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The Open Banking opportunity is super-sized in the US.
What’s the market size and how do we best access it? What are the gotcha’s? What do we need to know…?
To answer these questions and many more we’ve had from our global community we’re sharing our latest report with Oxford University in digestible bite sized chunks.
The U.S. is the largest market for financial services in the world and the U.S. Open Banking market currently stands at $7.08bn with projected growth to $35.79bn by 2031. Fintechs in the U.S. scooped up 45.6 per cent of the global share of fintech investment in the first half of 2024.
Open Banking has a long history in the United States of America that goes back roughly a quarter century.
Today, an estimated 100 million Americans use screen- scraping as an Open Banking conduit. However, a new era of Open Banking innovation is emerging, driven by a shift to an API-based system supported by stronger consumer regulations and standardisation, which will enhance competition and boost adoption.
The Consumer Financial Protection Bureau’s (CFPB) Personal Financial Data Rights Rule, brought in under Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enshrines consumers with the right of access to their digital financial data and the ability to share it securely with third parties.
While excitement is building in the US’ financial services community, across the pond in the UK, Europe and beyond there is also a groundswell of interest quickly building about this market inflection point, which is probably why you’re reading this. For example, since 2022, the UK and the US have signed, sealed and increasingly activated eight separate state-level Memorandums Of Understanding on closer trade and economic ties, sometimes specifically regarding financial services. The new Open Banking rules, now live in the US, make this all the more attractive for firms to expand to the world’s largest market for financial services.
The Three Forces Driving Future Ecosystem Development.
The Market vs Regulation
Most people agree markets need some form of regulation but beyond that it is axiomatic that market participants tend towards disagreement on the depth and nature of rules.
When asked whether US regulation should take a heavier regulated approach or a lighter market-oriented approach the ecosystem is split. Just under half (44 per cent) wanted a lighter market-orientated approach. Just over half (56 per cent), conversely, said they wanted a heavier regulated approach. The sector overall, the data suggests, has an age-old faultline typical of many industries as to whether the market or regulation drive better outcomes when it comes to innovation and the driving of adoption.
Despite this, nearly one in two people (46 per cent) felt market forces combined with regulation were the main driver of entrepreneurial activity and innovation in open banking and/or open finance in the US.
An even more decisive 6 out of ten (59 per cent) people thought a hybrid approach would help in overcoming obstacles compared with other systems in the world, pointing to a more balanced approach being welcomed compared with other systems.
Unaware Consumers
Like other open banking jurisdictions, there is a pervasive question about to what extent consumers know, care or should be aware of open banking. With the US’ long history and widespread use of ‘screen scraping’ this is also a particularly interesting question. There was a large clustering around the middle range (when asked to score 1-5) as you would expect with a not overly optimistic position overall. Fintech and tech companies were more optimistic than regulators. Open banking operators therefore may still have work to do to reassure regulators of the appetite of consumers to share data.
When asked directly about the awareness of the products and services available in the market via open banking and/or open finance, a huge majority (85 per cent) say consumer awareness is not there.
What will the sector do to respond to this? The best use cases were highlighted within personal financial management. But clearly, the opportunity is not widely understood.
While privacy is another important issue, 90 per cent felt the U.S. did not need to increase privacy laws and 71 per cent say consumers are not aware of consent management for data sharing. While products have been developed and used, consumers are still mostly blind to opportunity or any technical aspects of data sharing.
A huge number (90%) of respondents outside the US suggested a desire or plans to come to the US owing to the excitement building following the new open banking rules. While many of these are from well-known existing open banking systems in the UK and Europe, many also came from more nascent markets such as Brazil and India.
Two thirds (66 per cent) of those responding from outside the US indicated that they intended to operate in the US with 73 per cent identifying that they felt it was easy for fintechs to develop and grow stateside. The fact two thirds of companies want to do business in the US begs questions as to how they will achieve this, and whether they have a sufficient roadmap to start the journey?
“Based on the UK experience, adoption will be enabled by the tech but reliant on humans being open to sharing data and profit. This is always a difficult trade off” – Professor Karen Elliott, Department of Finance, University of Birmingham.
⭐️ 90% of respondents outside the U.S. suggested a desire or plans to come to the U.S. owing to the excitement building around the new Open Banking rules.
