Whitepapers > How Modern Connectivity is Shaping Open Finance
Open finance represents the opportunity to paint a more detailed picture of customer preferences, needs and behavior — ultimately allowing banks to provide more tailored products and services.
In 2009, former Federal Reserve Chairman Paul Volcker famously quipped that the Automated Teller Machine was the only useful innovation in banking for the last 20 years. To be fair, the ATM revolutionized the banking industry in a profound way. It changed the consumer experience, represented a tangible link between money and technology and laid the groundwork for other breakthroughs to come.
Yet, another invention may ultimately claim its place in the history books: application programming interfaces, or APIs.
APIs are the building blocks of open banking and finance — a new paradigm that gives customers better insight and control of their financial data and represents a new era of innovation for the financial services industry. They make it possible for financial institutions, fintechs and other entities to connect their applications, such as for account authentication, payment processing and data sharing. When tokenized, APIs create modern connectivity, providing customers with a seamless and secure way to grant, manage and revoke access to their accounts.
Open finance is the structured sharing of data via APIs between financial service providers, based on the needs of and consent by their mutual customers.
While the move to democratize financial data has been building momentum for decades, the concept of open banking — which is increasingly referred to as open finance — reached a new milestone with directives in Europe and the United Kingdom, which require banks to share customer data with authorized third parties. Open finance is not mandated in the United States and most other developed markets, but customer demand and industry innovation are driving the need for better connectivity and better money experiences.
Until recently, banks only had a one-dimensional view of customers, solely based on relationships with their own products. Open finance represents the opportunity to paint a more detailed picture of customer preferences, needs and behavior — ultimately allowing banks to provide more tailored products and services. It represents a sea change in how startups and established institutions alike do business.
“We believe that modern connectivity to financial data is the foundation for increased innovation in the financial industry and long-term financial health for consumers. Without reliable and secure data access, consumers have little transparency or insight into what is going on in their financial lives. By having secure access to their own financial data, they’ll be able to make more informed decisions about their own finances.” JANE BARRATT, Chief Advocacy Officer at MX
Just as the ATM removed barriers between customers and their money, open finance brings customers closer to their own financial data — paving the way for more convenience, visibility, customization and inclusion.
Anyone who has applied for a mortgage, analyzed their spending or tried to quickly transfer funds between institutions understands that there are still many barriers for seamlessly sharing financial data. The practice of screen scraping — gathering data from one app and displaying it in another — has been used for decades. Still, screen scraping is to financial connectivity what dial-up was to the early days of the internet. It not only raises issues of security and transparency, it can also present incomplete data and is prone to glitches, such as broken links.
With modern connectivity, customers don’t need to hunt down account and routing numbers or download and upload bank statements. They can use tokenized API connections to share and access that data quickly. This links customers to the right products and services, grants a more complete view of their financial lives and gives them better control over their data.
That control is critical now that a growing number of consumers have multiple connections between their primary financial institution and other applications, such as peer-to-peer payments, budgeting tools or saving and investment accounts.
“On average consumers have relationships with five to 10 different financial institutions,” says Shayli Lones, Director of Product Marketing at MX, a leading data platform that helps organizations deliver modern, personalized money experiences. “Consumers often link their accounts, stop using a service and forget about it, but those connections may still be live, and their credentials may be sitting out there.”
Modern connectivity also gives consumers better visibility and control over their accounts. Whether through their financial institution or a data platform, they can see and manage all their connections on a single dashboard. This allows customers to track, manage and revoke access at any time. If they have multiple accounts with the same service provider, they can also specify the accounts or categories for which they grant access.
“Tokenized API access is a net new channel that allows for very customized experiences, done very securely and transparently,” says Don Cardinal, Managing Director at Financial Data Exchange, a nonprofit financial industry organization, which is dedicated to promoting a common interoperable standard for sharing consumer financial data.
“This is going to manifest itself in a variety of ways, including taking the friction out of new account opening and onboarding, and providing a highly structured way to make data available in real time so consumers can apply for loans, do their taxes, manage their finances and get on with the business of life.”
WHY TOKENIZED APIS HOLD THE KEY TO MODERN CONNECTIVITY: Put simply, tokenization is the process of turning sensitive data, such as account credentials, into non-sensitive data, or tokens. These tokens are not only more secure, they provide more specific information on what entity is accessing an account and why.
