Seizing Open Banking Opportunities in 2023: A Guide for Fintechs

Fintech Industry

The Fintech industry took a significant hit in 2022, but looking ahead into the future we shine a light on some valuable insights for open finance predictions and trends in 2023. See why the expert panel of industry leaders present at Thinking Outside the Vault - Why Open Finance Opens Doors to Opportunity believe there is still plenty of opportunity in this sector. This panel explored the transformative impact of open banking, open finance, and secure data sharing on financial service delivery, benefiting businesses and customers worldwide.

The panel consisted of industry leaders, including Felipe Torqueto, Head of US Solutions at Sensedia; Natalia Cruz, Head of Open Finance; Don Cardinal, Managing Director of FDX; Charith Mendis, Worldwide Banking Industry Lead at AWS; Chris Kennedy, SVP Strategic Initiatives, Technology & Operations at Regions Bank; Brandon Baines, VP, Relationship Manager Tech Enabled Banking at Customers Bank; and Randy Heffner, Industry Analyst. The insightful discussion was moderated by Paul Wilke, CEO of Upright Position Communications.

Finance is Always Evolving

The banking and financial services industry is undergoing a significant transformation, fueled by greater openness and connectivity. This shift is reshaping service delivery for businesses and customers alike. The rise of API-based solutions has empowered banks and their partners to explore innovative business models, including Banking as a Service (BaaS) and embedded finance. By embracing these opportunities, regulated financial institutions can actively collaborate with fintechs, dismantling traditional barriers in the banking landscape. Both banks and fintechs are adapting to this evolving BaaS landscape, expanding their roles beyond mere providers of borrowing and investment services. To thrive in this era of openness, success hinges on embracing flexibility, driving innovation, and nurturing adaptability as core attributes.

Charith Mendis summed it up beautifully, stating, "Banks need to think of themselves as product companies and design their tech and business strategies in a way that's adaptive because business models are evolving. Until we know exactly what the right business model is, the ability to adapt using the architecture is going to be crucial." 

APIs Open Doors

API strategies are creating opportunities in the banking industry and other sectors reliant on secure consumer data for business transactions. n the past, financial institutions operated within silos to ensure security, compliance, and competitiveness. However, the landscape has evolved, and today the collaboration between banks and fintechs is needed to maintain data security, regulatory compliance, and user accessibility. By joining forces with fintechs, traditional financial institutions can accelerate innovation and unlock new revenue streams.

Chris Kennedy shared his thoughts on this "I would say traditionally, banks aren't always the most innovative. There are innovative banks out there, but I do see open banking as an enabler for us to be much more innovative, or at a minimum, to partner with really innovative companies."

Don Cardinal added "APIs are the next new channel, so you're seeing banks become net data ingesters" and continues,  "You're seeing opportunities like Experien Boost where you can offer people who would have been subprime, near-prime - or near-prime, prime rates." Cardinal highlighted the benefits of Open Finance and standardized practices, enabling banks to leverage existing relationships and make accurate lending decisions for customers, including recent immigrants with limited credit history. APIs also play a crucial role in verifying the authenticity of individuals, ensuring that financial institutions engage with genuine customers rather than newly created bots.

Customers Are The Real Winners

The increasing openness and connectivity in the financial services industry are driving positive outcomes for customers. In other countries, the industry's shift towards a more open environment has already resulted in enhanced customer experiences and greater data management. Now, it's time for financial institutions in North America to respond to customer demands for increased access to their data and align with this industry evolution.

Brandon Baines explained, "Banks are stewards of consumer data. And open banking is just a small piece of the bigger picture of open finance and looking at the entire financial picture of the consumer. You can only get so much from one bank. Typically, whether you're a consumer, small business, or large business, you have multiple relationships with multiple financial institutions that are servicing multiple products. To be able to share that data cross-functionally between institutions presents a benefit for the consumer but presents added risk-inherent risk."

Shifting the focus to business customers, Mendis highlighted that banks are engaging in new conversations regarding service delivery to meet the evolving needs of their customers. "It's no longer about providing deposits and cash management accounts to a small business, but it's actually helping a small business be successful" Mendis emphasized that the paradigm shift involves leveraging APIs and ISV solutions to empower customers in running their businesses. Also, the data sharing back and forth between the customer and the bank drives a much better and more cohesive experience. By obtaining customer consent, banks can offer better insights and more personalized recommendations to their customers.

Lessons from Other Countries

Organizations can draw valuable lessons on open finance from analyzing successful implementations worldwide. Brazil has emerged as a frontrunner in open finance, with over 800 institutions embracing this strategy, as noted by Natalia Cruz. Through open finance and payment processing APIs, customers can seamlessly conduct real-time transactions between accounts held at different institutions, revolutionizing the way financial transactions are conducted.

Cardinal added that Brazil took a proactive approach to open banking, involving various industries in the dialogue and learning from the experiences of countries like the UK and Australia. Chris Kennedy mentioned that he appreciates the direction the US is heading, with industry-led discussions involving regulators, fintechs, and consumer advocates collaborating and fostering a cooperative environment to listen and learn from one another. He shares, "I see it all coming together, and I think, really, we have to look broader than just North America to pick the best learnings and bring them here."

