As we journey through 2024, I'm exploring some pivotal trends steering credit unions into future success. My first trend, AI is Changing Existing Applications, can be found here. And here's my second trend: Platform Engineering Becomes More Systematic.

Now, let’s explore the next trend:

open finance matures worldwide.

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How will US credit unions embrace the open banking frontier?

Online and mobile banking were once new concepts, riddled with concerns about implementation, safety and compliance. While these important innovations haven’t replaced branches and live teller assistance as once predicted, they’ve certainly altered the way credit unions support their members in a big way.  Open banking is poised to do the same thing: it’s a game changer.

But what is open banking, really? Different providers of technology and services tend to skew the open banking notion to their own offering, especially in the US. Here is Gartner’s definition:

“Open banking enables access to data and services across ecosystems of third-party financial service providers, banks and their customers via open APIs. Open banking initiatives are the formal embodiment and integration of open banking principles and technologies to deliver against a bank's digital banking and technology strategy. Open banking initiatives may range from transformative through to simple regulatory compliance.”

So it’s about opening up services and data (with user consent) for financial service providers to use. Opening up (say, just for regulatory compliance) is NOT open banking. Experience all over the world has shown that opening data without an ecosystem of financial services becomes a significant cost with no benefits. You built it, and they didn’t come. The real benefits come when an ecosystem of financial service providers uses the open banking platform (see also my second trend: Platform Engineering Becomes More Systematic.)

In the US, the Consumer Financial Protection Bureau’s (CFPB’s) Rule on Personal Financial Data Rights will likely be approved later this year. According to the rule’s draft timetable, small and medium-sized financial institutions will need to comply starting in 2027. My question to credit unions of all sizes is, why would you wait until 2027 to build the ecosystem and reap these benefits? It’s a new game; you better master it before everybody else. Let’s see how opportunities from adopting open banking have proven incredibly fruitful for credit unions and financial institutions across the globe.

Use regulations to drive innovations.

Global experience has demonstrated that Fintech partnerships are proven to increase loyalty to established financial institutions, helping them adapt, extend their services and thrive as regulations and standards evolve. Whether it be the EU’s PSD2 (soon PSD3), heavily prescriptive requirements in Brazil, or Colombia’s recent open banking mandate, innovative banks and credit unions see the opportunities and react quickly.

As open banking changes the game, significant work will be required for small businesses and financial institution’s IT application infrastructure support. Mature, experienced open banking offerings like Sensedia’s will help. New, compliance-only offerings will not, being just a cost with no reward. Real open banking will enable innovative partnerships with fintechs, making new, multibank customer interactions possible. In the US, credit unions are fortunate to have strong support through the most innovative CUSOs already seeking open solutions to provide services, strategies, and answers to help credit unions implement compliant open banking for their members.

As an example, according to Vladimir Jovanovic, Velera’s Vice President of Innovation, in a recent CreditUnions.com article about the coming open banking regulations, credit unions have a transformative opportunity to strengthen their position in the future of the financial services industry. The article states, “As open banking changes the flow of data — not only between consumers and their financial institutions but also between the institutions themselves and the larger market — the industry will undergo a shift that drives innovation and promotes collaboration between traditional banks and fintech companies. Credit unions can enhance their own service offerings by forming strategic partnerships with fintech companies. This will allow them to tap into specialized, innovative solutions, such as cutting-edge mobile banking experiences, seamless payment solutions, and personalized financial management tools, to benefit their members.” And there’s plenty of AI coming on top of that.

Will members flock to competitors?

Several examples around the world have shown that the simple answer is no. In addition to finding ways to meet compliance and integrate on the technical side, financial institutions have expressed fear that offering a clear view of competitive choices will erode their consumer base. Let’s not fool ourselves: consumers will find what they need, and when they do, if their current bank doesn’t offer it, they will get it anyway from somewhere else; at that stage, they are lost already! In truth, Open Banking gives financial institutions a chance to keep them.

Take Sicredi, for example. It’s a Brazilian financial cooperative that initiated an open banking project in April 2021 and advanced in sync with each phase of open finance implementation in Brazil (as mandated by the local regulations). Marta Dalpian Heis, Head of Credit Solutions at Sicredi, shared that while Sicredi experienced minimal attrition, her organization now understands why members leave. It has a much better view of what members seek from competitors and can respond in a customer-centric manner, offering members a chance to consider Sicredi’s options.

Sicredi documented the growth of over R$3.5 million in credit card limits and more than R$7.3 million in credit extended to members who opted to share their data for self-service offers via open finance. Additionally, with authorization from the Central Bank, Sicredi achieved a significant milestone by becoming one of the pioneering financial institutions to receive such authorization and operate as a payment initiator in the market.

Open banking benefits extend to small business customers (SMEs), too.  Classical cases for open banking with corporate clients generally hinge on integrating with the companies’ internal financial applications, like paying invoices, for example, or general accounting. Gen AI opens up many more options around what-if scenarios, digital twins of part of the organization, and generating/using synthetic data (see AI is Changing Existing Applications). For corporate bank users, compliance is not an issue — efficiency is, so they make good use of whatever APIs/constructs/dev portal the bank has to do for compliance to then automate/speed up their internal processes. Automating interactions between credit unions and SME members using the credit union’s platform APIs makes them safer and speedier for all parties.

In Northern Europe and Southeast Asia, corporate open banking is generating success.  In the UK,  Credit unions are discovering ways to approve loans faster and with guidelines to serve unbanked populations. As another example, UK financial institutions are helping SMEs and consumers receive payments quicker and offering consumers “frictionless, fast” car sales settlements.

It’s time to embrace open banking.

Open banking’s arrival in the US and other countries is inevitable.  Concerns are understandable, but it’s vital for credit unions also to see the opportunities open banking and its standards will bring to their businesses. And it is essential for CUSOs who serve them to provide the platform for open banking and help credit unions build an ecosystem of partners that use it.

Bank execs are already creating open banking strategies. According to a recent KPMG survey, 2024 US Banking Industry Outlook Survey - Future-proofing banking: The enterprise transformation imperative -“When in doubt, choose change,” banking executives shared plans for various digital channels this year—53% prioritized investment in open banking APIs.

It’s exciting to see the US take steps to adopt open banking guidelines and consider the opportunities it will bring. Fintechs and financial institutions are already building bridges between each other and across industry sectors. Now it’s time for US credit unions to take action. Why wait?

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