For years Financial Institutions (banks, credit unions- collectively FIs) tried to be one stop shop. So, they offered everything from checking account to credit card to bill payment to mortgage. Bill payment at the bank portal remains mostly clunky and years of direct deposit history rarely matters when the customer applies for a loan at the same bank. Applicant is often asked to submit copies of checking account statement.
In summary, banks have been sitting on extremely valuable data on deposit, loan and card transactions and have failed to create any value for the consumer. In a best-case scenario, history with one bank can help the consumer only if he/she wants to buy the next product from the same bank. Since banks do not share their data with other financial service providers (credit bureau and other legally mandated sharing aside), consumer loses the opportunity to get the best deal across all the providers.
In recent years, services have popped up to help the consumer unlock the value of his/ her own data. Usually, customer has to provide user id and password for the account with the richer data to the new service provider. In absence of any formal data sharing across the FIs, this is a roundabout, last-ditch effort by FinTechs to unlock consumers data from banking core.
European union’s PSD2 (Second Payment Services Directive) legislation mandates FIs to release their data in a secure way to third parties. UK requires that data from the largest banks be shared with other authorized entities in a secure and standardized format.
Hoping that US would move in the same direction, its time for FIs to liberate the data from their core banking systems. In house or vendor provided core banking systems are often decades old legacy systems, expensive to build on, cannot provide the UX consumers demand and have fewer releases in a year.
FIs have tried to respond two ways-
1) build bank’s own distributed digital surround systems outside of the core banking system, or
2) take vendor’s digital surround services connected to the core banking system at the vendor.
#1 is expensive, creates longer GTM timeline and slows down innovation. #2 is often suboptimal as FI is limited to the specific vendor’s solutions. So, the vendor expense in not providing the return it should, slowing down client growth and providing cookie cutter solution without differentiation.
Both the options create one to one connection between the core banking system and digital surround applications. A better way to reimagine the future is to open up the data from the core banking systems via API based middle layer. APIs can help FIs connect to a platform in a centralized fashion without any need for each FI to connect with the core banking platform individually. A well thought out API layer can offer multiple solutions through a single integration. FI can build its own application based on the API or can choose other solutions that interact with the APIs.
The core system providers must open access to the core banking data and embrace API for all processes. Keeping APIs available to only paid clients and providers’ own applications could eventually make their entire platform obsolete. Alternately, core banking system providers may be forced to provide access via legislative mandate anyway.
Getting the data out of the core banking system will give FIs opportunity to innovate more easily. Exposing the data and creating the standard APIs will require one time investment but will significantly lower ongoing investment while increasing speed to market and growth. Potential benefits that deliver revenue growth or expense saves are endless-
Countless new tools and techniques like AI based automations become easily accessible
Help the FIs create greater personalization as they are now free from the rigidity of the core banking platforms
Enables better UX for end customers and reduces friction
Decreases development time
The argument against data sharing usually centers around data ownership, privacy and security. But what if the consumers want to give away the data? They have been increasingly giving third parties access to their data for better UX, lower fees (e.g., overdraft fee) or better products, period.
Open banking is technically as safe as online banking. APIs are being used more and more but usually just between a specific FI and the FI’s core banking system. Similar security and authentication measures can be used across the board without limiting it to the favored insiders. This is actually better than providing user id and password as is being widely used today.
And while I am dreaming, streamlining to an API standard across the countries and globally will help everyone. Since climate change agreements show the limit of global cooperation, I am not holding my breath on this one.