As U.S. rules and standards are developed for banks to share customer data with fintechs, there’s one obstacle that’s rarely discussed openly: Some banks simply don’t want to do it.
Some traditional banks, given their legacy equipment and the extra red tape involved in such efforts, are reluctant to hand over data to third-party fintechs, Michael Bilski, CEO of North American Banking Co. in Roseville, Minnesota, said during the recent Chicago Payments Symposium hosted by the Federal Reserve Bank of Chicago.
Even though his $950 million-asset bank has embraced new technologies and even built its own peer-to-peer payments product called ExcheQ, Bilski said, he realizes many would consider him "not the biggest fan" of open banking.
"I truly believe it is my data and I don't have to share it, and I don't have to give it to my customers if I don't want to," Bilski said, quickly adding that "obviously, I couldn't compete if I didn't."
If customers expressed a desire to share their data in order to get loans or open accounts, and there were specific standards to follow for data sharing, Bilski said he would support the process. After all, Bilski knows where data and payments trends are heading — he is the current chairman of the U.S. Faster Payments Council.
"As we think about opening banking, we have to make sure we think about the myriad laws, regulations and rules that banks currently operate under," Bilski said. In addition, banks deal with several government agencies and state entities that enforce those rules, he said.
In order for open banking to progress, the fintechs that have had mixed experiences with screen scraping would need banks to collaborate on the development of application programming interfaces that allow banking data to be shared more freely, some observers say.
The mentality of the organization at which the data resides is vital, said Mark Ranta, payments practice lead at Alacriti, a payments and billing technology provider in Piscataway, New Jersey.
"If the bank doesn't have an open-banking mindset, the [progress of needed] technology is doomed," Ranta said as part of a panel discussion at the symposium. Banks and other financial institutions have to determine how open they really want to be, he added.
Data-sharing rules exist already in other parts of the world. The U.S. will continue to monitor how the PSD2 directive is playing out in Europe and how the United Payments Interface is advancing in India. Officials here are also studying how the API and standards created through the U.K. Open Banking Implementation Entity resulted in a large increase in payments there starting in early 2021.
In addition to perceiving a need for stronger data-sharing standards in the U.S., some banks object to the cost of creating and maintaining the APIs required to fully share customer data with fintechs.
"The lion's share of financial institutions in this country are blocked" from advancing the opening banking ecosystem "because they don't have the resources," said Brian Costello, vice president of data strategy and strategic solutions at Envestnet|Yodlee, a data aggregator in Redwood City, California.
As for those banks that don’t see any benefit to sharing data with fintechs, Costello said: "To me, that indicates old thinking."
Still, Costello understands why banks may be reluctant. "I don't blame banks that don't want to give up data, because for years they have been building systems to protect that data to comply with regulations and avoid enforcement," he said.
The Consumer Financial Protection Bureau is in the process of writing rules governing consumer financial data sharing in the U.S. And standard protocols are emerging for the transfer of such data from the Financial Data Exchange. As of Sept. 1, data from 22 million U.S. consumer bank accounts is fed to fintechs through APIs created using the FDX standard.
But these initiatives don't address the fact that many banks’ legacy systems might not be able to quickly accommodate new APIs.
"We also have to figure out how you are going to reimburse the financial institutions to upgrade their systems to be able to handle those transactions coming in looking for information," Bilski cautioned. "If you are expecting the financial institutions to individually go out and provide the data based on an API created and agreed upon, they have to update their systems at some point."
But the future of financial services and banking will be crafted by consumer expectations and demands, and any banks not embracing an open banking concept are likely to be left behind, other panelists said. Rather than seek compensation for upgrading, the banks should view it as their chance to keep pace, Ranta said.
Avoiding a 'Wild West'
For banks to be more comfortable with data sharing, the U.S. needs to develop one universal standard that would create a level playing field and discourage a chaotic approach to development that may lack checks and balances.
"But we already have the Wild West out there" because fintechs are going to continue to develop new technology and there is no real way as of yet to filter out bad actors among those developers, Costello said.
"The first bedrock principle of an open data economy has to be that it is absolutely an opt-in for consumers and set up on a consumer-by-consumer basis," he said.
The hunt for data standards
Costello points to the FDX, an industry body for financial institutions and data aggregators, and its FDX standard for a data-sharing API as an indication that development standards can move in the right direction when all parties are engaged in the process.
"Core processors, aggregators, financial institutions and third parties are all at the table defining this API standard — the syntax, data model, developer consideration, security profile and performance testing," Costello said.
The process currently leaves the governance to bilateral contracts between the aggregator and the financial institution, but "it's a great start to harmonizing the technology so we have the standard, or the presumptive standard, for [financial institutions] to use and it creates a good uplift to the ecosystem," he added.
