A Discussion on Innovation and Open Banking
David Peterson
Chief Innovation Officer, Speaker, Facilitator and Advocate for Metacognition!
Open Banking is a term commonly used to denote a new and innovative fintech solution.? Certainly, the concept of open banking is innovative. The idea that instead of a system with pre-determined functionality that allows some variation using parameters (ie: a traditional core solution), you implement something that allows a tailored, unique solution that performs exactly in the manner you prescribe. The underlying premise is that with an open banking solution you can hook up any 3rd party system and have the flexibility to adapt to unknown future financial technology demands. Who wouldn’t want a system that does that?
I was recently perusing a Financial Brand article that touched on this very subject. At the center of the article was that bankers should not let “myths” of open banking deter them from implementing an open banking solution. The article’s author goes so far to suggest that negative misconceptions about open banking can be “dangerous,” in effect “leading institutions with limited budgets down paths that don’t add value to the institution.”? The implication is that a traditional core system does not return a reasonable return on the investment or won’t support the need for a more advanced tech strategy.? Maybe the author is correct, but is choosing a non-open banking system “dangerous?”? Let’s examine this issue more deeply.
There are three myths the Financial Brand article posits:
Myth 1 – Open Banking is Just For Big Banks – Open banking opens more API availability for smaller banks to implement 3rd party systems that it seems strategic. And that is true. But there is nothing specific to “Open Banking” that gives it a special ability to make APIs available. All of the traditional core systems offer APIs, and my intel tells me they are adding even more “open” access via APIs.? The likely origin of this “myth” is that the work needed to make an open banking system operate requires a technical capability most community banks do not possess or would be expensive to acquire. This issue will be explored more in Myth #3 below.
Myth 2 – Banking-as-a-Service is the Best Use Case for Community Banks – BaaS is best described as embedding financial services in otherwise non-financial applications. The most noticeable examples of this are where a non-bank offers “banking” services to some niche group or a traditional bank wishes to open an internet-only presence with separate branding.? These niche applications have features that blend certain financial service elements with an activity unique to the target group.? While this may be worth doing, my take is if an internet-only financial institution was valued by the market, there would be more that are successful. Instead, we see these offerings pop-up, usually with a big marketing campaign and lots of social media buzz. They do acquire some market share but do not seem capable of generating any profitability and subsequently get acquired or fold.? For this reason, the Financial Brand author suggests that a traditional bank should consider an open banking based solution to address other use cases that are valuable to achieve the bank’s growth strategy.? Sounds good, but the author left out of the article any examples of what the other use cases might be.? I am at a loss to come up with any use cases that could not be solved with a non-open banking API.
Myth 3 – Open Banking Applications Require Tech Geniuses – The author of the article suggests that any subject matter expert, say a loan account specialist, would be able to make the requisite changes in the open banking applications and that open banking documentation is written specifically for non-developers.? Maybe that is true, but it has not been my experience.? FNBB recently performed a full evaluation of multiple core providers, which included an open banking core system.? There is no possible way that the open banking core FNBB reviewed could have been customized by subject matter experts. Thus, I find the claim that no technical resources would have to be added for an FI to deploy an open banking core to be disingenuous.? Do those additional resources need to be geniuses?? Hardly, but they must have the requisite technical skill to not only perform the customization of the system to operate the basic functions of the bank, but they also ?need to understand how to navigate the APIs that are available (and trust me, the documentation for APIs is written for technical experts, not for subject matter experts).? So, the cost of these additional resources must be factored into the overall financial analysis of making a new core banking decision.
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Let me be clear, I am not criticizing open banking, but I think that open banking platforms are still a work in progress. I believe there is a place for them in the fintech ecosystem. Yet, I also see that the traditional cores are addressing the issue of “openness” and are busy adding APIs and other technology advancements to give financial institutions the capability of selecting the systems they see as most strategic, while also having the ability to interface those 3rd party systems to their core.
Another key observation: I believe I have the technical knowledge and experience to make an informed decision on a new core purchase. And yet, FNBB engaged Profit Resources Inc (PRI) to assist us in making the new core choice.? PRI provided the expertise that augmented our internal resources and experience to make the evaluation process efficient and cost effective. If you are considering a core evaluation in the coming years, you owe it to your institution to contact your FNBB relationship manager and have them setup an introductory call with PRI.? Maybe open banking is the best solution for your institution, maybe not.? I can guarantee that PRI has the expertise to empower you to make the best, most strategic decision for your institution.
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