Cracking the Code: Open Finance’s Impact on US Banking

Open finance is a game-changer for the banking industry in the US. With responsible and collaborative approaches, open finance offers key benefits for both financial institutions and their customers. According to Polaris, the global Open Banking market was valued at $16B in 2021 and is projected to reach $128B by 2030 – that’s a CAGR of nearly 27%. Does this fact alone explain the constant buzz on open banking? Let’s take a closer look.

What is open banking/open finance?   

At a simplistic level, open banking is rooted in personal data control. People want to have unfettered access to their personal finance data and be able to dictate how their data is used beyond just opt-out data privacy rules. People don’t want their finance data controlled by banks and financial institutions.  

One of the chief benefits to consumers and small businesses is the seamless, unlimited access to financial products and services coming from any bank or fintech willing to compete for their business. However, open banking will exert pressure on banks to engage in competition with products and seamlessly integrate with third-party services in order to attract and retain customers.

I recently had the privilege of delving deeper into this topic during a webinar hosted by GFMI, where I was joined by two open banking experts, Tushar Tyagi, Associate Director of Open Banking Product Management at Equitable Bank, and Stephane Bousquet, Head of Open Banking Expertise at the National Bank of Canada. Together, we explored the dynamic shifts occurring in the banking ecosystem, assessed the current progress across the industry, and critically evaluated the strategies adopted to overcome potential challenges, ensuring the safe implementation of open finance.

Among several related topics, we emphasized that embarking on the open banking journey requires a well-thought-out strategy.

The build, buy, partner analysis

A participant in the open banking value chain must strategically determine first, the role it wants to play, and second, how it wants to play. For example, it could be something as basic as building and implementing APIs for smaller banks which often lack the funding and technical resources to develop their own API infrastructure. These banks need to determine whether to invest in building out this capability or implementing it through a strategic partnership.  It’s the classic build, buy, partner analysis that needs to be done for every facet of becoming a competitive open banking participant.  

It’s also critical to have executive support from the top down to ensure proper budget and prioritization of resources, without which, the integration of open banking won’t have the necessary staying power.

While some players have been working towards this strategic approach in recent years, others have taken the wait-and-see approach before deciding how they want to play. Determining one's role and how to implement open banking is not simple and requires many dedicated resources and prioritization. Going forward, we will also see the impact of CFPB’s rulemaking on industry participants.

Market-driven approach: a winning outcome for all parties, including banks

Open banking has the potential to be a win-win scenario, especially for small and medium-sized banks. Resource-constrained banks will be motivated to partner with fintechs that can provide competitive products and services.  And the fintechs are often built for efficient integration and scale. Both sides will be able to quickly access each other’s customers and provide a more seamless, robust and competitive offering, generating new revenues for all involved.