Felipe Torqueto said, "It's very interesting to see the banks evolving the discussions within the central bank (Brazil), so it's not only about regulatory discussion. We see banks really trying to be innovative in the ecosystem with the central bank, not just working together from a regulatory perspective."

Regulation is Moving Forward

During the panel discussion on regulations, Chris Kennedy shared some insights from the US. "There's been really good discussion with the regulators. You've seen proposed regulations in Congress around this, around GLBA, Gramm-Leach-Bliley Act. There's the proposal for third-party risk management which actually refers to open banking… The principles from the CBP have been around since 2017." He added, "Banks are taking action even without those regulations being finalized… I think it's very positive in the US and North America as to how it's progressing."

Baines continued the discussion, "We're working with tech companies because they have the technology, whereas the banks bring the data to the table. The tech companies are much faster, and they use buzzwords like APIs, AI, and machine learning, but how we merge all that together in a safe and sound compliant manner to better serve the end user, I think, is the biggest question."

From a solutions perspective, Torqueto added, "You don't want to slow down the innovation, but at the same time, we need to keep things protected well enough. This is a very complex scenario."

Governance is Critical

The integration of legacy data and systems with modern infrastructure poses a challenge for banks. Effective governance becomes crucial, and both banks and fintechs need to strive for improvement in this aspect. It is worth noting that when implemented correctly, API security easily surpasses the security provided by simple login and password access methods.

"We're getting to a much better place by default with some basic secure APIs," said Kennedy. "I do want to celebrate that," Chris Kennedy continued to emphasize the importance of banks securely incorporating APIs into their operations. He highlighted the guidance provided by FDX and other entities in prioritizing security measures. Strong governance practices are crucial for protecting customers, ensuring their privacy is safeguarded throughout the process.

Accept That We Don't Know Everything

Mendis emphasized that APIs fuel rapid innovation by inspiring a new outlook on legacy systems and the creation of business capabilities designed to align with them, rather than attempting to force them onto existing infrastructure. Banks are undergoing a transformation where they are shifting from simply providing technology within their current business models to becoming software providers for the industry. 

This means that their services will be consumed through APIs, similar to how fintechs operate. The way traditional banks execute their strategies in this evolving landscape will be crucial for their future success, particularly as they navigate the need to scale up or down according to market demands.

Mendis added that when banks think about open finance, they need to understand that where they start is probably not where they're going to end up. "One: you do need to think of yourself as a different firm, just providing IT infrastructure to banking. You need to think of yourself as a product company. And two: you need to think how the design of your tech strategy enables your business strategy in a way that's adaptive. Business models are evolving. Until we know exactly what the right business model is, your ability to adapt using the architecture is going to be crucial."

Hefner added the significance of sound architecture and APIs that revolve around key capability points and data flows. These elements play a crucial role in addressing regulatory requirements and enabling efficient analysis of downstream data in a transparent and adaptable manner. Hefner also highlighted the inherent uncertainties surrounding the regulatory landscape. "The API-based infrastructure is serving the regulatory, and the unpredictable regulatory demands as well, so the platform is not only helping you be flexible for open-ended business, it's helping you respond to anything that your government happens to throw at you."

Innovation Comes From Unexpected Places

Don Cardinal shared, "By having common standards and laying down common rails, and I give the metaphor when I hooked my modem up to my Commodore 64 using CTM basic, I never envisioned YouTube, but we got IP addresses. We eventually ended up with DNS. We eventually ended up with HTTP and HTTPS. And so, laying common foundations and common standards to build on that have principles of security, sustainability, and scalability that work well with other standards. I'm always waiting to see what's going to come next… We've started fraud APIs. No one in the world has those except FDX because our members said. 'Hey, we need to share this data.' We have these rails that are secure. Why aren't we doing this? And so it's the innovations you're going to see on top of these rails that is, I think, really exciting."

Mendis followed, "I think the imagination has always been there. The technology has caught up to allow organizations to be able to experiment at a reduced cost." He continues, "Open API standards are actually providing the mechanisms to communicate globally, or at least within each country, and that common standard makes it easier for new entrants to experiment because you're not redefining a point-to-point integration with every single organization you need to work with. You're plugging into a common standard, and therefore, the development time to achieve that has actually been reduced."

Baines concluded that banks need time to innovate. He shared, "Banks don't like to jump in headfirst. We like to dip our toe in the water and test it out, see performance models for six months to a year improving track records and model validation. So it is a very slow process, and the key part to being successful is just making sure we keep that imagination alive as an industry."

What's Next in Open Finance and Fintech?

Panelists expressed their desire for greater collaboration between banks and fintechs, along with increased partnerships among banks. Their vision encompasses broader payment integration, expanded utilization of Banking as a Service (BaaS) and embedded finance, and a global uptick in investments to bolster these capabilities.  

Kennedy predicted, "I'm expecting open finance to really drive consolidation of banks through both M&A activity and account portability." He added that it would be easier for consumers to switch banks and more straightforward for banks to onboard other banks with streamlined data.

Hefner's vision summed up the discussion, "2023 will be unpredictable, and we have to be ready for anything. But fundamentally, the combination of architecture, governance, imagination, and a broad definition of what business we're in - almost defining we don't know what business we're going to be in tomorrow - is the outlook and perspective that will allow a bank or other financial institution to find an opportunity to invent whole new ways of doing things that that we hadn't thought of before."

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