Convenience goes a long way, to be sure, but it’s only the beginning. Modern connectivity opens doors for new money experiences that make it possible for banks, fintechs and other entities to get a more complete view of their customers, allowing for more personalized products and services.
While it’s still early days, the customization that comes with better connectivity can help customers make better spending, saving and investing decisions. Data sharing makes it easier for customers to consent to being matched with institutions seeking specific credit or risk profiles — and that can lead to savings on everything from interest rates to insurance premiums. The potential goes beyond financial products to possibly include big-ticket purchases and everyday expenditures.
Better connectivity not only helps existing customers, it also makes financial services more widely available to new customers — including individuals who have not had access to traditional banking services or don’t have robust credit histories.
“There are widows, divorced spouses, military personnel, immigrants and other people who, for whatever reason, have a very thin or no credit history, but they have managed their cash flow and paid their bills on time,” Cardinal says.
With open finance and common interoperable standards, he says, institutions can get a more complete picture of relevant financial histories, at scale, and expand opportunities to people who don’t have traditional credit histories.
MODERN CONNECTIVITY HELPS CONSUMERS: Improve spending analysis and budgeting Automate cash management Minimize overdraft and late fees Simplify insurance claim settlements Receive faster credit decisions Optimize investment portfolios Save time on product search and applications.
Meanwhile, for the nearly two billion “unbanked” individuals around the world, open finance represents an opportunity for better financial inclusion. While many of these individuals have access to a smartphone, they are often unable to conduct basic financial transactions because they don’t have a relationship with a bank.
Open Finance further accelerates financial inclusion by fostering innovation to help underserved populations access accounts and payment apps, build credit capacity, finance small businesses and improve their overall financial wellbeing. “From the perspective of new fintech providers looking to offer creative solutions to niche markets, having a common, interoperable standard makes it possible to access key data without significant technology resources,” says Cardinal. “We see this as force multiplier smaller fintechs, including those founded by minorities, women and other underrepresented groups.”
WHAT OPEN FINANCE MEANS FOR BUSINESS Consumers aren’t the only beneficiaries of open finance. Modern connectivity makes it easier for smaller organizations to see the full picture of their businesses, recognize patterns in spending and billing, reduce their cost of capital, improve cash management, and automate more back-office functions.
Account aggregation isn’t a new practice. It’s a process that has been used for more than two decades by mortgage underwriters, tax advisors and personal finance services, among others. What has changed, however, is the technology used to share this data. In the past, data sharing was done primarily through screen scraping. Within the last decade, account aggregation has evolved considerably as the industry has embraced APIs — and now tokenized APIs — as a better way to access and share customer-authorized data in a way that is safer and more comprehensive.
The move to API connections has the potential to greatly benefit financial institutions, fintech companies and consumers for many reasons. Because customer-permissioned data sharing is bi-directional, it allows all parties to use data in more secure and productive ways.
“With token-based APIs, banks and their customers have more visibility into where that data is going and why, which opens opportunities for banks to provide customers with more of the products and services they want,” says David Whitcomb, Head of Connectivity at MX.
In the world of ecommerce, the success of a business often hinges on the checkout experience. All things being equal, customers who find the checkout experience too cumbersome or too lax in security are more likely to abandon their carts and never come back.
In an open finance landscape, however, customer experience often begins and ends with account verification. Customers want to connect accounts quickly and conveniently, but they also want reassurance that their data is safe.
Better connectivity raises the bar on account verification. At the same time, it opens doors for new technology, including artificial intelligence, biometrics and blockchain, letting fintechs and financial institutions “know your customer” without adding unnecessary friction. It provides a more unified approach to digital identity management and gives customers more control over who sees their data and under what circumstances.
To understand why token-based APIs play a central role in open finance, consider how data has been shared until recently, with customer routing and account numbers (verified with micro deposits) and screen scraping. The process begins by having users share their login credentials so a financial services company can gather data from a third-party platform to display it on its own.
Although hundreds of millions of account connections rely on screen scraping, it has limitations when it comes to supporting open finance in the truest sense. Those limitations include: regulatory rules (which vary by country), lack of traceability and transparency, lower quality data and security concerns, particularly around sharing login credentials.
It’s a popular narrative that incumbent financial services firms are loath to support open finance, but the reality is that industry leaders recognize the growing role of APIs. Some of the world’s largest banks have committed to replacing all screen scraping with sanctioned API channels. While European and UK banks are now required to use APIs for data sharing, U.S. banks have been proactively taking steps to share their data.
