US Open Banking Uptake Hindered By ‘Fragmented’ Market With Too Many Players

The state of open banking in the U.S. might be summed up in a few words: fragmented, and perhaps, dysfunctional.

In an interview with Karen Webster, Paiak Vaid, head of Global Product Partnerships at TrueLayer, said U.S. companies, particularly financial institutions (FIs), have their work cut out for them as they seek to get data, and by extension, payments-related innovation, flowing seamlessly to third-party providers.

Change is difficult, you might say, without either a regulatory mandate in place or without strong incentives to give stakeholders the impetus to embrace open banking. To get everyone on the same page here in the U.S., he said, start with the banks.

That’s no easy task, really, because even the banks are taking a multi-pronged approach to open banking.

In the absence of regulation, he said — a top-down approach that lays down what FIs must do, how providers can collect data and how consumers may give permission — we’re seeing a bit of a patchwork approach take shape here in the states, in a free-market evolution.

The President Joe Biden administration has given a bit of a nudge to data portability. But the data collection piece of the puzzle (linking FinTechs to data), said Vaid, has to happen through screen scraping, or by going directly through banks or consortiums of FIs to gain access to those application programming interfaces (APIs). The onus falls on individual firms to reach out and get the data they need to enable open banking, so payments innovation suffers.

“The ability to allow users to do instant, open banking payments, to link their accounts and let the data within those accounts support those [faster] payments — well, that dynamic does not exist in the U.S.,” Vaid told Webster.

Part of the roadblocks toward a systemic, coordinated approach in the U.S. is due to the fact that there are just so many banks and FIs dotting the landscape. Vaid noted that in some markets in Europe — the U.K. or Spain, for example — the market share of the top half-dozen banks might be a collective 90%. In the U.S., the top 10 banks have less than half of the country’s market share, he said, the rest of it converging across a “long tail.”

Data, Powering Payments

Data powers payments, in other words, and according to Vaid, we’re still in the conversational stages of developing an open banking-led change in financial services. Allowing that critical data access “has to be commercially viable for the banks to make this happen,” he said. “Europe is learning that you cannot just mandate things and expect it all to work flawlessly. There’s an element of incentive that needs to happen there.”

The European experience is instructive. There are costs involved with managing the infrastructure, managing the APIs and updating contracts with platforms like TrueLayer.

To help defray the heavy lifting in the U.S., he said, banks might explore a variety of options, including FIs working together to create and operate an API “store” that provides access to third parties.

We’re already seeing some consortium approaches take shape, such as with the Financial Data Exchange, a nonprofit organization operating in the U.S. and Canada, dedicated to secure and streamlined data exchange (and API standardization through its FDX API), with roughly 200 FIs and FinTechs on board.

Another approach has been for banks to invest directly into companies that will, essentially, act as “external” operations to help with data and permissioning efforts.

Looking Ahead

As these approaches crystalize, said Vaid, we’ll see more use cases take root. Multi-banking, in which users consolidate all their accounts into one service that allows a financial “snapshot,” will be the most immediate service that FIs will want to provide.

Noting that the U.S. consumer is “very credit card focused,” Vaid said buy now, pay later (BNPL) options, combined with faster payments, will give rise to new business models. As consumers use alternative bank rails to pay merchants, the merchants’ cost of acceptance can go down — giving them the means to fund rewards.

In the meantime, as companies seek international expansion opportunities, especially as European FinTechs eye the U.S., it’s important to avoid a one-size-fits-all approach. (That’s a mistake U.S. firms have made in their own global efforts, he said.) All too often, enterprises think localization is just about translating a website to reflect a new country’s native tongue.

“That’s not what localization means,” he said, noting to Webster, “You really have to get down to product level, understand the consumer behavior in those markets. My biggest advice would be, don’t just assume that what worked in your home market will work in the U.S. because it’s a very different animal.”