Banking customers are demanding more and more access to innovative fintech services and applications that are making their financial lives easier. Big banks are responding by embracing the trend of open data, allowing fintech companies to access user information to provide a more seamless customer experience. One needs to look no further than the recent data sharing agreements with Intuit reached by Wells Fargo and JPMorgan Chase.
A big reason that Wells and Chase make agreements like these is to knit innovative fintech services, like Mint.com (recently acquired by Intuit) more tightly into their service offerings. By providing fintech app providers like Mint.com with access to customer data through an open application programming interface (API), banks like Wells Fargo can better integrate customers who use Mint.com into their own ecosystem.
But the question is, will the trend of open data sharing benefit certain banks or fintechs over others? What are the consequences forbig banks that are slow to make their data accessible? And in the end, will regulators leave them any choice?
Big banks are adopting open data primarily for three reasons. First, they’re trying to reassure clients from an ethics and security standpoint. By opening their data to third parties, they’re demonstrating that security measures are adequate and they’re not afraid of transparency.
Second, bringing new customers who are attracted by the bank’s fintech offerings into their ecosystems creates the opportunity to upsell and cross-sell those users more traditional products like mortgages and business loans. Finally, big banks want to leverage fintech technology and innovation to expand their service offerings, without incurring the cost of internal innovation. Banks like Chase can then focus their internal IT development resources on back-end functions to support customer facing technology.
But in a world where fintechs are in an arms race to onboard users, and banks are all too happy to partner with the “next best thing” in fintech, will there be enough room in the marketplace for everyone? Big banks will obviously be able to survive in this environment, with the money and resources to cement data sharing agreements with the best fintechs. Niche fintechs will also have an enormous amount of leverage. For instance, peer-to-peer lending platforms like SoFi that are challenging traditional big bank lending will have their choice of who to partner with and how much they’re able to command. It’s the mid- to lower-sized banks and credit unions that might be challenged, as they simply don’t have the resources to adopt the “Banking as a Platform” mentality that Chase and Wells Fargo are moving towards with their data sharing strategy.
There are reasons why banks might be skeptical of the open data era. Security and privacy of data, along with the issue of who “owns” customer information being the primary concerns. However, legacy institutions that are slow to open their APIs to fintechs will likely experience negative consequences.
The cost for banks to innovate and develop products like Mint and QuickBooks (under the Intuit umbrella), are extremely high. To compete with Chase and Wells Fargo in terms of similar personal finance and accounting software, banks would have to divert significant amounts of internal IT resources away from critical areas like security and back-end infrastructure. Moreover, even if banks do successfully develop similar technologies on their own, they’re missing out on the user and customer base that fintechs have already established. As of 2016, Mint.com had over 20 million users, a number that would be nearly impossible for even a very large bank to reach on its own with an internally developed and branded application.
The Consumer Finance Protection Bureau (CFPB), has already outlined its plans to advocate for open data sharing. And in fact, the trend has already been set abroad, with the European Community adopting the Directive on Payment Services Regulation (known as “PSD2”). PSD2 was implemented to encourage competition in the fintech ecosystem, and to make it easier for third-party technology providers to gain access to customer financial data. The end goal is to enhance the benefit that consumers get from banks and fintechs, and the CFPB is rowing hard in that direction.
In recent remarks at the Money 20/20 Conference in Las Vegas, CFPB Director Richard Cordray made clear that banks that don’t open their data to third parties are not operating transparently, nor in the best interests of their clients. Moreover, he believes that the CFPB can force all banks to adopt open APIs due to certain provisions in the Dodd-Frank Act. The CFPB also realizes the increasing prevalence of mobile banking, and wants to ensure those third-party mobile apps have adequate access to bank-end customer data to best serve consumers on their smartphones.
Globally, all signs point towards more open data sharing relationships between big banks and fintechs. The winners will be banks that focus on opening up sooner, rather than later, and partnering with fintechs that serve their customers’ core needs. Banks whose core business is investing, for instance, should focus on opening and partnering with investing fintechs that their customers are probably already using, such as the low-cost trading platform Robin Hood. Mature fintechs will also benefit, as they’ve already built a user base and can scale even more once they’re part of a Chase or Wells Fargo type ecosystem. Finally, legacy banking customers who seek simplicity in their experience will be big winners. Customers of big banks will begin to have access to fintech applications, technology and innovation in a “one stop shop” fashion. In the end, the CFPB doesn’t look like it will give banks much of a choice, so it’s up to them to embrace the trend or risk falling behind the competition.