Why is open banking so important to credit unions and community banks? (VB On-Demand)

March 8, 2022

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Presented by Envestnet | Yodlee

Open banking data-sharing regulations are on the horizon in the U.S., and it’s critical for credit unions and community banks to prepare now. Learn how the industry will change, how to participate in the new ecosystem, best practices for making the switch, and more in this VB Live event.

Watch on-demand right here.

In the U.S. and Canada, the number of financial institutions offering an API-based interface for the collection of consumer-permissioned financial data sharing continues to grow. That means that these institutions are moving from tolerating their customers using a third-party tool to access their data, to actually facilitating.

“And by facilitating that they are signing up for risk management and positive customer experiences and increased safety and liability protection for the entire data-sharing economy,” says Brian Costello, vice president of data strategy and strategic solutions at Envestnet | Yodlee.

The Financial Data Exchange, FDX, the standards body for the interoperable standard of consumer-permissioned financial data exchange, is growing in terms of membership and in the number of installations of their system. Costello also points out that this evolutionary step, from consumers sharing their data with a third party via their online banking credentials to data being shared by APIs published by financial institutions, demonstrates that the open banking movement in the U.S. and Canada is doing very well.

Another clear indicator is that things are moving along on the regulatory front as well. The Consumer Finance Protection Bureau (CFPB) has indicated that they’ll be presenting what’s essentially a final draft of the ruling around potential new data-sharing regulations in April.

Why this matters to community banks and credit unions

Community banks and credit unions know their customers intimately. Located in smaller centers, they’re living and working with them side-by-side. As a result, they understand more about their lives and circumstances than only financial behaviors, and can tie it all together to provide hyper-personalized advice and services.

Taking the community financial services approach to digital engagement is a huge opportunity for these organizations, Costello says. It allows these institutions to expand, broaden, and deepen their knowledge of their customers and provide those same personalized services faster, and in the pandemic, more safely.

“The community banks, because of the technology gap, have been denied these opportunities that the Wall Street banks have enjoyed for years,” he says. “That’s why we’re bullish on the opportunity for community banks and credit unions to get on board with open banking.”

Historically, community banks have lost out in a few ways. They get their tech from a service provider, which has carried some of the operational and security risk — but because of that, the community banks also have an opportunity cost. They’re not able to participate in and get the benefits of consumer-permissioned data sharing in a more safe and operationally resilient way if not available via their technology provider — which means their customers and members aren’t getting access to services that bigger banks can offer, like finanical coaching, automated savings plans, or payment opportunities that might make more sense for them.

New product opportunities

Another key indicator of the advent of open banking is the explosion of new solutions using consumer-permissioned financial data sharing to provide some value-added service — either directly to the consumer or to an advisor, lender, or underwriter. And these are emerging from both incumbent players and new market entrants.

“These solutions are increasing the level of innovation, increasing the level of competition, and providing more opportunities for customers to get positive financial outcomes,” Costello says. “This is because of the evolutionary steps in the way the data is shared. It’s making it safer and more comfortable for these firms to get into the business, for their executives to greenlight the solutions, and for venture capital firms to start investing, because they see higher potential for positive return on that investment.”

Some of these companies are also using their customers’ data to align their services around social, environmental, and other value-based ideals that are important to customers, who want to engage with brands that align with their values.

Or consider the new set-it-and-forget-it savings tools, which help people whose living expenses are pretty much equal to their pay check and are challenged to begin saving. These tools monitor their cash flow, learn their behaviors, and figure out when and how it’s possible to make a painless debit, even if it’s just five dollars – which adds up. At the same time, these apps are helping consumers find opportunities to improve their financial situation.

“This is driven not just by access to the data, but by improvements and enhancements in the research of consumer behaviors and behavioral economics and psychology,” Costello explains.

Another popular category of applications is centered around better payments – from peer-to-peer payments to paying merchants across border. Open banking makes payments safer also by eliminating the need to enter credentials and get access to payments faster.

The third big category is investment – because financial advice should not just be for the rich. Consumers can now begin self-directed investing through apps that guide them based on their financial data, covering everything from retirement planning to exploring the cryptocurrency market, arbitrage, and more.

These kinds of apps are based on the biggest consumer trends, and inspired and enabled by the move toward open banking. They’re the kinds of products and services that customers are looking for in their financial institutions – and can help make community banks and credit unions significantly more competitive in a crowded market. But being prepared for the transition is essential.

“The technology gap and the regulatory gap. are being addressed, so the time is really now,” Costello says.

To learn more about how open banking is changing the financial services industry and the competitive landscape, the opportunities being enabled by regulatory changes, and how credit unions and community banks can make the transition seamless, don’t miss this VB Live event!

Watch on demand right here.

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