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A Roadmap for Fintechs and Financial Institutions

THE NEW DATA REALITIES IN BANKING

Scott Harkey, chief strategy officer and head of payments at payments consultancy Levvel, wrote recently in Forbes:

“It has been stated many times that data is the key to unlocking the next wave in financial services. In the last decade, we’ve seen this play out in countries across the globe to various degrees; some have legislated openness of financial services data between different institutions and service providers, while others, like the U.S., have approached things more cautiously. Regardless of the method, the financial services ecosystem is evolving in a way that encourages the opening up of data sources previously locked down inside large organizations.”

The discussion about open banking and open finance in the United States typically revolves around statements like, “We need to enable consumers to move their data wherever they want.” Much of the conversation, however, ignores how data is shared and for what purposes. The most common use case is account verification, and data is typically shared one of three ways:

1. Tokenized APIs. Industry associations like FDX are working to standardize application programming interfaces (APIs), while data platforms from companies like ���Ĵ�ý and Plaid are developing libraries of open-source API documentation that matches FDX guidelines to help financial institutions connect without having to develop their own APIs.
2. Screen scraping. This is fast becoming an unacceptable approach because regulations in some countries prohibit it, there is a lack of traceability, data quality isn’t very strong, and there are security concerns, particularly around sharing login credentials.
3. Manual data entry and verification through microdeposits. Speed of the process is the biggest drawback here as it can typically take one to three days to verify an account.

What’s a bank to do? Scarlett Sieber, chief strategy and growth officer for Money 20/20, wrote in Forbes:

“For many U.S. financial institutions, the starting point to open banking and API enablement will be their core provider. Currently, the three leading providers in the U.S.—FIS, Fiserv, and Jack Henry—are creating API gateways that expose the data and functionality inside of their core systems, allowing banks to easily work with third parties.”

Jim Marous, CEO of the Digital Banking Report, isn’t so sure about that. According to Marous:

“Research of financial institutions indicates that core providers are not regarded as ready to support the technical or innovation needs for the development of open banking solutions.”

Digital Banking Report found that most financial institutions see open banking as an important contributor to a wide range of business objectives including customer experience improvement, new customer generation, new revenue generation, and new product development (Figure 1).

While the term may be overused and misused, banking industry constituents—which include financial institutions, fintechs, and end customers (whether they be consumers or businesses)—have three underlying needs regarding open banking: the need to 1) acquire, 2) use, and 3) analyze data.

The common thread that runs through those three needs is the reliance on third-party partners or vendors (sometimes referred to as data aggregators) to meet those needs. No single financial institution or fintech—even the largest banks in the United States—can create and manage the connections necessary to accomplish the promise of open banking.

The goal of this report is not to preach the need for open banking, however. The goal is to help financial institution and fintech executives make smart choices about which partners or vendors they use to meet their data acquisition, utilization, and analytical needs.

Making these choices will require financial institutions and fintechs to make tough decisions about their 1) strategy in a changing industry, 2) the role they need to and want to play in a highly interconnected network of providers, and 3) the business and technical capabilities they need to build to operate in the ecosystems in which they participate. 

THE OPEN BANKING IMPERATIVE

Conventional wisdom holds that open banking in the United States is lagging. According to an American Banker article titled “U.S. way behind the curve on open banking”:

“Policymakers, fintech companies, and financial services firms are finally beginning an earnest dialogue about open banking. It’s good because the U.S. has a lot of catching up to do. In the U.S., there’s no legal requirement stipulating a financial institution must make a consumer’s financial data available to a third party if a consumer provides affirmative consent.”

The rationale for that view is often supported with meaningless consumer survey statistics like this one from the American Banker article:

“Consumers have demonstrated their desire for open banking. 87% of individuals prefer to adopt a fintech app rather than use a product or service offered by a traditional financial services provider.”

How does that data point demonstrate a desire for “open banking?” If consumers prefer a fintech app to a traditional provider’s products and services, then why would traditional firms need to share data? In addition, fewer than 87% of consumers do their banking on a mobile device today, so it’s hard to believe that that many consumers would prefer a fintech app to their traditional bank account.

Instead of embracing the benefits of open banking, U.S. banks have fought against it and the data aggregation providers that have worked to enable it. As the CEO of a North American bank recently expressed:

“I truly believe it is my data and I don’t have to share it, and I don’t have to give it to my customers if I don’t want to.”

