COMMENTARY: Why Networks Should Welcome, Not Fear, Open Banking

As readers of this article likely know, banks have traditionally kept customers’ financial data within their own closed systems. Open banking allows for financial data to be shared between banks and third-party service providers, using application programming interfaces. With open banking, consumers can dictate what data can be shared with third parties and apps — and what details cannot be shared.

While it was previously more firmly rooted internationally, open banking is now gaining some ground in the United States. On Oct. 19, the Consumer Financial Protection Bureau issued its Personal Financial Data Rights Rule. The proposed rule would “require depository and nondepository entities to make available to consumers and authorized third parties certain data relating to consumers’ transactions and accounts; establish obligations for third parties accessing a consumer’s data, including important privacy protections for that data; provide basic standards for data access; and promote fair, open, and inclusive industry standards.”

This rule would hasten the transition to open banking domestically, where consumers will have more control over information about their financial lives and additional safeguards against firms abusing their information. By prohibiting financial institutions from retaining a person’s data, and by mandating that—at the individual’s request—companies share it with other businesses that provide better products, the rule would also spur competition. It would prohibit data recipients from mishandling or fraudulently monetizing private customer information, and it would enable consumers to sever ties with institutions that offer subpar service.

This opens the door for financial-technology providers and institutions to innovate the products and services they offer around open banking to drive additional business. At the same time, the rule also could open up potential risk to networks like Mastercard and Visa, given open banking has the opportunity to boost account-to-account transactions that now may not flow through the card networks.

Given all this, open banking does have the potential to negatively impact networks, as they could lose money if transactions bypass their card schemes. However, companies like Visa and Mastercard, with their acquisitions in the past few years of Tink and Finicity, respectively, have been preparing for initiatives like open banking and other payment methods, like cryptocurrencies.

For example, with regard to open banking, networks have the opportunity to differentiate themselves for consumers by the add-on services they can provide that open banking by itself cannot. Examples of this include travel insurance and additional travel-related services like hotel and car rentals. They can also make their payments more convenient for consumers than open banking can, with options like click-to-pay. In addition, refunds are much easier with cards than with open banking.

From retailers’ perspective, if they begin to see that open banking presents issues with authorizing payments or payment guarantees, or the process for these becomes too cumbersome, they could be less likely to offer this as a payment method. Networks, on the other hand, already have well-established and efficient processes for these scenarios, so this would position them well at checkout. Networks also have easy, proven processes for settlements. Merchants would need to establish well-planned background processes for bank-transfer advantages with open banking.

In sum, with open banking, card networks do face increased competition. But they also have the chance to further promote their strengths and differentiators to drive business. For this reason, open banking should be viewed as an opportunity, not a threat.

—Jed Danbury is a vice president at Computop.