Embracing Open Banking for Small Banks

As the Consumer Financial Protection Bureau (CFPB) finalizes its Dodd-Frank Section 1033 rulemaking, the U.S. is on the brink of establishing an open banking ecosystem. While some smaller community and regional banks may perceive this as a compliance challenge, Envestnet recognizes the significant value a customer-centric open banking framework will enable for small and midsized financial institutions and their customers.

In this new era of open banking, smaller banks will have the opportunity to compete on a level playing field with larger institutions. With customer-provided access to transaction and balance data, these smaller institutions will be able to deploy technology-based applications and tools that provide customers with significant value, enhancing their competitiveness. The ability of smaller financial institutions to launch new products, tools, and customer benefits enabled by open banking data will drive their growth and improve customer retention.

One of the key use cases in an open banking framework is the ability to offer more expansive credit underwriting. By utilizing customer-permissioned, cash-flow underwriting, lenders can expand access to a broader set of applicants who may not qualify for credit using their traditional credit report alone. This approach will enable smaller banks to extend credit to underserved segments of the population, promoting financial inclusion, expanding access to affordable credit, and empowering individuals to live an Intelligent Financial Life.

Open banking will also enable smaller banks to provide their customers with a more holistic view of their financial position. By leveraging customer-permissioned open banking, banks will establish data connections with other financial institutions and nonbanks where their customers hold accounts. This comprehensive approach will allow banks to offer their customers a robust view of their financial position, empowering them to make more informed financial decisions and achieve greater financial well-being.

But better visibility into one’s financial picture is only a small piece of the benefit that open banking will provide. The CFPB’s Section 1033 rule will facilitate the ability for banks’ customers to manage their cash flows more effectively. With open banking, business customers can accept and make payments more easily and quickly, leveraging automated accounting and bookkeeping services to efficiently manage their finances. This streamlined, technology-enabled approach will enhance the operational efficiency of businesses, allowing them to focus on growth and innovation.

In addition, open banking will play a pivotal role in customer retention and expansion for banks. As external pressures increasingly strain small and regional banks, open banking will support these institutions in retaining customers and reaching new consumer segments. Leveraging the benefits of open banking APIs, banks can connect with tech-savvy consumers in diverse geographies, expanding their footprint beyond their physical branch locations and bolstering their customer base and revenue. Smaller banks will enhance customer satisfaction and loyalty in an increasingly completive landscape by providing superior personalized products and services, better user experience, and seamless account connectivity.

To prepare for the era of open banking in the U.S., smaller banks need to take specific steps ahead of the finalized rulemaking. Authentication is a crucial aspect that requires solving the challenge of secure data sharing. Establishing an online portal for account opening that is both secure and efficient is key to expanding the consumer base. Banks must be able to verify the identity of the consumer when opening these accounts online. For example, utilizing Yodlee's identity assurance service to instantly confirm user authenticity, banks can securely and efficiently expand their consumer reach while digitizing the account opening experience, including authentication.

Building and implementing APIs is another critical step for smaller banks to enable seamless connectivity in an open banking ecosystem. It’s true that many smaller banks lack the funding and technical resources to develop their own API infrastructure. One important way banks can bridge this gap and eliminate the need for proprietary APIs is through a strategic partnership. For example, Envestnet’s partnership with Axway will help shorten the time it takes to connect to financial institutions, and subsequently onboard partners, allowing consumers to quickly access their financial data via a secure, common API. With impending open banking regulations on the horizon, Axway and Envestnet stand ready to assist banks in harnessing the potential of the open banking ecosystem. By doing so, they empower banks to embrace innovation and leverage valuable customer insights, ultimately fostering business growth beyond mere compliance.

Open banking holds tremendous potential for smaller banks to enhance their offerings, expand their reach, and drive customer-centric innovation. By leveraging open banking, these institutions will level the playing field, offer more expansive credit underwriting, facilitate efficient cash flow management for small business customers, and provide them with a view of their financial position. With the right strategic partnerships and technology solutions, smaller banks will successfully navigate the open banking landscape and secure their position as key players in the financial industry of tomorrow.