Open banking, a collaborative model in which banking data is shared with third-party players, is expected to revolutionize the financial services ecosystem. For consumers, the opening up of banking data could mean better control over their finances. At the same time, the trend has also raised concerns over data privacy and security.
In a conversation with Knowledge@Wharton, Jane Barratt, chief advocacy officer at MX, a Utah-based company that provides data to financial institutions and fintechs, talks about how open banking will impact legacy institutions as well as nimble startups.
Below is an edited version of the interview, which was conducted at the recent Fearless in Fintech conference in New York.
Knowledge@Wharton: What is open banking? What are some of the factors that have led to the opening up of banking data to make it shareable via secure APIs [application programming interface] with third parties?
Jane Barratt: Over the past decade or so, we have seen open government and other open initiatives. There’s an expectation now of increased transparency. The idea of people sharing their data — their financial data — is not a new one. It’s happening, and it’s happening with methods that aren’t necessarily private or secure or transparent. People don’t really know where their data is going. Open banking is basically accessing the APIs that the financial institutions use to get greater transparency into your own data, and then being able to share that, with your consent and permission of course, with third parties of your choice.
Knowledge@Wharton: Could you give some examples of how this is happening, both in the U.S. and in other parts of the world?
Barratt: The U.S. is in the early stages of having an ecosystem built around open banking. Europe has had PSD2 [the revised Payment Services Directive]. You’ve got open banking in the U.K. European banks have a head start on the U.S. in terms of getting the frameworks and the technology in place.
There have been some gaps in terms of understanding by the general public about what open banking actually is. If there is a use case for sharing your data, most people understand. “I can use it to share data with my accountant or a budgeting app.” Or, “I don’t have to manually share my data through a statement or [by] writing it down for them.” But the ecosystem around it is still coalescing.
When you look at Europe or Australia, for example, or potentially Canada and Mexico, these are countries that are leading with regulators. Regulators and governments have come together, and they have a strong seat at the table. Australia has a singular consumer data right — not rights. It’s just the data right, which is that it’s yours. They’re starting with open banking as the first vertical, and then moving into energy and telecommunications. You can see your usage and pricing and competitive offers.
“There’s a lot of talk of the customers being at the center of everything we do, but organization charts do not reflect that.”
And you can see information that often used to be behind the scenes within institutions. The U.S. is much more of an industry-led solution versus a government-led solution. It is by far the most complex banking model in the world. There is a lot of momentum, but it’s still relatively early days.
Knowledge@Wharton: What changes do you think open APIs will bring to banks’ organizational structures and also their competitive positions in the market?
Barratt: From the early days of digital, I used to joke, “Show me a website, and I can draw you your org chart,” because it was always laid out by division and byproduct. There’s a lot of talk of the customers being at the center of everything we do, but organization charts do not reflect that. You now have companies investing heavily in, say, data lakes. These tell us where our customers are and what they do. I think that will start to coalesce around organizational changes.
For instance, who is driving the structure of this? Who is extracting the intelligence from it? How is it being put to work? That’s a more sensible organizational approach than every division having their own databases and CRM and all of the different product databases. It has gotten very messy over the years. Hopefully, true data centricity will come about through how data is collected and what tools are layered on top of it, and all this will help the end customer.
We have some data on return on investment from both the institutional perspective and the individual perspective. We have seen that when someone can access their data and is given access to tools, their financial strength improves. Institutions spend a lot of money acquiring customers and cross-selling to customers. Instead of this, institutions could focus on reducing high-interest debt, increasing deposits and moving customers up the value chain to higher value products.
There is now so much more competition [to be the] customer’s primary financial institution — even Amazon could be a peer at some point soon. If financial institutions can organize themselves around customer outcomes, they will be able to retain that primary financial institution status. But if they continue to just cross-sell a bunch of products, then it’s going to be [downhill] for them.
Knowledge@Wharton: Will a platform strategy be profitable for incumbent banks that own most of the deposit and lending market share?
Barratt: Banks are already platforms, especially institutions that have multiple product lines around insurance and deposits and lending. They just haven’t acknowledged it yet. It’s not that big of a stretch to put a level of intelligence on top of it with which people can engage. At present, the language is still around segments. For instance, if you’re newly married, you’re put in that segment. But your financial profile may be the same as a boomer because you’ve inherited money or you’ve got good financial habits and you’ve got good savings. And then you have boomers who have the same profiles as millennials.
It’s only when you get to a platform level that you can extract the intelligence around who a person is based on their true profile. Who I am with my credit card company is different from who I am with my insurance company, or who I am with my primary institution. No one has given me a really great reason to connect all of them. And that is the platform that an institution could be, because they have the biggest advantage out of anyone in the ecosystem, which is trust.
I’ve trusted you all this time with my money. I could trust you with my data. There is a great quote from Walter Wriston, who was the CEO and chairman of Citicorp in the 1970s. He said, “Information about money is as valuable as the money itself.” An institution could be a major value-add player in the data-as-currency space. No one’s talking about this as yet. It could be a seismic shift in the industry.
Knowledge@Wharton: How should challenger banks position themselves in this environment?
