How Open Banking Can Result in More Innovation

Playing Safety Catch-Up

As we outlined in our last post about the practice of screen scraping, in order to protect user’s data, it’s extremely important that financial institutions start moving towards APIs. With the PSD2 initiative, officially the Revised Payment Security Directive, Europe is ahead of US in terms of best financial institution security and consumer privacy practices. And if the recent Facebook/Cambridge Analytica scandal is any indication, it’s more likely that the US will see a data protection movement similar to what we’re seeing in Europe.

The question isn’t if PSD2 will be adapted in the US, but rather when? Before we try to answer this question let’s take a closer look at what PSD2 actually includes.

What is PSD2?

At its core, PSD2 or Open Banking is about protecting consumers. It enables bank customers to use third-party providers to manage their finances. Banks are obligated to provide third-party providers access to their customers’ accounts through open APIs enabling them to build financial services on top of banks’ data and infrastructure. This places an emphasis on consent via security, innovation, and market competition.

Third-party providers can be either Account Information Service Providers (AISP’s) or Payment Initiation Service Providers (PISP’s).

  • AISP’s provide users with aggregated information about their payment accounts in a single location, such as transaction history, account balances, direct debits etc.
  • PISP’s facilitate the use of payments via online banking with regards to online fund transfers, direct debits, credit cards transactions, etc. This is a game-changer when it comes to avoiding credit card fees and other transaction costs.

By enabling fintechs, large technology firms, other banks, and even certain retail organizations to go head-to-head with banks as PSPs, PSD2 aims to provide lower costs and higher security for consumers and to afford merchants greater flexibility to differentiate customer experiences, including payments.

APIs give the financial institutions the ability to manage security and control compliance risks while at the same time giving users access, control and visibility into how their data is being used—a win/win.

Control Begets Innovation

Giving consumers control of their data and who has access to it opens the door for new innovation and new partnerships where security and compliance are givens. PSD2 creates opportunities for banks to compete as technology innovators, wielding powerful analytical tools to extract valuable insights from their vast stores of proprietary data. And market dynamics and customer attitudes may favor banks that can capture opportunities quickly and effectively. In fact, 35% of banker’s surveyed said in the payments arena, FinTechs were the most likely to benefit from the implementation of PSD2.

There are countless other services FinTech companies could provide if they had access to customer transaction information. Currently, most banks cooperate with data requests, but they can be slow to respond or sometimes block them entirely. PSD2 will make it compulsory to both share the data and build systems capable of making this trade real-time. A massive win for consumers and businesses.

So When Will PSD2 Come to the US?

There’s no timeline right now, but there are several factors that could compel this directive to happen in the US sooner than later: requirement of screen scraping companies, FinTechs and FIs to release known data breaches; a regulatory push; another Equifax breach; a consumer-driven movement; or even FIs finally having good personal finance management capabilities.

Smart companies will start preparing so the minute we have our own Open Banking, they’re ready. Or better yet, start acting like PSD2 is already here. That means:

  • Building and opening up APIs to allow your customers to have control
  • Thinking about how you can innovate once restrictions are lifted
  • Understanding the control APIs provide for consumers and why this is a benefit
  • Learning how Open Banking can save you and your customers both time and money   

Creating more transparency and providing consumers with more control over who can access their data is a great thing for investors and an even better opportunity for innovation. How will you capitalize?  

 


1 McKinsey Global Payments Practice PSD2 Survey 2017

Your Data: Open for Business

Giving Control

Despite all the talk about big brother-like tactics, Twitter, LinkedIn, and Facebook (the Cambridge Analytica scandal, notwithstanding—but we’ll get to that in a bit) actually provide their users with a significant amount of control. Users can set their privacy and access settings for data downloads, block people, enable and disable logins, as well as receive alerts when they log in from other devices.

Taking Control

Considering how much personal consumer information they have, financial institutions have nothing comparable. In fact, they’re being screen-scraped by everyone from Mint to their own credit card marketing teams. And what’s worse, users may or may not know this. There’s no warning message or communication from the banks to their customers and if there is something, it’s probably buried in the Terms of Service of the scraper itself. Banks have no visibility into the data sharing practices or downstream uses and they have zero ability to turn-off these authentications on the banks’ site.

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So while you can choose to block a high school sweetheart or de-link your Facebook account from Tinder, once you set up an auto-payment with Stash to Bank of America, BofA has no control on where the data is going, how the data is used or when the data is accessed. It’s a lose-lose for the banks and consumers.

