Digital IDs Help Open Banking Reach Its Fullest Potential

Open banking comes in several flavors, yet its rise requires robust Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, Zac Cohen, chief operating officer at identity verification firm Trulioo told Karen Webster in a recent interview.

As financial institutions (FIs) work with FinTechs, they need to know that these tech-nimble startups are not only enabling access to customers’ account data but also in a manner that embraces KYC and AML. The end goal: to speed innovation toward new products and services while keeping fraudsters out.


Regulation Vs. Market Forces

The need for both innovation and security comes at a time when open banking is gaining a foothold in the United States due in part to the pandemic. It’s also growing across the pond in the European Union, albeit with some important distinctions.

“In recent years, we’ve seen the heavily regulated version of open banking in the E.U.,” Cohen said. “It’s been a coordinated effort — regulatory-driven, highly standardized and thrust upon the banking community. In the U.S., it’s been an organic-but-inevitable exercise, driven primarily by innovation and consumer demand.”

That’s due in part to the fact that America has a more fragmented banking and regulatory landscape, he said. But despite the differences, Cohen said he believes open banking is here to stay in the U.S.

Just consider all the recent acquisitions from major payments players. For instance, Mastercard last month bought Finicity, while Visa earlier this year acquired Plaid. Through those acquisitions, the networks have shown their interest in serving as intermediaries between banks, their customers and FinTechs that want access to important account-related data.

After all, the financial services ecosystem is striving to give consumers access to their financial records and leverage tech-driven innovations to improve their lives.

Cohen said that if banks don’t jump on board with those goals, they risk losing significant numbers of customers. Consumers want to share and access data to make such things as applying for a mortgage or tracking spending across various accounts easier.

Protecting Consumer Data

But with an ever-greater exchange of data must come an increased FI focus on data privacy, data ownership and how information gets used, he said. At a high-level view, banks must have robust ID verification procedures in place, making sure that the right people are showing up at the right time to do the right thing.

Webster noted that KYC and AML procedures aren’t governed by global standards. However, Cohen said that in the U.S., various forms of privacy legislation have been making headway. For instance, he pointed to statewide initiatives in California and Illinois that have focused on biometrics.

“It’s a good move for organizations that are involved in open banking and driving that innovation to have similar high privacy standards in that regard,” said Cohen.

Checks And Balances

He recommended that organizations have checks and balances to make sure consumers are protected and data is secured via coordinated efforts between banks and FinTechs.

Along those lines, financial services players — banks and FinTechs among them — are entering into data exchange agreements that operationalize tenets around what can be done with data, what information is needed and how long it can be stored.

“You’re confirming pieces of information on demand, but you’re not maintaining an open channel, nor are you retaining information nor sharing it or using it for any other purpose other than strictly what has been stated,” he said.

Generally speaking, firms shouldn’t retain data in searchable format, but should keep it in anonymized formats and quickly expunge it, Cohen said.

“When you feed that information back or you provide that connectivity and access, there’s no reason to retain it,” he said. “As long as you’re following strong data retention principles and as long as you’re securing those networks and channels, that’s the basic foundation that you want when operationalizing open banking.”

The Pandemic Is Speeding Innovation Up

Dialogue and close coordination between financial services players have spurred the equivalent of three years of innovation during the pandemic’s past three months, Cohen said.

“There’s been a huge amount of volume and demand for these types of digital journeys, as opposed to being able to walk into a branch and do things in person,” he said.

As a result, banks are rethinking their workflows with an eye on becoming more digital. They’re creating customer-facing applications that work for all of the new use cases coming into play in the open banking environment.

Those enterprises also must contend with new surges in demand for their products and services — and a growing volume of attacks. Unfortunately, the reputational risk to banks tied to data breaches is strong — and getting steeper.

“We’re seeing consumer demand shift toward wanting more security over just speed,” Cohen said. “They demand strong protocols.”

He added that trust is a necessary component to all interactions.

Speaking about Trulioo’s niche, he said that “looking at our segmentation of typical consumers [and] the customers that we work with, there is an older demographic that is a little less aware and a little less comfortable with some of those digital channels.”

But he added that when trust is in place, that same demographic is ready to share information and get onboard faster.

And stepping back to view the differences between open banking here and abroad, he said, “it’s interesting to see the two various roads. But the end game is clearly the same” — innovation and greater access to financial services.