Barratt: Challenger banks have done a great job in different countries, to varying degrees. They have done a good job of being more digitally savvy. That has been their value proposition. “I’m going to give you a better app. I’m going to give you a better experience. I’m going to give you better transparency.”
They haven’t necessarily invested in their brands or in the trust. As your financial life becomes more complex, are you going to trust your deposit account with your mortgage or insurance provider? It’s still early days to be able to point to a challenger, but I think there are some examples of players who have done an amazing job, like Aspiration out of Los Angeles, which is a values-led bank.
“The newer players are telling compelling stories and offering compelling digital experiences.”
Knowledge@Wharton: What are some of the key lessons that the bigger institutions could learn from them?
Barratt: It’s about being able to tell a stronger story. There is a genuine human need to understand the story behind companies with which you do business. The newer players are telling compelling stories and offering compelling digital experiences. Of course, bigger institutions can do it. They can micro-target it down to the individual if they wanted to and tell a story that’s great for me. It’s just that organizationally they’re not set up for it at this point in time.
Knowledge@Wharton: Is the introduction of APIs going to bring improvements in banking services? If so, what might be some examples?
Barratt: Definitely. We are seeing giant institutions engaging in a deep way with the ecosystem from a contractual perspective. The data aggregators, who have traditionally been the middle men between the fintechs and the APIs, are doing a lot more direct connection. People no longer have to share their credentials. Out into the ecosystem, you can now have much more secure, token-led engagements.
What some of the institutions are doing is that they are opening up their internal APIs. It’s not heavy lifting for them. You can’t see everything. But they’re getting out there quickly, and they are then seeing how the data moves.
For them, it’s less around, “Let’s make this a uni-directional flow of data.” It’s very much the expectation that it’s bi-directional. And if I can get the incentive to connect my investments, insurance, etc. back to my primary institution, they’re in a much better place to be able to service me.
Knowledge@Wharton: What do you think are the biggest challenges of open banking for both banks and for their customers?
Barratt: With increased transparency, there is definitely increased risk. There is an expectation that the industry should be able to solve these challenges and risks — because that’s what we’ve been doing. But there is a nefarious element to the financial services industry, and so [the question is] with more open data, is there more chance for more scammers, for example? The answer generally — and in theory — should be no, because the personally identifiable information (PII) is taken out. All I’ve done is to allow someone to have a look at my transactions. That’s not going to track back to me. So, the risk element from privacy and transparency should be reduced. However, there are some very creative scammers out there.
From a predatory lending perspective, it could be both a risk and an opportunity. Risk, in that they are creative and moving ahead of the curve. In terms of opportunity, if financial institutions can see there are payments going out on a monthly basis to payday lenders, then as a moral obligation, if you can offer that customer a 15% debt consolidation loan when they’re paying 100%, then why not do that? From a business perspective, it’s money that you weren’t getting before.
“The expectation of a global standard around data sharing and open banking is a while away.”
So there are two sides to the argument. The real headline is that it’s happening anyway, in a less secure way. That’s the problem we’re all looking to solve: How do you get credentials out of the ecosystem, how do you protect people’s personally identifiable data, and then how do you provide a level of service and products that are much more oriented around the whole person, rather than just the niche, the slice that you know about them.
Knowledge@Wharton: How do you see the regulation of open banking playing out in the U.S. and globally?
Barratt: In the U.S., we expect the regulators to play a role, and it probably will be around things like liability and privacy and setting standards for access. It’s not about just slapping the bad actors, which is absolutely welcome. It is also about regulating a broader part of the ecosystem. In the medium-term, we expect a regulatory line in the sand around, “Here are the implications for breachers. Here are the implications for not providing access.”
Globally, we’re a long way away from seeing a global standard. Even if we could start with a global standard for data format, it would be great. I have had banking experience in six countries, and it is so markedly different in terms of the service level and the products and the reporting. I think the expectation of a global standard around data sharing and open banking is a while away.
Knowledge@Wharton: How do you see open banking evolving over the next two to three years? What will be MX’s role in all this?
Barratt: With regard to how it will evolve, I think it will be slowly, and then all at once. Already a third of all banking customers are using some sort of external fintech apps, and that’s with a very cobbled-together ecosystem. So, the immediate uptake is probably going to be pretty extreme. You’re going to see the financial institutions pushing it as well.
In terms of MX’s role, we are a data platform. We bring together a number of different data sources. But the real value is turning that data into intelligence. We talk with companies who have these massive data links that they can’t make head or tail of. We talk to them about how to make the data usable and what are the functions on top of that data, like identity verification or digital money management apps that we can enable. We talk in terms of actionable data. When you can show someone three different paths to debt reduction with two simple clicks, it’s enormously powerful.
At present, we have nearly 30 million North American customers on the platform, and we are working with about 1,800 institutions. We have a huge view of what’s working and what’s not working, and we have a clear insight into what’s being adopted and when and, more importantly, why.
And that comes back to the return on investment question. When you can see the value of becoming a primary financial institution, as well as the value to the individual and the improvement of their savings and reduction of debt, that’s what we do this for. Our mission is empowering the will to be financially strong. It’s not about selling more products, because anyone can do that. Data really is the new oil. Unfortunately, it’s being treated as crude at present. Our goal is providing that level of insight and intelligence and engaging with people who are invested in great outcomes for their customers.