Open Banking

APIs are the only way to address the issue. The US is already behind Europe’s PSD2 (Second Payment Services Directive) Initiative which creates Open Banking, allowing brokers to open up data via API, providing a secure and compliant means for data transfer. This change provides greater control and limits the potential misuse of screen-scraped data. That’s why the emphasis on control and compliant access is a foundational principle of TradeIt’s platform, providing connectivity to brokers and financial institutions.

After what recently came out with regards to Facebook and Cambridge Analytica, 50 million people just got a big wake-up call when it comes to how their information is being used and disseminated. It’s likely only a matter of time before Open Banking comes to our friendly shores and once it does, everyone’s going to have to play nice in the banking sandbox.

Where’s Jamie Dimon when we need him?

Before this happens, the smart US financial institutions will need to build the APIs and control centers and start educating consumers on the risks associated with scraping and gaining control of their data. In fact, some, like Fidelity, are already doing that. Their new Fidelity AccessSM product allows consumers to see which third parties the consumer has permitted to access their data. Consumers can even go one step further to disable a token that’s in place, thereby removing the connectivity and the third party’s access to the investor’s data.

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Under Lock and Key

Privacy and controlled access are a mantra for Financial Institutions and people expect security, especially with the increasing numbers of hacks and data breaches. Now more than ever, providing users with control over who has access to their data is vital. Financial Institutions need to jump on the bandwagon with features that control their customers’ data. And FinTechs who partner with them need to push for APIs with secure and compliant access that allows customers to control that data. Open Banking should spur innovation, not deter it, but it needs to be done with security and compliance at the forefront. After all, they are the tenets of our industry.  

Blockchain’s Impact on the Finance Industry, Part 3

This is part 3 of our multi-part series on the blockchain. In parts 1 and 2 we talked about the specific effects of blockchain and cryptocurrency on the finance industry as well as how it will impact asset management and investing. Today we are diving into payments and banking.

You Get a Currency and You Get a Currency

While many banks are skeptical of bitcoin, none are skeptical of blockchain. But the marriage of the two is where it gets dicey. Because while central banks are looking into issuing digital currency, the biggest banks think the technology isn’t evolved enough to handle the world’s biggest payment systems.

Case in point: while Bank of America won’t allow their customers to trade bitcoin futures, the company itself has received at least 43 patents for Blockchain, the most of any other payment firm. Why? Because the slow processing of cross-border payments is one of the areas most commonly identified as ripe for blockchain-based innovation. And everyone wants to jump on the bandwagon.

“…in a world where you can stream video from the space station, but you can’t move your own money from point A to point B…how do we take advantage of technology available today to dramatically accelerate the nature of how transactions and payments happen?” – Brad Garlinghouse, CEO, Ripple

Right now capital is sitting in pre-funded accounts all around the world. When you decide to work with someone, you transfer your currency and they transfer theirs. But what if you didn’t have to pre-fund those accounts? Ripple wants to disrupt this model with sub second cross-border payments and automated best pricing from its network. Since Ripple payments are nearly instant, their model removes credit and liquidity risk from the process, thus lowering bank (and societal) costs considerably.

Ripple sees an opportunity to make payments faster and cheaper by connecting different ledgers and thereby creating a universal protocol and solving the multi-trillion liquidity problem. And they’re not alone.

Feeling the Need for Speed

Payment providers getting into the blockchain space have the distinct benefit of doing the fund transfers so they can funnel users’ funds into purchases of the underlying currencies or to accounts at exchanges. This allows for significantly lower settlement time and lower costs for both providers, thereby lowering costs for the end user.

Mastercard is testing the technology to facilitate payments between businesses.

But, it’s not just about sending cryptocurrency payments. IBM is looking into platforms that allow blockchain payments of mainstream fiat currencies instantly, cutting down on the time it takes to set up and send wire transfers. And making it cheaper.

And IBM has started numerous pilots in this area. From their collaboration with startup Stellar, which uses blockchain technology to connect flat currencies to enable instant international transfers, to New Zealand-based payments company, KlickEx, they are hard on the heels of several blockchain endeavors.

What’s Next for Blockchain?
As we wrap up this series, one thing is for sure, Blockchain is going to have a huge impact on Fintech and that impact will likely change almost daily as the technology develops and gets more widely adopted. According to Goldman Sachs research, companies that switch to digital could see $57B in net cost savings globally each year. In other words, the financial profit and time-saving applications are enough of a game-changer to make all this fluctuation in the space worth it in the long run.