Banks, financial services firms boost usage of open banking to expand digital offerings

The COVID-19 pandemic left many customers with one choice - digital channels. But not all financial institutions were up to the task.

The usage of open banking has increased since COVID-19 as the banking, payment and financial services industries seek more collaborative solutions to provide additional digital loan applications, credit decision and wealth management tools.

The adoption of open banking in the U.S. has given third parties such as banks and fintechs the ability to access account information and collaborate with partner institutions. Consumers also benefit because they should have more access to vendors, such as the ability to get better interest rates for savings and loans. 

COVID-19 has accelerated trends that existed prior to the onset of the pandemic, said Philipp von Girsewald, U.S. CEO of Deposit Solutions, a German open banking/open architecture platform.

“What’s happening is that these changes will remain,” he said. “We won’t go back to our old normal. One aspect of these changes is that we’ll continue to see a greater influx of collaborative relationships in order to innovate and digitalize quickly.”

Open banking gives customers the option to “interact with their accounts with whatever tool and channel they like,” said George Anderson, founder of Ninth Wave, a New York-based secure data connectivity provider between financial institutions and third-party applications.

Financial institutions need to determine how to deliver the data securely and customize it for their customers, he said during the 2020 Finovate conference. 

The pandemic has accelerated future initiatives to “reduce friction for the customers,” Anderson said.

Financial services companies are also boosting the usage of open banking. Deposit Solutions works to help banks easily distribute their retail deposit products beyond their local market to reach savers nationwide, said von Girsewald.

The company’s platform convenes both banks and customers together. Banks can obtain national deposits exposure through the platform of Deposit Solutions and customers will gain access to products from around the country – all from a single online account.

“Savers get a greater selection of attractive deposit products without having to open new accounts again and again,” von Girsewald told FinLedger. “The beauty of it is that, thanks to our platform, all parties benefit. Deposit-taking banks gain access to retail funding without having to complete traditional customer acquisition processes. Not only that, banks are no longer limited to signing up customers at the local level.”

Charles Schwab, a San Francisco-based retirement provider, said Sept. 18 it signed an agreement with Finicity, an open banking software provider, that was acquired by credit card giant Mastercard in June for $825 million. Mastercard President Michael Miebach previously said that open banking is a “growing global trend” and said it was “a strategically important space” for the company. Fincity signed a similar agreement in 2018 with Fidelity, another major retirement provider. 

Sharing data via an API means Schwab consumers can connect and access their financial data via third-party apps securely. Founded in 2000, Finicity provides financial data APIs, credit decisioning tools and financial wellness solutions and partners with financial institutions such as personal financial management tools, major lenders and payment providers.

Finicity CEO and co-founder Steve Smith said the company’s goal is for consumers to connect their financial accounts to the apps and services they want to use. Consumers should be able to connect their budgeting apps to their bank and credit card accounts to track and manage their income and expenses. Finicity bridges the technological gap so that consumers can keep their current bank and credit card accounts and not have to share credentials with each financial services provider.

The pandemic has driven the digitization of core servicing journeys, upgrading help and support with the development of chatbots and new personal financial management tools, said Anne O’Leary, a research analyst at Informa Financial Intelligence. Banks had to ramp up mobile check deposits while lenders had to increase the use of digital mortgage applications. 

It has long been the goal for digital banking to become the first point of contact for customers, as it can reduce both cost and strain on the bank’s traditional servicing models,” she told FinLedger. “As we know, the pandemic forced branches to close around the world, overwhelming call centers.”

Customers were left with one choice – digital channels. But not all financial institutions were up to the task. 

“Banks were and still are in some cases, scrambling to digitize core functions, notably in check deposits, mortgage applications and loan freezes,” O’Leary said.

A loan freeze occurs when a lender halts payments or puts the loan into forbearance. These suspensions do not impact a borrower’s credit score.

Chatbots alleviated some of the demand during the peak of the pandemic in March and April as consumers sought auto loan and mortgage forbearances and had other questions about their assets and loans. These chatbots provided quick and concise answers to common queries and lowered the volume of calls. 

“The channel is fast becoming the first point of contact for customer needs for those like Bank of America with a more sophisticated bot that provides services and app navigation, from checking balances to making payments and getting help from the bank to applying for products,” O’ Leary said. 

Banks, credit unions and fintechs are developing new personal finance management tools as many consumers are facing job losses, reduced income and an increase in debt. The tools include insight, recommendations based on the individual customers’ situation and comparisons to other customers.

Banks and other financial organizations use DNA Behavior International’s API as a behavioral “chip” so they can “relatively quickly and cost-efficiently deploy behavioral insights across existing platforms, products and systems without having to reinvent the proverbial wheel,” said Leon Morales, managing director of DNA Behavior International, an Atlanta-based behavioral insights fintech.

A bank partnering with a fintech can scale much faster and reap the rewards sooner compared to creating the software themselves. 

“In most cases, we have found that if a company builds it, it will take a minimum of three to five years to get something that a fintech can deliver ready-made and integrate via an API in 90 days,” he said.

A faster integration could help a bank better connect with and communicate with customers and potential customers across all of their channels and platforms, ranging from in-person and online transactions to ATM operation. The bank would use a “plug in” to adapt and improve what they already have, Morales said.

More banks are interested in adding APIs because the pandemic has “clearly demonstrated they have to find ways to further know their employees and customers and potential customers without typical interaction,” he said. 

“I can tell you such organizations have an uptick in interest,” Morales said. “So banks are looking for ways to quickly adapt, including ways to learn and interact that may involve AI and other smart, remote solutions.”

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