However, this anti-competitive attitude is increasingly at odds with the sentiments of consumer advocates who preach that consumers should own and be in control of their own data, and with regulators like the Consumer Financial Protection Bureau (CFPB), which views open banking as a critical tool for leveling the competitive playing field:

“We can only accrue the benefits of competition if customers can vote with their feet. Unfortunately, switching bank accounts isn’t easy. It involves new account numbers, new debit cards, updating direct deposit, updating auto-debits, and much more. If America can shift to an open banking infrastructure, it will be harder for banks to trap customers into an account for the purpose of fee harvesting.”

CONSUMERS’ INCREASINGLY COMPLEX FINANCIAL LIVES

But consumers aren’t “voting with their feet.” The new reality is that fintechs co-exist with—not replace—traditional providers. It’s not uncommon for a young couple to do business with 30 to 40 financial providers (Figure 2).

This picture doesn’t even include consumers’ insurance relationships or the borrowing side of the coin, where many consumers have student loans, car loans, mortgages, and other personal loans. And you can bet that they don’t have all those loans with one provider.

The result: consumers’ financial lives have become more complex. What are the implications of consumers’ new, complex financial lives?

• Financial products—not the banks—have been unbundled. There was a graphic from CB Insights that became popular a few years ago (you don’t really want to see it again, do you?) titled, “The unbundling of a bank.” Pithy, but it missed the point—it’s the product that’s been unbundled, not the institution. 
• Financial advice and guidance have been compromised. As personal financial management (PFM) and credit management tools have been unbundled from checking account and credit cards, consumers—and their providers—get an incomplete view of their finances. This means consumers are making financial decisions based on incomplete data, but just as damaging is the fact that financial institutions’ advice and guidance are also based on incomplete data, making it wrong and potentially harmful.
• Primary status is meaningless. Ask a Gen Zer or Millennial who their primary financial institution is and you’re likely to get a blank stare. They may have a primary checking account or primary investment account, but that doesn’t guarantee any wallet share for the provider of that account. Likewise, “top of wallet card” status is no longer a valid concept. Point-of-transaction convenience and value drive choice of payment mechanism.
• Managing money is more important than moving money. Of “buy now, pay later” (BNPL) users who have been late with a payment, 66% were late because they lost track of the bill due date. Among the 45% of Millennials with more than one checking account, about half overdrew on those accounts in 2020. For most of them, it was because they failed to keep track of their account balance or didn’t transfer funds from other accounts in time—not because they didn’t have the money. Conclusion: today’s consumers need more help managing their money—and they need the ability to manage and view their entire financial life in one place.

A Morning Consult study found that just 45% of Americans said they’ve heard of open banking and 63% are worried that increased data sharing will lead to more fraud. The study was conducted before President Biden’s July 2021 executive order about which Bloomberg Law wrote:

“[Biden] gave a boost to Consumer Financial Protection Bureau’s decade-long effort to kickstart open banking in the U.S. when he signed an executive order last week aimed at boosting competition in the economy. The president’s executive order includes a provision that strongly encourages the CFPB to issue Dodd-Frank Act regulations that would make it easier for consumers to access their bank data and transfer it to other banks and outside apps, such as Venmo or Robinhood.”

The real impact of the executive order is likely to be more contractual than technological. It will enable data sharing constituents to rely on data standards instead of the one-off developed contracts and agreements that dominate the industry today.

This fragmentation of consumers’ financial lives increases the urgency for financial institutions to create—either by building or buying—open banking data aggregation capabilities. Without these capabilities, they’re left with an increasingly narrow view into their customers’ financial lives, which makes it more difficult to provide those customers with financial advice and relevant cross-sell offers.

The imperative for open banking is growing. As the financial services industry embraces open banking and works with third-party data aggregators to create new capabilities and offerings, it will need to address an important question: How should financial institutions select an open banking data aggregation vendor? 

SELECTING AN OPEN BANKING VENDOR

Selecting a technology vendor is as much art as it is science.

This is especially true in the open banking data aggregation market because the market itself is relatively immature. It’s only existed for a couple of years. There are no RFP templates for selecting a data aggregation vendor and few (if any) contract negotiation services specializing in open banking or open finance.

Compared to decisions regarding established technology vendors—like a core apps provider or credit bureau— deciding which data aggregator to use can feel a lot like stumbling around in a dark room without a flashlight.

To better understand how to make a smart open banking data aggregation vendor decision, Cornerstone Advisors spoke with bank and fintech executives who have gone through the process of evaluating open banking data aggregation vendors.

We’ve distilled the hard-earned wisdom of these executives — which was shared with us candidly and anonymously — into six recommendations for banks and fintechs to follow when embarking on this selection decision (Figure 3).

Download the full report to read more about these six recommendations.