Banking

Arizona group aims to jump-start European-style open banking in U.S.

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An organization in Arizona is laying groundwork for the U.S. to develop its own definition of open banking, a European policy that called for banks to share consumer data with third parties such as fintechs.

Forward-thinking bank and technology executives sense the U.S. could go well beyond the original intentions of open banking by getting banks and fintechs to modernize payments and financial services tools — and quickly move digital products to market — through an API-driven ecosystem.

CCG Catalyst Consulting and the Arizona Bankers Association want to support that scenario through the creation of the Arizona Fintech Council, an organization of banks, economic and technology groups and other stakeholders to promote the partnership of banks and fintechs in moving technology forward.

So far, the U.S. is moving cautiously toward that goal. Not only is opening banking channels not a government mandate as it is in Europe, but many in the U.S. have different definitions of open banking.

Open banking, as pushed through PSD2 in Europe, called for banks to share consumer data with third parties requesting it. For many, that also established a definition and set a clear path toward developing APIs to easily share the data across platforms. In the U.S., banks either have their own interpretations or stay out of the discussion altogether.

“The lack of a definition here in the U.S. creates confusion but also creates a lot of opportunity,” said Kate Drew, director of research at CCG Catalyst Consulting and author of a report on open banking to help guide the new council. “There are many more things you can do through open banking, using banking-as-a-service models or to integrate with fintechs more deeply.”

“The lack of a definition here in the U.S. creates confusion but also creates a lot of opportunity,” said Kate Drew, director of research at CCG Catalyst Consulting.

Banks in the U.S. have to get past the European model of deep data sharing, and think more in terms of how to get the bank’s systems and infrastructure to operate an API-driven layer to the point it can reasonably support various new capabilities, Drew added.

It will take some time for larger and smaller banks to view open banking in a similar fashion. Smaller banks simply rely more on core technology providers and would outsource more often, working with providers like FIS and Fiserv.

“Our report notes that you are going to need to bring some of the tech resources back in-house if you want to be able to compete and differentiate,” Drew said. “Or, you will have large banks wanting to move forward with technology and the gap between the large and small banks will get bigger.”

While the U.S. already has investors and technologists promoting this kind of innovation, the Arizona Fintech Council aims to bring those minds together and establish a common vision. It intends to leave any future merger, acquisition, investment or platform development decisions up to the banks and fintechs.

“Our goal is to get the fintechs in front of the banks and facilitate the opportunity for a long-term partnership,” said Miranda J. Jenkins, chief operating officer at CCG and manager of the Arizona Fintech Council.

“We do hope that this Arizona council is just the first of its kind in the U.S. and the concept would expand, because we think this model can work elsewhere and we would like to see that happen,” Jenkins said.

Many of the fintech applicants are based outside the U.S., with open banking implementations operating in Europe and Asia. “They want to come to the U.S.,” Jenkins said.

CCG’s report cited case studies of banks operating with new technology and API layers delivering any number of services. Digital-only Grasshopper Bank launched in 2019 to serve entrepreneurial businesses, turning to Temenos as a core technology provider. But it also built its own API layer to connect to Temenos and all of its other services for easier integrations — and doing so with the likes of Plaid, QuickBooks, Xero and others.

 Miranda J. Jenkins, chief operating officer at CCG and manager of the Arizona Fintech Council

“We do hope that this Arizona council is just the first of its kind in the U.S. and the concept would expand,” said Miranda J. Jenkins, chief operating officer at CCG and manager of the Arizona Fintech Council.

Ultimately, its business customers had access to far more services through the Grasshopper platform, including three different options for bill payment.

“We have total flexibility to offer different solutions,” Grasshopper CEO Judith Erwin said in the report. “It’s really a complete freedom to choose on behalf of our clients. Our goal is to provide highly curated services that are highly repeatable and scalable.”

Other banks were seeing similar results in working through FIS, Fiserv or Finxact to create the API layers and adopt a plug-and-play strategy for its fintech partners.

“Initiatives like the Arizona one will help to create awareness with banks for open banking,” said Ron van Wezel, senior analyst with Aite Group. “But in particular smaller banks will need time to understand the benefits of open banking.”

The council will have to address the fact that not every bank is ready to open up its customer data to third-party providers yet, van Wezel noted. “The business case for the bank may not be understood well enough to prioritize the investment and there will also be concerns about data privacy, security, and IT readiness.”

Those obstacles can be solved by data aggregators like Plaid, Yodlee and Token, he added.

The Arizona Fintech Council also wants to bring companies into the state’s regulated fintech sandbox, where fintechs and banks can develop and test technology together.

Neither the council nor the sandbox restricts financial institution or fintech applicants to those based in Arizona. As such, it is drawing interest from other regions of the country and from U.S. companies doing international business.

Arizona organizations involved in the council include the Arizona Commerce Authority, the Arizona Technology Council, the Greater Phoenix Economic Council, and Sun Corridor Inc. All are part of the process to entice fintechs to come to the state and help them partner with financial institutions.

Arizona State University will also partner with the council to make connections for its students who have an interest in the financial services industry. ASU says U.S. News & World Report ranked the university No. 1 in innovation for the sixth straight year.

“The big takeaway from all of this is that open banking should even the playing field,” CCG’s Drew said. “It’s the smaller banks leveraging open banking in a way they are building API layers and sort of freed themselves from the legacy technology.”

When smaller banks are closer to the larger banks in terms of technology, it can allow them to operate in much the same way, Drew noted. “But in order to play on that field, you have to have your infrastructure in order.”

Creating an API layer on top of legacy systems is the best way to get there, and that is done most efficiently through collaboration with fintechs, Drew added.



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