How U.S. can avoid U.K.’s mistakes in open banking

It’s only been weeks since open banking hit the U.K., but the country’s mandate for banks to share data with third-party services when the customer says so has already encountered a public backlash.

U.K. media, along with consumer advocacy groups, have called attention to the increased risks of fraud and cyberattacks that could result from the new data-sharing model.

This kind of negative coverage will likely stoke existing consumer concerns about banks sharing their data with third-party providers.

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Late last year, an Accenture survey of 2,000 U.K. consumers found that 69% of the respondents would not want their bank to share their data with retailers, tech firms and social media companies. In fact, 85% of the respondents said they worried about increased fraud risks, and 74% of them said they were concerned about having their data stolen. Much of these worries likely stem from a lack of knowledge: A survey from consumer advocacy group Which? found 92% of U.K. consumers weren’t even familiar with the term open banking.

Only time will tell how this initiative will play out, especially as six of the U.K.’s nine largest financial institutions failed to meet the deadline for opening up their application programming interfaces. Many consumers may decide to avoid sharing their data with third parties unless banks help educate them on the benefits. The reality is open banking could help them manage their money and, in fact, the model is safer than the system we have now in the U.S., where consumers divulge their bank login credentials to a third party in order to use a service like Mint, the personal finance tracker.

While regulations are making open banking a reality in Europe, it is only a matter of time before open banking becomes a reality in the U.S., too. Therefore, U.S. banks must heed the public reaction to the U.K.’s new open banking initiative and resolve to help their customers understand how open APIs and third-party services will impact their financial lives before the initiative jumps overseas.

With or without new rules, growing customer expectations and increasing pressures from both traditional competitors and new entrants will force the hand of U.S. banks to open their customer data to third parties. This is a good thing.

Banks have long struggled to differentiate their products and make the most of their customer data. APIs, however, allow them to enlist the help of digitally native third-party companies that have expertise in analytics or user interfaces to accomplish both of those goals. In turn, banks can offer a wide range of new services to both consumers and other enterprises.

For example, customers could aggregate all of their data from different institutions into one bank’s portal to get a single view of their financial lives. That capability, in turn, would create opportunities for the bank to offer more personalized financial advice — advice the bank could instantly deliver to the customer’s mobile banking app. Banks could also create services for other businesses through APIs by, for example, charging the business customer minor fees to check a person’s credit instantly.

Perhaps most significantly, open banking positions financial institutions to take on the role of trusted broker of that data and to launch identity management services. This would turn a consumer’s bank into her most important data guardian at a time when data security and privacy concerns continue to grow among the public — an enviable role that would help keep banks relevant in an increasingly digital world.

Of course, banks that are quick to formulate and pursue effective open banking strategies will gain an early mover advantage with these services. However, to realize the vision and revenue opportunities, they must avoid the confusion and fear showcased in the U.K.’s open banking rollout.

To get ahead of the issue, banks in the U.S. should invest in broad customer outreach campaigns that explain what open banking is and what it means for customers, including the new types of services and experiences it will enable for them. Most importantly, those campaigns will need to clearly communicate the ways a bank is ensuring that customers’ data is shared securely to mitigate fraud and identity theft risks.

In time, these efforts will help banks from losing out on important revenue sources while also driving more engagement with their customers.