Open banking's not just for Europe anymore

Now is the time for institutions to rise to the challenge to meet the demands of their customers, who for the better part of the year were only able to interact digitally, and open banking can be part of the solution.

On the consumer side, the U.S. saw an 85% spike in mobile banking traffic in April 2020, according to Fidelity National Information Services. At the same time, declining cash use during the pandemic was offset by the “unprecedented surge” of contactless payments, according to CNBC.

On the B2B side, the shifting economy has created a need for digital capabilities, particularly related to corporate payment requirements. In an article published by multinational professional services network EY, the authors note that corporations are increasingly expecting real-time payment capabilities and demanding that financial services “are available whenever, wherever and through multiple channels.”

Some of these trends were already emerging before the pandemic, but they’ve accelerated over the course of the past year in ways many would never have imagined. Digital capabilities are no longer aspirational but a must-have in the banking industry.

Despite the ubiquity of legacy enterprise technology stacks, many of which are mere iterations of software first launched in the 1980s, FIs managed to quickly adapt to the digital-only, remote-work and customer-facing operating environments presented throughout 2020.

Community banks, in particular — which lack the resources and bigger budgets of tier-one players — put in the time and effort to make sure customer needs were met. Where manpower wasn’t enough, they sought out fintechs to help fill technology gaps that became even more apparent during the processing of PPP loans.

Looking more comprehensively at COVID-19’s impact on the broader business of banking, a July KPMG report identified profitability and credit management; securitization markets; customer relationship and commercial models; operational resilience; and stock market volatility as the most critical risk areas for banks.

It is customer engagement via new business models and operational resilience — much more than the other three risk parameters — which arguably form the fulcrum that will decide which institutions will excel in “the new normal” and which risk falling behind. Both of these factors hinge on rapid digital transformation and the speedy adoption of open banking technology.

Open banking is a term used to describe a symbiotic and continually expanding ecosystem of application programming interfaces (APIs) that open up the opportunity for FIs and others to deliver innovative products and services to their customers more efficiently. This can involve the use of artificial intelligence or machine learning, for example. These fintech programs — which encompass everything from customer onboarding to transaction monitoring, regulatory reporting, credit-risk scoring, treasury management, payments and more — seamlessly migrate, store and cooperatively share data in the cloud.

But while a cloud migration initiative can cost an FI as much as $300 million with a time horizon spanning two to three years, emerging fintech solutions can simplify, accelerate and conserve budget for FIs in immediate need of modernization.

Banking as a service, for example, is an “end-to-end process that allows fintechs and other third parties to connect with banks’ systems directly via APIs so they can build banking offerings on top of the providers’ regulated infrastructure,” according to Business Insider. BaaS and other API technologies enable FIs to rapidly modernize without ripping out their existing technology rails and spending tens of millions of dollars, if not more, in the process.

For FIs looking to get or stay ahead in 2021 and beyond, serious consideration of API solutions should be on the radar.