We Must Accelerate Open Banking to Help Withstand Today's Economic Volatility

By Farouk Ferchichi

We are living in an age of unprecedented uncertainty. Inflation has spiked to its highest levels in over 40 years. The federal funds rate is 32 times what it was just a year ago. Volatility is spiking across a range of markets from currencies to bonds. According to “The Intelligent Financial Life National Study,” conducted by Envestnet this year, only 35% of Americans are confident in their economic future.  These pressures are straining the financial footing of Americans.

Fortunately, banks and financial institutions have the opportunity to give Americans a clearer understanding, than ever before, of their financial situation as they prepare for the uncertainties that lie ahead. However, it’s increasingly contingent on banks shifting to a more seamless and accessible way of helping customers connect, view and share their data between authorized organizations online.

Giving consumers a better financial lens

The adage goes, "you can't manage what you don't measure," and the first step toward financial stability is visibility. To meet the evolving needs of consumers, we believe the industry must accelerate the adoption of open banking so that financial institutions can better serve their customers and, in turn, enable them to create strong financial foundations.

Open banking is revolutionizing how consumers move and use money as well as interact with their finances. It allows individuals to share their financial information seamlessly and securely with third-party financial service providers. The advancement of open banking data sharing increases opportunities to create and deliver innovative financial wellness products and services, while establishing uniform security standards for data access, transparency around data usage and user-based permission and control. Instead of sharing banking credentials, usernames and passwords, open banking enables consumers and their financial institutions to seamlessly share data via open application programming interfaces (APIs).

Through open banking, consumers have more choices and access to a broader universe of solutions to help them optimize financial wellness. These solutions make it easier for them to manage their money, budget, obtain credit, plan for their financial future and more – especially important now today’s market.  According to that same Envestnet study, 39% of Americans do not formally organize or plan their short-term finances, and a surprising 42% do not formally organize or plan their long-term finances. Reliable, seamless access to various sources of financial data will create a "single source of truth" for consumers' financial situations – making it far easier to plan both in the near and long term. With visibility and better access to their financial data, consumers are empowered to make more informed decisions based on holistic financial insights.

Best for banks, business and the underserved

Along with benefits to the consumer, there are many advantages for banks to accelerate open banking momentum. While open banking requires an up-front investment, the end benefit will pay for itself in the form of innovative new services, more personalized and relevant offerings and improved customer retention and acquisition. This is especially important because financial institutions continue to lose market share, as customers move outside the banking system to financial apps that offer more personalization and deliver services more efficiently and holistically.

At its core, open banking gives financial institutions greater access to financial data and insights at significantly improved connection rates, enabling them to provide superior products and services, a better user experience and seamless account connectivity – all critical ingredients in today’s environment as more people seek to better understand and control their financial futures. Providing better and more customized experiences enhances engagement and stickiness with customers and drives customer satisfaction.

Open banking can also provide a revenue opportunity for banks by opening access to individuals with whom they have not historically had a relationship. According to a report by the Federal Reserve, in 2021, 19% of Americans were either unbanked or underbanked. The unbanked, often from underinvested communities, do not have access to a basic bank account, while the underbanked are shut out from banking services based on income or a lack of education.

Through open banking, financial institutions can provide access to responsible credit for underserved consumers by leveraging alternative financial data, increasing their ability to get approved for loans and accurately assessing what they can afford. Such data can include mobile bill payments, rent payments, utility bill payments and more. Acquiring these new customers not only opens additional revenue opportunities, but is the right thing to do for financial equality.   

Open banking also decreases reliance on physical bank locations as it provides better and faster access to mobile and online banking services that are currently required to be performed in person, such as opening an account. This impacted nearly all of us during the pandemic and proved to be a major driver in the surge of open banking in the UK during that time[1]. Further, it opens consumer choice to banks that may not be located in a particular geography.

Embracing a change

For open banking to succeed, we believe banks must embrace modern technology platforms that are based on open APIs which facilitates collaboration with third-party providers to create value; driven by artificial intelligence (AI) analytics which makes data processable and actionable; elastically scalable through cloud-based platforms that can handle dynamic spikes in use; and lastly that are secure through authentication, authorization and access control.

In times of crisis and uncertainty, people seek safety and reliability – a key component of open banking. Right now, Americans need quick and reliable visibility into their finances and an easy, seamless and secure way to connect their financial accounts. Now is the time for the U.S. to accelerate open banking so financial institutions can better meet the demands of the public and all Americans can achieve an Intelligent Financial Life. 

Farouk Ferchichi is Group President, Data & Analytics for Envestnet, where he’s focused on bringing together the combined capabilities of Envestnet | Yodlee, Envestnet Analytics, Envestnet Abe.ai, Harvest, Truelytics and more, to serve as the foundation by which Envestnet creates and deploys personalized and actionable insights across its platforms, to empower all individuals to live an Intelligent Financial Life™.

Envestnet Data & Analytics is at Money 20/20 in Las Vegas. Visit Booth #1221.

[1] source: https://www.openbanking.org.uk/news/adapting-to-survive-uks-small-businesses-leverage-open-banking-as-part-of-their-covid-19-crisis-recovery/