Open Banking: What U.S. Banks Need To Watch

19. March 2018.


One of the most significant changes to the U.K.’s banking industry in recent years came into effect earlier this year: Open Banking. In the U.S., banks should be paying close attention to what happens next. As part of its Market Investigation into competition in the U.K.’s retail banking sector, the government’s Competition and Markets Authority is requiring the country’s nine largest banks to implement Open Banking. Open Banking enables third parties to safely and securely access current accounts with customer consent, either for the purpose of gathering transaction data or initiating payments on the customer’s behalf, through an Open Application Programming Interface (API).

Here’s what it means.

Banks will have to share their data, which they have long held and safely guarded as a key differentiator. They’ve typically leveraged that data for critical insights, including, for example, credit analytics and cross-marketing of new products and services. Open banking fundamentally changes the dynamics of banks and new financial technology emergents that build their platforms on top of the bank’s data and services. While it opens the door to innovation, it also creates massive competition for banks in how they stand apart from other banks.

Why it matters here.

In the U.S., many will be watching to see how successful the new system will be. Will it level the playing field for banks and financial technology companies alike? And, what would the implementation of a similar system in the U.S. look like?

By the time Open Banking took effect, only three of the nine banks participating in the initiative had their solutions ready. The majority of the remainder had already been given extensions. The first weeks and months will likely be a testing phase. Eventually, everyone should have their APIs ready.

Monitoring the success or failure of the system through a U.S. lens will be interesting. Having been introduced as a means to break down the competitive advantages that banks have long enjoyed, Open Banking will undoubtedly support an emerging market of new third-party products and services, such as tailored price comparison websites.

Beyond cheaper and more competitive financial products, programs such as Open Banking hold further advantages, including standardization of data-sharing technologies and liability for control of data.

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