a skeptical eye, it actually brings an additional layer of security to the famously security-obsessed banking industry. In the United States, digital data security protocols are in place to protect digital dollars just as much as physical dollars and cents.

Why Shift to Open Banking?

So why would someone with 30 years of experience in banking be interested in open banking?

It might offer benefits for customers, but why would a financial institution with a long history of traditional banking want to make the transition to open banking?

Jane says there are two sets of reasons: obvious reasons and not-so-obvious reasons. On the obvious side are benefits like increased efficiency and better access. Customers can finally pursue the mythical “five-second loan” they’ve always wanted.

Digging even deeper into the benefits, Jane says, there are larger and more powerful forces at work. These are the not-so-obvious benefits. For example, open banking provides new insights into your financial customer’s journey and brings up issues of diversity and inclusion. 

Access often arises as a key issue. Everyone deserves equal access, but it’s not always occurring. Financial institutions may struggle to come to grips with this fact. A fresh perspective on the organization’s user base may come into focus, but it’s still hard to interpret.

As Jane puts it, “Think of it from a NASA spaceship looking down on the earth. You are going to be able to build innovations. Now we're getting those non-obvious benefits to new products and services, being able to understand the member's true financial health - not just in the spot they are right now and doing interventions and figuring how to adjust, but helping them get to where they want to be.”

This is a critical turning point that should cause financial brands to reevaluate where they want to be in the future, perhaps 30 years from now. Open banking is an opportunity to embrace digital transformation more fully and become one of the world’s successful financial brands of tomorrow.

The Fundamentals of Financial Insecurity

Data security plays a significant role in financial security. When you don’t understand the security of your information, it’s hard to believe in the security of your money.

The average banking customer experiences a feeling of low visibility into their financial picture. Often, they can’t answer basic questions about the status of their accounts, like: How much money do I owe on my loans? What interest rates am I paying? Who’s taking fees out of my account? 

When people can’t answer questions like these, they’re data insecure. This leads to a persistent feeling of financial insecurity.

Jane points out that feelings of financial security can change over time, regardless of how much money you have. 

Credit unions have traditionally had great relationships with their members, but the new digital/financial landscape has complicated this relationship and clouded it somewhat. Credit unions haven’t always kept up with the times. This leaves many people feeling less financially bonded with their credit unions, and thus less financially secure.

By helping people open visibility into their money, financial brands can help them feel more financially stable. Jane says it should go beyond basic financial literacy and lead to measurably better outcomes.

How we do we overcome a lack of confidence in making financial decisions and committing to a financial journey like opening a new line of credit, making a purchase, or even choosing a new financial brand?

Anne says it’s about strategy. Financial institutions should teach their customers about strategic planning for a better financial future and, in turn, they must have their own strategy in place to support their customers in this effort.

“If you really want to save X or you want to achieve such a dream, like open your own company or what have you, we want to be there to do that,” Anne says. “To do that, though, we've got to make sure that is a strategic initiative. That has got to be about my strategy.”

Strategizing involves setting priorities and building new partnerships that allow a financial institution to serve its educational and supportive role. “This is an enterprise play,” Anne says, and institutions must find enterprise-level strategic solutions.

Regulatory Oversight of Open Data

Data sharing is an aspect of banking that’s covered under what’s known as Dodd-Frank Act Section 1033 or Consumer Access to Financial Records. The Consumer Financial Protection Bureau (CFPB) has stated that within the next year, they will provide additional clarity and guidance on the roles of data sharing and regulatory compliance related to open banking.

Jane explains that the United States is fortunate to have “an ecosystem of transparency and interoperability” that makes it fairly easy for regulators to stay ahead of new digital trends. In other regions of the world, like Jane’s home country of Australia, regulators tend to stay narrowly focused on areas like retail banking or interest rates.

Still, regulation is an intimidating topic. Bank executives often wonder which organization with which set of confusing letters might be in charge of regulating the new initiatives they’d like to explore. Is it FINRA? The SEC? The OCC? The CFPB?

Collaboration offers an opportunity to answer these questions while staying within the law. There's a possibility for financial brands to come together and collaborate instead of competing in the name of resolving regulatory concerns.

In the United Kingdom, open banking rose to prominence in 2018. Anne says the U.K. government now projects that 60% of all banking customers will be using open banking by next year. Financial institutions in the U.S. should pay attention to this trend. 

However, traditional financial institutions should keep in mind that competition isn’t just coming from banking and financial brands, but also other industries. Insurance companies, 401K providers, and many other types of organizations are becoming de facto financial companies by providing innovative open banking solutions through fintech partnerships.

Is Lyft a financial brand? No. But Lyft already offers its drivers banking services to facilitate driving for Lyft. Is Gucci a bank? No. But Gucci could probably handle a billion dollars worth of credit card transactions if they wanted to. These kinds of examples show just how much the financial landscape is transforming.

3 Key Takeaways for Open Banking

Here are a few key takeaways for financial executives to consider when exploring open banking:

  • Data insecurity leads to financial insecurity. Help people understand the data points behind their money and they’ll begin to feel more financially secure.
  • Finance has an impact on the human condition. Perhaps it’s finally time for financial brands to take responsibility for improving the quality of people's lives.
  • Your financial brand has an opportunity. Reframe how people engage with their money. If your industry - the financial industry - doesn’t do it, another industry will.

For more information, reach out to Jane Barratt or Anne Legg on LinkedIn or contact them at their respective companies, MX and THRIVE Strategic Services. You can also connect with James Robert Lay and access more resources about digital transformation at digitalgrowth.com.