⭐️ 71% thought there were sufficient consumer protections.
⭐️ 90% felt the U.S. did not need to increase privacy laws.
⭐️ 50% of those outside the U.S. did not know about the impending regulator rule.
⭐️ 64% feel the new Open Banking rules will have a high or very high impact.
⭐️ 42% indicated that they wanted the CFPB to operate the conformance testing sandbox.
⭐️ 83% of those surveyed felt the U.S. has the necessary skills to succeed in Open Banking.
⭐️ 85% of consumers in the U.S. are not aware of the products and services available in the market via Open Banking and/or Open Finance.
“As Open Banking progresses, AI and machine learning will be essential for improving the customer experience and driving innovation. These technologies combined will help financial institutions better understand and respond to consumer needs, while also enabling new, efficient, and secure financial services” – Dorina Miron, R&D Specialist, Salt Edge.
The concept of open banking has evolved significantly from its origins in open finance and the UK’s post-financial crisis reforms. While technological progress has been made, there is a risk that the original consumer-centric goals of increased competition and reduced friction in banking services have been obscured.
The collaboration between banks and fintechs will definitely help open banking and open finance to evolve. The bank-fintech partnership helps to accelerate innovation and product time to market. Open banking and open finance are expected to accelerate in the UK combining both existing market driven success and the more recent regulatory push.
We are able to determine interoperable data models that reduce time to market and enable common issues to be solved together. At the end of the day, data is the new oil; banks and fintechs alike will do what they need to get it. We need to be able to ensure consumer outcomes for this to work.
The term “open banking” has been adopted by various stakeholders, often with interpretations that serve their own interests rather than the original consumer-focused intent. This has led to an overemphasis on payment systems and technical implementations, a lack of focus on consumer benefits and financial management tools, regulatory approaches that may not fully address consumer needs or market competition and limited consumer impact.
To see significant adoption of open banking and open finance services in the US over the next three years, a deeper understanding of user needs and behaviours is crucial.
Collaboration between the banks and fintechs is essential. The institutional nature of banks and their embedded legacy systems means progress is slow and difficult. Acknowledging that fintechs complement not challenge, is a must for a more effective ecosystem.
There needs to be synergy between all parties involved working to a common goal and scheme. If access is available at all levels to the tools that can be utilised to allow open banking payments to take place then that will foster innovation and growth.
While 1033 will bring pain for banks in the short term, it will level the playing field for emerging and international fintechs vs established aggregators and bring consistency to consumer experience and control of data.
Open banking will bring significant enhancements to customer experience, reduce friction, and enable the creation of ‘super apps’ that centralise users’ financial information. While major institutions will embrace open banking more aggressively, especially due to CFPB 1033 timelines, regional banks, CUSOs, and credit unions are likely to take a more cautious, gradual approach.
Open banking will democratise banking services and will bring tremendous ease of use, greatly expand access and has the potential to hugely simplify financial products that are otherwise difficult to use.
Good security and open finance go hand in hand. Consumers deserve and should expect providers to manage their information and data in line with their choices and in their interests.
The CFPB’s Section 1033 rule is an important milestone in making sure consumers have the right to access and control their financial information. We believe that it will lay the groundwork for the United States to move into the next chapter of fintech innovation.
The US has seen coalitions grow up around open finance adoption and has been more market led than regulator led. In the UK, there are many more data takers than data givers which makes legislative and regulatory change vital.
The next three years will witness a seismic shift in the US financial landscape as open banking and open finance rapidly gain traction. Driven by consumer demand for financial control and innovation, we’ll see a surge in adoption, transforming how individuals manage their money and businesses operate.
Customer adoption is underpinned by powerful use cases coming to market. It doesn’t happen overnight, but where there’s real customer value, adoption will surely follow, as the fintechs and banks will invest to develop it.
Open Banking in a Box: World class regulatory expertise to support your open banking implementation journey.
Open banking advisory service to support on strategy, policy, and delivery. Contact Helen Child to find out more: helen@openbankingexcellence.org
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Sergio Barbosa CIO of Global Kinetic, and CEO of FutureBank. at Global Kinetic and FutureBank
21 February
John Bertrand MD at Tec 8 Limited
Saumil Patel Content Marketing Manager at InCred Money
Katherine Chan CEO at Juice
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