Open Banking RulesPending Regulation Will Shake-Up the Payments Industry & Make Collaboration a Must

June 23, 2023 | 7 min read

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Open Banking Rules

In a Nutshell

Open banking may soon become standard practice in the US. When it does, open partnerships between banks and fintech firms will bear mutual advantages. This article will examine the concept, and explain the benefits for banks and merchants.

How Banks Stand to Benefit From Proposed Changes to Open Banking Rules

The payment space is an exciting and fast-changing environment. However, much of that change happens in an asymmetrical manner.

A misalignment of priorities and practices is inevitable without direct communication and collaboration between entities in the payment space. Considering all the touchpoints involved in a single transaction, it’s no surprise that there is such a disconnect present. However, this might be changing.

Closer Collaboration in Payments on the Horizon

The pursuit of collaboration between banks and fintech firms in recent years has emerged as an encouraging phenomenon. This is particularly significant in light of potential regulations around open banking in the United States that may soon necessitate such collaborations.

The Consumer Financial Protection Bureau (CFPB) made a landmark move last October regarding open banking in the US. The regulatory agency introduced a new open banking framework that will significantly impact cutting-edge fintech firms and traditional banking institutions alike when it comes into effect. Pending further clarification, this could potentially happen as soon as 2024.

The proposed framework will demand that banks grant certified third parties access to consumer financial data (assuming consent from the consumer, of course). This data encompasses settled and unsettled transactions, deposit details, personal information, and other miscellaneous data. All of this may be shared via application programming interfaces (APIs).

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Sharing data through APIs has been a well-established practice in Europe for several years. Specific rules and practices might undergo changes before they are put into effect in the US. When they do take effect, though, fintech companies and banks will need to strengthen their alliances to guarantee adherence to these rules.

Banks Must Make Changes to Facilitate Collaboration

At present, many banks are ill-prepared to comply with these CFPB requirements. This is due to the prevalence of antiquated back-end systems in most banks, which do not easily support such capabilities. 

For instance, the proposed rules would require banks to offer specific information through two API-accessible portals. They’d need one for consumers and the other for third-party access. Banks have consistently struggled with API integration, though. This is reflected in a recent survey; 81% of the participating banks expressed a lack of experience with APIs as a hurdle in their collaborations with fintech firms.

Fintech companies, on the other hand, primarily use cloud-based systems. These are inherently more adaptable and customizable. As a result, they pose fewer challenges in incorporating APIs for leveraging open banking.

To improve collaboration, banks can make use of agile fintech systems and technical expertise to adhere to the forthcoming CFPB rules. They may also extend their customer base and tailor their services and products according to the unique needs of their customers. This is crucial, as open banking has the potential to be massively beneficial to institutions that are willing to get on board.

Open Banking Benefits Everyone

The association between banks and fintech firms is reciprocal. Each brings to the table something that can benefit the other.

Fintech firms are poised to reap the rewards of stronger connections to banks when open banking takes effect in the US. Despite fintech companies possessing the necessary technological acumen to meet open banking mandates, they stand to benefit from banks' expertise in areas such as data security and regulatory compliance.

In contrast to most fintech companies, banks have devoted decades to establishing robust data security infrastructures. As a result of their status as regulated, legacy financial institutions, banks are obligated to adhere to stringent privacy and safety protocols. Thus, banks are well-positioned to guide the industry by example.

In their report from June 2021, McKinsey outlined four specific advantages that financial service companies can gain from implementing open banking strategies. These include:

Open Banking Rules

Enhanced Operational Proficiency

An uptick in efficiency will facilitate cost savings and promote the adoption of automated technologies. The outcome of this progressive approach is a refined, smoother customer experience. It will be characterized by quick and transparent dealings with financial service providers.
Open Banking Rules

Elevated Fraud Safeguards

Leveraging real-time access to customer information can pave the way for advanced methods to mitigate fraud-related expenses. According to McKinsey's report, “Data sharing equips organizations with more proofs and hints to detect suspicious operations. This assists them in enhancing their fraud predictive models and identifying potential fraud incidents sooner.”
Open Banking Rules

Optimal Workforce Distribution

Open data enables companies to allocate human resources toward high-priority tasks. As the McKinsey report suggests, “This approach aids companies in directing their calls towards high-risk customers, curbing the time dedicated to monitoring credit for low-risk clients, and ultimately recouping more outstanding debt.”
Open Banking Rules

Streamlined Data Intermediation

Open data can equip financial institutions with valuable insights about potential customers. This will be useful in activities like lead generation or loan initiation. APIs play a crucial role in data intermediation. Specifically, they help to alleviate friction. Acquiring information such as credit scores and property valuation can be expensive, but the advent of open data in finance is democratizing this access.

Finally, there’s one more key benefit of open banking that every agency can enjoy: enhanced customer satisfaction.

Improved internal processes with fewer communication hiccups allow for faster, more efficient delivery of products and services. This will lead to more satisfied customers, and a better payment experience overall.

Case in Point: Chargebacks

In recent years, banks have progressively adopted groundbreaking technologies and practices. However, their approach to payment disputes remains rooted to dated methods originating in the mid-20th century.

Open banking aims to bridge that gap. Cooperative tactics and expansive data sharing can assist in facilitating informed chargeback decisions. This will alleviate operational obstacles, diminish friendly fraud, and protect cardholders.

To elaborate further, the growing involvement of artificial intelligence and machine learning in fraud prevention has amplified the need for precise data to educate these systems. By dissuading merchants from responding to disputes, institutions miss out on vital data that could be harnessed for fraud prevention efforts.

Open Banking Could be the Key to Resolution

Improved merchant response to payment disputes could strengthen banks' capabilities in pinpointing and forestalling fraudulent transactions. This could result in a decrease in criminal fraud instances and false declines, ultimately leading to shared benefits for all parties.

The advent of modernization could help manage the growing volume of cases. With technology, merchants could transmit raw data in a globally standardized format, thereby replacing the current reliance on non-uniform, paper-based documents. This would facilitate the automation of processes, reduce errors, and diminish the manpower needed for dispute resolution.

Moreover, issuing banks could avoid the need to issue chargebacks by having more data at their disposal when processing inquiries. A considerable number of chargebacks are filed mistakenly; when cardholders raise concerns about a charge, banks often find themselves compelled to initiate a chargeback due to a lack of information.

Currently, dispute resolution technologies provide merchants with the opportunity to share data with banks during a cardholder inquiry. Despite the demonstrated advantages of such data sharing through chargeback management platforms, the cost and complexity of their implementation remain significant challenges for merchants.

The focus should be on boosting data sharing. By facilitating this information exchange, banks and fintechs can collaboratively tackle the complexities of open banking, yielding benefits for the industry and its consumers alike.

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