How a rapidly evolving US open banking ecosystem will take shape

Innovation, collaboration and competition are rapidly shaping the open banking ecosystem in the US.

Open banking in the US benefits from robust innovation and a thriving FinTech environment. Moreover, intense competition among banks is prompting many regional banks to partner with FinTechs to secure their place in the open banking vanguard, and, avoid being outmaneuvered by the global banking giants.

Interestingly, the US is moving toward an open banking environment organically without a strong regulatory mandate. Most in the financial services industry appreciate that US regulators are taking a largely hands-off approach to open banking, and they consider it the best way to foster continual innovation and ensure the market develops in a way that best serves customers. However, in the absence of regulatory guidance, financial services companies will need to settle on standards among themselves, something that could delay open banking adoption.

Even with this caveat, the dynamics of the US open banking market are potent, drawing added energy from very strong consumer sentiment toward open banking and the convenience it could make possible. Ultimately, weighing all these factors, the US placed fourth in our EY Open banking Opportunity Index, which assessed the readiness of ten different markets around the globe to foster a vigorous open banking environment.

In the Index open banking is defined as online banking and financial services enabled through consumers ability to offer third-party providers access to their personal bank account data and payment initiation. Third-party providers can use a variety of mechanisms and tools, including ‘screen scraping’ and APIs.

The Index research assessed four areas: the regulatory landscape, adoption potential, consumer sentiment and the innovation environment. We believe these four pillars are key indicators for open banking success.

The Index also shows that most individual markets need to strike a better balance between implementing regulatory structures, building consumer trust, and encouraging innovation.

Regulators are taking a wait-and-see approach

As noted, US regulators are taking a very light touch to open banking. Their ‘organic’ approach to open banking is in sharp contrast to the UK’s highly prescriptive regulatory model.  

That’s not to say that regulators in the US have been silent on the matter. In July 2018, the Treasury released a report advising the Bureau of Consumer Financial Protection to affirm that third parties authorized by consumers, including data aggregators and FinTech providers, would be entitled under the Dodd-Frank Act to access financial account and transaction data. The Treasury also wants to move firms away from screen scraping to more secure methods of data access but says the solution should be developed by the private sector.

The question remains, however, how fast US banks can settle on industry standards and move ahead with open banking without firmer regulatory involvement. 

A culture of convenience could spur adoption

Based on 2017 data from our FinTech Adoption Index, US ranks sixth on consumer adoption potential. However, that might somewhat underestimate the true potential. Millennials, for example, are a cohort that are by and large fairly comfortable sharing data and transacting online; they are also entering their prime earning years and may begin to expect open banking services. Open banking also fits neatly into the US culture of convenience. It’s possible that any misgivings users may have about sharing data and transacting online will be outweighed over time by the enormous convenience of open banking.

Moreover, given the hands-offs regulatory approach and the intense competition among banks to win US consumers, institutions and their FinTech partners are likely to develop open banking products and services that are highly tailored to consumer needs. This hyper focus on the customer – as opposed to regulatory mandates – may help to spur consumer adoption.

Consumer sentiment is strong despite privacy concerns

According to our Index, US consumers have the second-best consumer sentiment score regarding open banking, behind only mainland China. Thirty-four percent of digitally active consumers were comfortable sharing transaction data with FinTechs for better services – a finding that implies that consumers put a premium on convenience, even as questions about data privacy and cybersecurity persist.

The consumer sentiment analysis in our Index was derived from social media, blogs and forums. Overall, 28% of these references were positive and 9% were negative, for a net positive score of 19%.