The Rise of Open Banking in the U.S. and Its Impact on Digital Banking Solutions

Open Banking, a concept rooted in empowering consumers to obtain greater control over their personal financial data within fintech applications and digital banking solutions, is evolving rapidly in the United States, drawing inspiration and benefitting from the learnings of its progression in regions like Europe. While European open banking frameworks are largely driven by regulatory mandates, the U.S. landscape is uniquely shaped by consumer demand and technological innovations from within the industry itself. The Consumer Financial Protection Bureau (CFPB), stepped in during the fall of 2023 to propose a new rule to “jumpstart competition and accelerate shift to Open Banking” that would allow consumers control over data about their financial lives and would gain new protections against companies misusing their data.

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What’s Driving Open Banking in Digital Banking Solutions?

The momentum for open banking in the U.S. is propelled by digital-native consumers who desire greater control and transparency over their financial data. Consumers want to be able to share their data with, or remove their data from, any financial service provider they choose. This consumer-driven demand is already stimulating the development and launching of open banking technologies, even without confirmed regulatory mandates. Leading financial services firms and fintech companies are responding by forming partnerships to enhance data sharing frameworks that benefit consumers.

It is true that this industry shift will make it easier for account holders to move their account from one institution to another, and it is understandable that this change has many financial institution leaders concerned. If we make it easier for people to leave, what will convince them to stay?

I honestly think it’s a more positive move for the industry. This is a story I shared with some of our smaller credit union customers about this open banking data share rule: In my personal experience, I live in this little country town called, “Boring Oregon”. Yes, it’s really named, “Boring.” I was limited to where I did my banking because there is only one Credit Union in my town. If I wanted to bank somewhere else, I would have to drive to another town.

Now, with the Open Banking solutions FIs have today, I’m no longer limited. My credit union now is part of Venmo. I can pay my babysitter in real time using CashApp. I can deposit checks via my mobile app instead of having to drive to the next town over. It really has changed the way I move money and no longer makes me think about moving my account. I can stay with my small town credit union because Open Banking solutions have opened my payment options.

Yes, there certainly may be financial institutions that will need to evaluate their account holder base and be strategic on how they handle possible attrition. However, accounts which may close as a result of the new functionality available to consumers, may not have been highly engaged or highly profitable accounts for those institutions in the first place. Those account holders may have been “already gone” – or what is often referred to as silently attriting.

The good news is that much can be done to prevent churn both prior to the change in regulations (right now!) and after the rules have completely rolled out. Learn more about using data to prevent churn here.

Ushering in This New Era of Consumer Choice

The CFPB’s rule which is aimed to be finalized by the fall of 2024, will require every institution operating in the U.S. to “offer the technology for apps to access consumers’ banking data securely and completely, at their request” according to Tyler Brown, senior research analyst for CCG Catalyst.

Recently on an American Banker webinar featuring Global Head of Policy for Plaid John Pitts, VP And Senior Counsel for Innovation Policy for the American Bankers Association (ABA) Ryan Miller, and Product Owner for Alkami, Jamie Lang, the group discussed where the responsibility for technology innovation would fall – the banks and credit unions, or their technology providers. Both Pitts and Lang agreed that the onus will be on the technology providers to prepare their account holder financial institutions with the structure and tools necessary to meet this new requirement.

Still, transitioning to open banking in the U.S. involves significant challenges, and the industry has concerns that smaller institutions may struggle with the financial and technical demands of such a shift. This has prompted calls from a variety of banking groups (like ABA) and fintech providers (like Plaid) to submit comment letters to the CFPB requesting the ability to charge fees to share data and allow for a phased implementation, among other things, to ease the burden and facilitate a smoother transition.

The Forward Path for Banks and Credit Unions

The implementation of open banking will ultimately position financial institutions to have a platform which provides API access to FinTechs, so that FinTechs can seamlessly and easily consume this data to provide value back to consumers. Banks and credit unions will be able to take this data, and give consumers what they want at the right time in their preferred channel. According to Deep Varma, chief technology officer at Alkami, banks and credit unions have a path forward, starting with asking the questions below and understanding what the expectations are with the future of open banking.

Recognize that consumers have a right to decide who to share their data with, when to share it, and how to get the value out of it.
Internally say, “Do I have someone in my organization who is strategically thinking about open banking?”
Look into the risk and compliance area of your institution. Are you ready? Do you have the right controls in place? Is your information security department also ready for the data exchanges? How is your financial institution going to respond in the event of data breaches?
Expect that data portability is going to play a role, where transitioning from one financial institution to another will not result in losing all of the consumer’s data (e.g., bill payment setup, recurring payment setup, etc.).
Expect regulations around risk and security associated with open banking. How does a financial institution ensure that this data remains safe and secure in some kind of a vault?
Expect to see momentum building around financial literacy and inclusion. Financial institutions should be looking at ways to engage with their account holders and educate for overall financial well-being.

While some of these points are foreshadowing, financial institutions can lean on their core provider for support and expertise as this new rule unfolds.

How Alkami is Enabling Open Banking

Alkami’s extensibility offerings, through APIs and SDKs, are empowering financial institutions to seamlessly adapt and evolve, gaining limitless opportunities for integration, customization, and growth. Alkami open banking APIs enable financial institutions to integrate with P2P services like Venmo and Cash App, via Plaid. End users can easily link their checking accounts to Venmo or Cash App on the same day.

Customer examples:

Idaho Central Credit Union (ICCU) uses Alkami APIs to integrate with SFDC, allowing Call Center staff to assist users and make system updates in one central location.
Spokane Teachers Credit Union leverages the B2B Notification API to facilitate real-time alerts for failed transactions.
Alkami’s Developer Tools and Integrations are helping Vibrant Credit Union achieve its digital strategy, grow relationships with members, and create efficiencies across their institution.

