Financial institutions and fintechs are gearing up for the inevitability of open banking as a standard practice as more U.S. open banking initiatives develop, assisted by application programming interfaces (APIs), and more consumers become aware of universal banking possibilities.

Americans are not as cognizant as the worldwide community in understanding open banking, with less than half (45%) having heard of the terminology, compared to 56% of adults in the U.K., according to Morning Consult.

However, the adoption of new digital habits and a drive toward online channels during the pandemic accelerated open banking needs and deliverables. Consumers may not specifically ask for open banking, but they surely expect the convenience and accessibility it brings as they rely on digital channels to meet their financial needs.

As a result, many financial institutions increasingly offer banking-as-a-service (BaaS) and embedded banking services such as payment processing; and open finance to enable third party providers to access customers’ complete financial data.

Increasing Open Banking Awareness

Prior to the last half dozen years or so, financial services firms had wide-ranging control over their customer’s information. The notion of yielding consumer data to a third party to benefit customers was never an option for financial institutions until it became a competitive weakness.

Fifty-two percent of individuals globally may not know what open banking means, yet 80% utilize mobile banking apps routinely supported though APIs or related technologies, according to Consumers have also become more comfortable turning to fintech or third-party apps for their banking needs, with 68% percent of customers in a 2019 EY survey claiming they would consider using financial products from nontraditional companies.

Per McKinsey, in the first six months of 2020, the number of users of open banking-enabled apps or products in the U.K. doubled from one million to two million and grew to over three million as of February 2021. In the U.S., almost one in two consumers now use a fintech solution, primarily peer-to-peer payment solutions and non-bank money transfers. A June 2021 McKinsey & Company report, “Financial services Unchained: The Ongoing Rise Of Open Financial Data,” stated “In our view, the question is not whether the customer interface will shift away from incumbent financial institutions, but by how much and in what areas or segments.”

McKinsey also reported some markets are already seeing a marked shift toward fintechs; some 55% percent of U.S. consumers use fintech solutions, with 44% having at least two accounts.

Recognizing Open Banking Development

For banking customers, open financial data affords greater flexibility in how to manage their money, permitting better account perceptibility and more expedient access to payments.

A study from Business Intelligence predicts that 75.4% percent of U.S. consumers — approximately 196.8 billion individuals — will be using digital banking services by the end of 2021.

Throughout Europe and Latin America and in many countries, such as the United Kingdom and Australia, mandates such as the European Union’s Payment Services Directive (PSD2) compelled financial institutions and service providers to implement open banking technologies to allow customer-permissioned access to their data. The intent was to inspire innovation and let customers take more control of their financial interactions and information.

While a lack of rules has slowed implementation in the U.S., and other countries including Japan and Canada, major fintech players and some financial institutions are still embracing open API models to improve transaction transparency. An Executive Order on July 9, 2021 even encouraged the U.S.’s Consumer Financial Protection Bureau (CFPB) to create rules that make it easier for consumers to transfer bank account data across financial institutions.

The capability to easily transfer data through APIs by third-party providers, given customer consent, is essential to open banking’s extensive embracement. The APIs enable those providers to offer new financial services and products with fast, well-designed user experiences.

Fintechs Driving Open Banking/Finance

Though open banking APIs, driven by consumer demand, is a hot topic in financial services currently, a dearth of regulation and standardization in the U.S. makes unsupported API integration concerning and hazardous.

U.S. banks are well aware of the need to match consumers’ changing expectations for speed and convenience online, according to Finastra’s “Financial Services State of the Nation Survey 2021,” evidenced by a 25% percent average increase in projected technology spending in 2021, per Finastra, compared to 2020 levels. In the U.S., financial institutions are tackling self-improvement initiatives with an average increase in technology spending of 25%, compared to a 9% increase globally, according to Finastra’s Financial Services State of the Nation Survey 2021.

Some banks are adopting a partnership approach to reach customers in innovative ways. Collaboration remains important to 94% of financial services institutions, according to Finastra respondents though there remain several existing and new barriers surrounding regulation, security, and technology. Adopting BaaS business lines, usually distributed to clients via application programming interfaces, requires robust risk and compliance management.

Many questions remain about the security of open banking. While open-banking APIs enable financial institutions, vendors and fintech companies to share data there are still compelling concerns over the protection of information. Issues related to cloud security and an upsurge in cyberattacks are also important to consider when entering the open-banking/cloud fintech API marketplace.

NXTsoft’s API connectivity provides a best-of-breed connectivity solution for financial institutions and fintechs. With the solution, financial technology suppliers can close deals quickly with pre-built API integrations into so many existing applications.

NXTsoft’s vendor agnostic OmniConnect Platform, the premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions, ensuring that NXTsoft clients have the most secure and reliable integration environment in the industry. OmniConnect provides the access needed to the financial institutions information, removing integration obstacles and providing a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems.

All organizations need security help as well.

ThreatAdvice Virtual CISO, NXTsoft’s flagship software solution, provides oversight into all cybersecurity needs, warning organizations and advising what appropriate action to take. In addition, the ThreatAdvice EventTracker, provides a 24/7 SOC team of cybersecurity engineers to assist with threat remediation, remote and on-site.