Customer demand is driving open banking adoption

If customers own their banking data and can decide how it’s used, what does that mean for banks and credit unions?

Banking institutions possess vast troves of data collected from their customers, but many struggle with how to extract the most value from that information—either to benefit customers or to drive business results. Fintechs have recognized this disconnect and focused on ways to make data more usable and impactful. Open banking’s objective of making bank-held data more accessible to nonbanks stands to create another key competitive front in their ongoing battle for customer loyalty.

We recently spoke with David Foss, chairman and CEO at Jack Henry and Associates, to get his thoughts on open banking—where it currently stands in the U.S. and where he thinks it’s heading. In his view, open banking in the U.S. is being driven by customer demand, and alongside the challenges for banks, there are also considerable opportunities.

This interview has been edited for length and clarity.

The idea that the customer owns their banking data has been picking up momentum in recent years. What do you think is driving that?

It’s been an evolution. Much of the conversation around open banking started with what’s called PSD2 in Europe, which mandated that banks had to provide access to data and enable the consumer to control that data. Fintechs have taken advantage of that conversation and have created this talking point with consumers that is, “Hey, it’s your data. Shouldn’t you be able to control where that data goes and when it goes?” The rising concern about security and ransomware and hacking has created a consumer focus on the idea of sharing my data—it’s my data, and I should be able to decide who gets it.

Regulators are concerned about what big tech companies might do if they have access to consumer financial data, but many banks aren’t waiting for the regulators to put rules in place. What’s the big hurry?

A big challenge for the average financial institution today is disintermediation. There is a lot of disruption that’s happening in our space as a result of all these fintechs that have figured out how to take advantage of data. The average person has 30 to 40 different banking relationships involving multiple institutions.

Then, there’s Gen Z and millennials, who tend to gravitate toward whatever is the quickest, easiest and most tech-forward. Put all those things together, and there is this movement among banks trying to figure out, “How do I become the center of the financial life again for my customers?”

This gets to the crux of the issue for banks—their main concern is the risk that they will no longer have primacy in their customer relationships.

I think most banks feel like they don’t have a choice. It’s happening. Open banking is coming. It’s here already, and it’s going to only become more of a topic in the United States. Customers are going to have access to the data within banks, whether they like it or not. There are all these fintechs out there that are evolving, and customers like them—they like the experience that they have with these solutions.

Now, how do banks solve this problem of potentially losing customers? One way is to create relationships, whether they’re close partnerships or relatively distant relationships, with these different solutions. Our study found that many millions of Americans feel financially fragmented or financially unhealthy. If the bank can help solve that problem, that can really put the bank front of mind again for the customer.

Is there a role for banking institutions to play in helping customers make good decisions when granting permission to access consumer data?

I think there is. Again, if the bank can position itself as the center of the customer’s financial life, that can give them a platform to help the customer make decisions. In a true open banking environment, the customer decides how and when they want their data to be shared, and they can decide when they want to revoke those permissions. It’s not a matter of, “I’m going to share my data and now I can never change my mind or do something different.” The bank can definitely play a role in helping advise customers on how and when they should be taking advantage of those open banking concepts.

What do smaller banks have to do to take advantage of the open banking opportunity?

The first step is to identify what unique capabilities they have within their financial institution that most other institutions don’t have. What could they do to create a strategy? That includes a marketing strategy, and it may include some kind of an online presence.

But what can they do to leverage that skill set to create a larger presence for their financial institution? I think it’s really exciting for community and regional banks to leverage their skill sets to go out and create new markets, but it all starts with strategy. Start with the skills you have within your institution, and figure out, “How do I leverage those to create a new opportunity for the financial institution?” Then, figure out what technology you need in order to do that.

Where does scale fit into this?

The interesting opportunity here is that scale isn’t key in this equation. In fact, what we’re seeing already is that a lot of banks are building a niche strategy around some of these concepts. With digital banking and the connectivity options it creates, a bank can define niches of customers based on the expertise that they have within their financial institution. They could potentially serve customers nationwide or even worldwide.

This creates huge opportunities for some smaller financial institutions that can devise a niche strategy and grab market share based on that niche strategy, not based on the fact that they’re a great big bank with a branch on every corner. It’s more about marketing, focus and creating a strategy, taking advantage of some of these concepts and the exciting rise of digital banking.

This interview was conducted by the BAI Editorial Team.

We offer actionable insights on other open banking topics that can benefit financial institutions in the BAI Executive Report, “Creating new opportunities through open banking.”

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