Meanwhile, industry associations, such as FDX, are working to standardize APIs, while data platforms, such as MX, are developing libraries of open-source API documentation that matches FDX guidelines to help smaller institutions participate in modern connectivity without the cost of developing their own APIs. This creates a virtuous circle. As more institutions add APIs, it improves connectivity and functionality, prompting more institutions to support better data sharing.
“A common misconception among smaller banks and credit unions is that creating APIs is a cost to them without a lot of benefit,” says Lones. “In reality, they can access and implement APIs at little or no cost through open sourcing, and in exchange, they get a system that is less taxing on their servers and provides more security, visibility and opportunity to monetize these relationships.
Everyone in the financial services industry — from regulators to fintechs — rightly worries about the potential for customer data to be shared without the customer’s direct permission. By implementing API connections, financial services companies make it easier for customers to give consent. These permissions can be set on a case-by-case basis, so each customer is empowered to choose what they want people to see and what they don’t want people to see. For example, if a customer sets up a budgeting app, they can grant permission for a particular set of data that allows a financial advisor to view their progress toward their financial goals instead of sharing all their account balances.
In addition, API connections bring a higher level of security because the process replaces sharing credentials with anonymized, single-use digital tokens. This means that bad actors can’t access the personal information of end users during a transaction. Tokens de-identify user data, greatly increasing the chances that personal data will not be subject to risk.
“In the world of screen scraping there is zero visibility into who, what, when, where and how data is used,” says Whitcomb. “Tokenized APIs provide that.”
It may seem counter intuitive, but with better security comes better connectivity. By improving security through tokenized APIs, financial services companies remove friction of data sharing while keeping it secure.
OAUTH CONNECTIONS OAuth API connections are ultra-secure, tokenbased connections ensure a dependable and fast connection — accelerating the onboarding process and increasing engagement. Among other benefits, they ensure that customers are able to control their login from beginning to end and never pass their credentials to an aggregator.
Data sharing is a two-way street, which is to say that banks and other financial institutions don’t just share customer data, they can also receive data by connecting via APIs. Within institutions, data sharing provides banks with a more complete view of their customers, by aggregating both internal and held-away accounts.
Further, token-based APIs provide visibility into what entities are accessing their customer accounts, and for what purposes. Such insight can be invaluable for making target offers to customers or identifying opportunities for strategic partnerships with other vendors.
The long-term benefit is more secure connections and data loss protection, as well as the direct benefit of more visibility into customer needs. For example, if a customer is getting pinged by a mortgage provider, a bank may use that information to provide a mortgage offer. If a bank sees that many customers are working with the same fintech, it might open doors for a strategic partnership.
While Open Finance allows broader access to data, with added transparency and security, it also makes it possible for organizations to better segment would-be customers to build more detailed competitive roadmaps.
“In the early days of the internet, no one envisioned a world where you could do quality academic research, in real time, across the planet, or access medical records from your mobile phone,” Cardinal says. “Now we’re building a foundation for open finance — and it’s the things we haven’t thought of that I’m the most excited about when I think of the future.”
MODERN CONNECTIVITY HELPS FINANCIAL INSTITUTIONS Reduce risk with better security and privacy Provide more targeted advice and offers Make better and more timely credit decisions Amplify value-add services to engage and retain customers Develop new products with non-personally identifiable data Identify opportunities for strategic partnerships.
The right security and the right technology are paramount to open finance, but so is working with partners who do the right thing. In a world where change happens quickly, it’s important to consider not just the policies of a banking partner, but what’s behind them.
Leading open finance partners understand that personal data is personal, and that personally identifiable information should not be shared with third or fourth parties. They put systems in place to delete or revoke access and make transparency a top priority. For open finance to succeed at democratizing data, customers and institutions alike must have a clear window into who is seeing their data and why.
Modern connectivity is paving the way for a new era in financial services where customers can not only access financial products and services more conveniently, but they can also use their own data to make better decisions about spending, saving and investing.
While this offers myriad benefits to customers, it also represents the potential for financial services companies to have a more complete view of customer preferences, needs and behavior. Modern connectivity makes it easier for new providers to launch new products or cater to new markets, but it isn’t one-directional. It also gives established institutions an opportunity to provide more targeted products and services, reach a larger customer base, make more informed credit decisions and develop new partnerships along the way.
When taken together, the financial system as a whole is more resilient and less prone to financial shocks. Better credit decisions don’t just benefit individual lenders and customers, they benefit entire financial systems.