Alkami has enabled its financial institution clients to benefit from direct application programming interface (API) access to Plaid, a data network powering over 8,000 popular financial apps and services. This is a first-to-market partnership with Plaid for Alkami where a majority of financial institutions are live, and Alkami is the first and largest major platform fully live on Plaid’s FDX aligned API, Core Exchange. Partnerships between technology providers like Alkami and platforms like Plaid will be critical to quickly scale secure and reliable financial data sharing, with minimal technical effort or resourcing.

With the FDX aligned API in place, Alkami’s financial institution clients can provide a reliable and consistent user experience for their end account holders, who can connect and link their financial accounts with Alkami. End users also benefit from a highly secure API connection and Alkami-powered financial institutions benefit from reduced friction, resulting in lower call center volume.

What’s Next for Open Banking?

As open banking continues to evolve in the U.S., it remains a space watched closely by consumers and financial entities, both eager to see how these changes will unlock new potentials in personal finance management and beyond. According to the recently published ‘U.S. Open Banking 2024 Report’ by CCG Catalyst, “The final rule will likely vary little from what we see in the proposal, as remaining rulemaking appears to be coming down to minutiae (with many specific requests for public comment).”

Other Resources from Alkami

Press Release Alkami and Plaid Partner to Provide Financial Institutions with Direct Access to Plaid via the Financial Data Exchange Aligned (FDX) API Core Exchange
On-Demand Web Seminar on American Banker Understanding opportunities and challenges for financial institutions under the CFPB’s 1033 open banking rule
Alkami Blog Demystifying Extensibility: Open Banking, BaaS and Embedded Finance

Here are some frequently asked questions (FAQs) about Open Banking that U.S. banks and credit unions can learn from:

What is Open Banking?

Open Banking refers to a system where banks and financial institutions allow third-party providers to access account holders’ financial data through secure APIs (Application Programming Interfaces). This enables the development of new financial services and products, promoting innovation and competition.

Why is Open Banking important?

Open Banking can transform financial services by offering consumers more choices, improving service quality, and fostering innovation. It allows for personalized financial management tools, easier switching between banks or credit unions, and better loan and investment options.

How does Open Banking benefit consumers?

Consumers can benefit from:

Personalized financial advice: Access to aggregated data can lead to better financial insights and advice.
Convenience: Seamless integration of financial services into everyday apps.
Better deals: Easier comparison and switching between financial products and services.
Enhanced services: Access to innovative products like budgeting apps, automated savings tools, and more.

What are the key challenges of Open Banking for banks and credit unions?

Data security: Ensuring account holder data is protected and privacy is maintained.
Compliance: Adhering to regulatory requirements and industry standards.
Technology integration: Updating legacy systems to support API integration.
Account holder trust: Building and maintaining trust with account holders regarding data sharing.

How can banks and credit unions ensure data security in Open Banking?

Banks and credit unions can implement layered security measures, including:

Strong authentication: Using multi-factor authentication to verify user identities.
Encryption: Ensuring data is encrypted during transmission and storage.
Access controls: Limiting access to data based on user roles and necessity.
Regular audits: Conducting frequent security audits and assessments.

How can banks and credit unions prepare for Open Banking?

Invest in technology: Upgrade systems to support secure APIs and data sharing.
Collaborate with fintechs: Partner with fintech companies to enhance service offerings.
Focus on account holder education: Inform account holders about the benefits and safety of Open Banking.
Stay compliant: Keep abreast of regulatory changes and ensure compliance.

What role do APIs play in Open Banking?

APIs are crucial in Open Banking as they allow secure, standardized access to financial data. They enable third-party developers to create new financial services and applications that can integrate with existing banking systems.

How can Open Banking drive innovation?

Open Banking encourages innovation by:

Enabling fintech collaborations: Banks and credit unions can partner with fintechs to offer new services.
Fostering competition: More players in the market lead to better services and products.
Encouraging data-driven decisions: Access to more data helps create tailored financial solutions.

What are some examples of Open Banking applications?

Budgeting apps: Tools that aggregate spending data to help users manage their finances.
Payment services: Apps that allow for seamless payments and money transfers.
Personal finance management: Platforms offering insights into spending habits and savings goals.
Loan comparison tools: Services that help consumers compare and choose the best loan products.

What are the best sources for information on these new regulations?

U.S. Consumer Financial Protection Bureau (CFPB): Provides guidelines and updates on financial data sharing and consumer protection.
The Dodd-Frank Wall Street Reform and Consumer Protection Act: Contains provisions related to consumer access to financial information.
Open Banking Reports and Whitepapers: Many financial institutions and consulting firms like Datos, CCG Catalyst, Cornerstone, McKinsey, Deloitte, and Accenture publish in-depth reports on Open Banking trends and best practices.
Banking and Financial Technology (Fintech) Websites: Like American Banker, Bank Director, The Financial Brand, PYMNTS.com, Tearsheet and more often feature articles on Open Banking developments and case studies.
Industry Standards and Best Practices: Organizations like the Financial Data Exchange (FDX) provide standards and best practices for data sharing in the financial industry.
Banking and Fintech Conferences: Insights from industry conferences such as Alkami Co:lab, CUNA GAC, The Financial Brand Forum, FinXTech, and Finovate can be valuable for understanding the latest trends and innovations in Open Banking.

By understanding these FAQs, banks and credit unions can better navigate the Open Banking landscape, leverage its opportunities, and address its challenges effectively.

Alkami Technology

Alkami Technology, Inc. is a leading cloud-based digital banking solutions provider for financial institutions in the United States that enables clients to grow confidently, adapt quickly and build thriving digital communities.

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