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Inverting open banking to favor banks and credit unions

I have a problem with authority and conventional wisdom.

I don’t like to follow.

These days, neither should community financial institutions.

There’s a longstanding rule of thumb in banking: watch what the megabanks do, then follow their lead. While this fast-follower approach makes sense when closing gaps on table-stakes features in digital banking, it’s literally self-destructive for community financial institutions in the era of open banking.

More important, imitating megabanks today overlooks the biggest opportunity that open banking creates for every other financial institution in the U.S.: the ability to invert open-banking rails and achieve first-app status among your accountholders’ growing use of third-party offerings.

Headlines are dominated by news of megabanks entering into Banking-as-a-Service (BaaS) arrangements with BigTechs and fintechs—arrangements in which megabanks embed their regulated wares into third-party settings. For example, Citibank, Barclays and Goldman Sachs are embedding deposit accounts into Shopify’s small business platform by way of their BaaS agreements with Stripe. And this year a handful of banks and credit unions will begin embedding deposit accounts (“Plex” accounts) inside the newly revamped Google Pay app.

All of these developments lead many to equate open banking with BaaS—and the “embedded finance” that BaaS makes possible. Consequently, open banking is widely perceived to be an outbound process only, one in which a financial institution’s products and services are placed into external settings that the financial institution doesn’t control.

No surprise then that in a recent Jack Henry survey of community bank and credit union CEOs, half said open banking was “not on the radar”, and, of those, 33% said it didn’t support their strategy while 19% said they were “not interested in learning about it”.  

Worse still, reducing opening banking to BaaS fuels the myth among some CEOs that open banking leads to accountholder attrition and defection: “It just makes it easier for our customers to leave.”

Wrong.

First, open banking is bi-directional. The growing number of interstitial APIs connecting every financial account in the U.S. are not one-way. The same APIs that can port the financial institution’s stuff out there can also bring third-party stuff into your financial institution’s native digital banking experience.

The strategic question therefore is one of focus: should community financial institutions follow megabanks’ lead and concentrate on embedding their stuff out there (aka “embedded banking”)? Or should they instead focus on embedding the best of what’s out there inside the community financial institution (aka “embedded fintech”)?

Instead of elbowing for room between megabanks at the BaaS table—and sacrificing ownership of both UX and accountholder relationships in the process—community financial institutions should instead be racing to embed the best of the open-banking ecosystem into their own digital offerings. In short, they should be inverting BaaS. It’s the only way for them to protect and extend their relationship-based business models.

Second, if you’re worried about attrition, you misunderstand the current state of consumer financial behavior. Consumers already rely on multiple third parties to manage their finances: merchant apps, P2P apps, PFM apps, digital wallets, crypto exchanges, neobanks and roboadvisors. According to Cornerstone Advisors, a surprising percentage of consumers now own multiple checking accounts across disparate financial service providers.

Over the course of the pandemic, the percentage of U.S. consumers who considered a digital bank to be their primary bank grew from 3% to 11%. Over the same period, increased consumer adoption and usage of third parties siphoned $250B of payments volume (and $25B of payments revenue) from incumbent financial institutions.

The question then isn’t how to prevent your accountholders from using third parties; it’s how to maintain primacy and capture upside potential in the context of your accountholders’ existing and growing use of third parties.

Finally, the world of open banking is growing and complex. Complexity raises the premium on simplicity, control and meaning (making sense of it all). There’s growing need for the ability to (1) see everything in one place (including a list of every entity with whom you’ve shared your financial data), (2) grant and revoke your financial data-sharing permissions with those entities, and (3) measure your financial health across all providers and improve it over time. This is the blue-ocean opportunity for community financial institutions—to become home base, first app, and/or first wallet. And it’s completely consistent with the ethos of community banking and the credit union movement.

Neither Paypal, Venmo, nor Square’s Cash App provide outbound aggregation, financial health tracking, or personal service at the moment of need in digital contexts. And this is exactly where the biggest opportunity lies for main-street banks and credit unions.

Obscuring the open-banking opportunity is the word “aggregation”. Many bank and credit-union leaders have been conditioned to tune out whenever it comes up because aggregation has been synonymous historically with screen scraping, and screen scraping sucks. Screen scraping is brittle and unreliable (bad UX), poorly disclosed (do you realize you’ve just given your banking credentials to an unnamed third-party?), and arguably indefensible from a security and best-practices standpoint. Screen scraping also triggers chronic fraud-related false positives and red flags—big operational headaches for the average bank and credit union.

The good news is that “aggregation” is changing. The growing use of standardized, secure, open APIs, and the proliferation of direct data-sharing agreements, means that the aggregation at the heart of open banking is better, more reliable, and more secure than ever. API-based aggregation is the tool by which community financial institutions can invert BaaS, differentiate UX, improve security, and gain cleaner and more comprehensive intelligence about their accountholders’ financial behaviors with and across third parties in real-time. Moreover, it replaces inbound screen-scraping (from the likes of Plaid, et al.) with direct API data sharing.

To win, banks and credit unions need an open mind, an open strategy and an open digital platform—a platform so open that it literally enables the bank or credit union to connect at will with third parties and fintechs of choice. Ultimately, banks and credit unions must become platforms unto themselves, directly matching their accountholders with the best fintech in the open banking ecosystem. This is the only way to curate and maintain differentiated digital experiences that keep pace with emerging competition and disruption.

To execute meaningfully on an open banking strategy that inverts BaaS, community financial institutions must not only have a truly open digital platform; that platform must be fully plumbed into the open banking infrastructure connecting all financial accounts in the U.S. Right now, that means API-connections to the leading data-aggregators like Finicity, Akoya, Plaid and Yodlee.

Over time, as screen scraping is replaced by APIs, those APIs will begin to cohere around data standards like Financial Data Exchange (FDX). These standards will create broader industry alignment around open banking, expand consumers’ ability to share and control their own financial data securely, and strengthen financial health as a result.

For financial institutions, inverting BaaS eases the fast-follower burden of replicating every fintech innovation that emerges and every new service your accountholders consume elsewhere.

With the right strategy and the right technology, community financial institutions can bring all of the most meaningful financial innovations and services home for their accountholders while strategically differentiating themselves from the megabanks, BigTechs and fintechs respectively.

If you’re tired of mimicking megabanks, good. Don’t do it.

If you can’t copy the latest fintech, fine. Just integrate it.

Whatever you do, plug in to open banking.

Because you can’t invert a system to which you don’t belong.

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