For a vast majority, banks operate in a black box, in which customers have no knowledge as to how their money is used once deposited. Annual reports lack details of a bank’s operations, banks reveal commercial loan values, but the intricacies are hidden. The credit-worthiness of borrowers and delinquency status of loans are simply unknown. This secrecy has harmful effects, exemplified in the 2008 mortgage crisis and the most recent fraud case at Wells Fargo.
Contrast this to many alternative lenders and challenger banks for whom transparency is considered a guiding principle and core to their business models
Online lender RateSetter publishes its loan book in full, including annual returns performance over the last 5 years. Their lenders have full access to the data behind loans, enabling them to make educated investment decisions. Incidentally, to date, no lender has lost money on loans made through this provider.
Despite calls for increased transparency, banks remain hesitant to give away what they consider their most valuable asset – customer data. However, in light of current scandals, the choice may not be theirs to make in the near future.
If transparency reduces risk of fraud and future financial crises, how can it be accomplished?
One solution is through the adoption of an open banking standard. Open banking promotes the sharing of bank data through secure open APIs, allowing customers to manage their finances more effectively.
The popularity of open APIs is growing quickly around the world, as it ignites the speed and cost-effectiveness of banking compared to legacy IT systems.
Open Banking allows startups and challenger banks to leverage data held at large banks in an effort to grow their businesses and provide superior products for their customers
Governments and banking regulators around the world are moving to an open banking standard as a way to accelerate competition in the industry, regain trust of customers and be ready for a world of digital services.
German startup Open Bank Project launched in 2010 with the goal to benefit both banks and consumers with the use of innovate apps and services. They describe their mission as follows:
The Open Bank Project is an open source API and App store for banks that empowers financial institutions to securely and rapidly enhance their digital offerings using an ecosystem of 3rd party applications and services.
In the UK, the Competition and Markets Authority (CMA) is tasked with promoting greater transparency for consumers and SMEs through the use of open APIs. The CMA encourages UK banks to 'work harder for customers' by placing an open banking model on the industry.
Just this month, the U.S. House of Representatives passed House Resolution 835, which many describe as the U.S.’ first step toward Open Banking. The resolution states:
Expressing the sense of the House of Representatives that the United States should adopt a national policy for technology to promote consumers' access to financial tools and online commerce to promote economic growth and consumer empowerment.
Benefits of Open Banking
Though banks may begrudge such standards initially, the benefits to consumers, SMEs and the banks themselves will force change over time.
Consumers and small businesses stand to gain greater control and insight into their finances, including the ability to:
- Securely share their banking data with other banks and third parties
- Manage all accounts within a single application (or from commercial applications)
- Compare product offerings and pricing options to find those most suitable for their needs
- Procure better loan terms as historical banking data is available in assessing borrower’s risk
Banks will benefit from a sharing ecosystem as well as the significant advantage of being able to develop services that one could call future proof, versus the legacy systems of today. Through open banking APIs, it will be possible to adapt to changing customer needs and environments in a way that is extremely painful and costly for most banks today.
Successful banks will transform the open banking model into an opportunity that will grow business: In doing so, they will rebuild trust through transparency
As more countries adopt an Open Banking standard, progressive banks would be prudent to prepare. Opening data for consumption should not be viewed an obligation, but an opportunity: transparency nurtures competition while benefitting customers. Transparency also builds trust, a value many banks sorely lack today.
Grow Advisors, North America & Canada
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