The jury is still out on the future of opening banking in the U.S. Without a regulatory mandate, many in the financial services and FinTech space believe that competition will — and already has — nudged the industry toward embracing data integrations across platforms and service providers in the name of better banking experiences
Increasingly, FinTechs are targeting corporate and small business banking friction, and exploring how open banking frameworks — including the use of application programming interfaces (APIs) and collaboration with traditional financial institutions — can achieve the disruption they’re looking for.
Bank participation is key to promoting open banking in the U.S., but according to Arjun Thyagarajan, co-founder and CEO of digital banking company Wise, the U.S. banking market is not like others across the globe - and it will affect how the nation's open banking journey takes shape.
For instance, in the U.K., regulations have not only mandated traditional FIs to open customer data to third-party FinTechs on the authorization of joint customers, the regulatory landscape has also encouraged greater competition in the small business banking space, giving rise to a flock of challenger banks.
Meanwhile, in the U.S., the emergence of new banks is few and far between. Regulatory efforts through the Office of the Comptroller of the Currency aim to connect FinTechs with the opportunity to apply for a national bank charter, an initiative that has been met with criticism and legal action. FinTechs are forced to wait for the smoke to clear and find another route into the U.S. banking system — often relying on collaborations with traditional banks.
Such is the strategy of Wise, which recently announced the launch of its small business banking product, a service that is made possible through its collaboration with BBVA Bank and the use of the BBVA Open Platform.
In a recent interview with PYMNTS, Thyagarajan said working with BBVA not only provides potential customers with a familiar brand — instilling customer trust from the get-go — but also eases the regulatory compliance and infrastructure burden on the FinTech.
They’re factors that showcase the importance of the traditional banking sector at a time when the burden to digitize, modernize and step up to rising customer demands has many criticizing the role of the traditional bank.
For FinTechs like Wise, working with traditional FIs means being able to “focus on adding value to small businesses, rather than reinventing the core-banking wheel,” Thyagarajan said, adding that the bank-FinTech strategy offers the “best of both worlds ... next-gen business banking built on top FDIC-insured banking services.”
On The Open Banking Path
The ability for traditional FIs to provide core banking services while FinTechs introduce a layer of value-added digital services is a business model ushering in the Banking-as-a-Service era, which Thyagarajan said offers a glimpse into the formation of an open banking ecosystem in the U.S.
“Banking as a Service platforms and open technologies offer a development environment for financial services that will shape the future of small business banking,” he noted. “It paves the way for an integrated ecosystem of financial products and services that deepen the business’s relationship with its customers.”
With Wise now operating with BBVA, the company will initially focus on core small business banking services as well as payments — an area Thyagarajan said is filled with pain points for small businesses both as senders and recipients of payments. The fees associated with payments are among the most painful, he noted, though payment delays and a lack of transparency into the status of a transaction are also top concerns.
While the U.S. may not be taking a regulatory stance on Open Banking, the same cannot be said for payments.
Earlier this week, the Federal Reserve announced plans to launch a real-time payments service, and while the regulator vowed that it will not position itself in direct competition with the slew of private sector payment service providers similarly looking to accelerate payments — including The Clearing House and SWIFT — its efforts have been met with criticism.
“We have a real-time payments network. It’s operating,” said The Clearing House’s Senior Vice President for Product and Strategy Steve Ledford in a statement earlier this week. “If the Federal Reserve decides to launch its own network, it’s just delaying the access to faster payments to everybody.”
As with open banking, bank participation in faster payment services is essential, so banks’ reluctance to embrace the Fed’s offering may add greater uncertainty over the evolution of the U.S.’s payments ecosystem.
In the meantime, banks and FinTechs appear eager to collaborate and promote adoption of the technologies and emerging services that are available today — and eager to test how these tools can positively impact small businesses, a market Thyagarajan said is significantly “underserved” today.
“Small businesses (in most cases) do not have large balances/reserves in their bank account,” he said. “Banks prefer to work with bigger enterprises because the larger balances provide more revenue for their time and resources, from account origination to offering banking products.”
Banks have instead directed resources toward larger businesses, meaning everything from underwriting models to service integrations with clients’ back offices are designed for conglomerates — not small firms.
As FinTechs step into the space to address these challenges, they’ll certainly rely on traditional banks to provide the kind of digital services tailored to SMB clients. But considering traditional banks’ current lack of adequate small business services, it appears those FIs need their FinTech partners, too, to fill the market gap.