Adam Mendas, Author at DIRO Original Document Verification Technology

Revolution of Open Banking

The gist of Open finance is that it provides customers with complete control over financial data which in turn can change the financial habits of millions of users regarding money and savings.

In the future, third-party service providers, by gaining customers’ consent, will be able to access mortgage data, investment data, insurance, savings, and pension data. Data is the core element in Open Banking and Open Finance. By leveraging this crucial customer data, existing companies of the future will be able to tailor financial services based on customer needs and interests.

With access to seemingly endless data about customers’ financial lives and habits, there will be no end to personalized services and products. With every FinTech, Bank, and other financial institution trying to build custom products and services, there will be a surge in innovation throughout the financial industry. Ultimately encouraging businesses to leverage the latest tools and technologies as much as possible to stay relevant in the industry while ensuring the best products and services for existing and potential customers.

Collaborations for a Better Open Finance

Countless businesses across the globe have their own unique take on Open Finance and their own ideas on how to utilize the data to build better products and services for the customer. To help the Open Banking revolution take a better turn, companies across the world need to move ahead with a centralized approach. Without proper frameworks or the incentives to work on Open Finance, it’s less than likely that the industry will be able to utilize the full benefits of open finance.

There needs to be an untied sense of urgency for open banking to take center stage in the financial industry. FinTechs all over the globe are focused on developing Open Banking APIs that banks can collaborate with to enhance day-to-day workflow. Open Banking APIs like online document verification APIs, online proof of address verification APIs, and online bank account verification APIs can streamline the KYC, KYB, and AML workflows.

Regulatory bodies will need to be more vigilant as open banking becomes more prevalent in the financial industry. With so much customer data open to access, there will be a need to build strong rules and regulations. If we talk about the situation of open banking in the USA, then President Joe Biden has issued a series of customer-friendly executive orders that are primarily focused on ensuring that the US banking system can transition to open banking as seamlessly as possible.

Australia’s consumer data right offers Australians the right to access all their financial, utility, and telecom data. While it’s true that the open-by-default approach has taken more time to implement than expected, the country is now well on its way to building a strong and secure open banking infrastructure. Another example of the Open Banking revolution is in Canada, similar to Australia, they’ve built a similar plan of action, and they’re expected to roll out their open banking infrastructure by 2023.

To successfully deliver open banking to consumers on a large scale, there will be a need for collaboration between banks and the government. As the main regulator for most of the firms that would work on the open banking landscape, the regulatory bodies will have to set forth some key rules and regulations. To successfully deliver innovative open banking products and services to the customers, the Bank-FinTech collaboration will be essential. The primary example of this is Open Banking APIs offered by FinTechs globally that can enhance the day-to-day of banks.

What’s Next for Open Banking?

The next step for global open banking is straightforward, it has to be based on a centralized, top to down approach. There have been some great initial steps from regulatory bodies and government entities, but there needs to be a centralized approach to building a proper Open Banking infrastructure. Only then will companies be able to leave traditional banking behind and transition to open banking. Needless to say, open banking and digital transformation are well on their way, the result is just about time.

Since the last couple of weeks, bank regulatory bodies have released tons of publications applicable to Community Bank FinTech partnerships. This can be called a newly proposed guidance, a FinTech due diligence guide, and a Federal Reserve white paper on types of FinTech partnerships:

The growth of FinTechs is a major concern for Federal bodies and regulatory bodies. With the release of recent publications, the efforts made by regulatory cross agencies continue to ensure growth throughout the evolving space. To boost that growth, the FinTech due diligence guide was made.

FinTechs need to be careful moving forward and build sustainable mutually beneficial partnerships between banks and FinTechs. So what does the FinTech due diligence checklist have in place?

A Pathway Towards Innovation

The last 10 years have been an incredible time to build a FinTech company as global equity investments in FinTechs have reached more than a trillion dollars with a 45% annual growth rate. The FinTech industry is becoming a threat for banks as they offer better services when it comes to online banking services. When it comes to community banks, FinTechs are even a bigger challenge as they don’t have the scale to access the expertise of a large institution.

Additionally, this is the best time for community banks to choose innovation over anything else. Community banks can provide their relationship experience and knowledge of compliance in partnership with FinTechs that are building innovative financial solutions that are focused on fulfilling customer needs. This is the core aim of the FinTech due diligence guide.

The US Paycheck Protection Program (PPP) increased the possibilities of community bank-FinTech relationships as FinTechs helped in enhancing the PPP loan application portals and also became a source of distribution. After all their help in enhancing the banking sector during the pandemic, it’s clear that by building relationships with FinTechs, banks can take their services to the next level. Regulatory bodies have shown more interest in the role that innovation can play in the financial sector and this led to them addressing the FinTechs. There have been several regulatory bodies sponsored events to facilitate better community bank-FinTech relationships.

The new proposed guidelines were released in July 2021, and the complementary guidelines released in August 2021 by regulators stated that FinTech partnerships are becoming vital in the growth of the financial industry. The proposed FinTech due diligence checklist acknowledges the importance of innovative partnerships for financial institutions.

With increasing relationships, the due diligence process should also be built around the relationships keeping in mind that FinTechs don’t have the compliance experience or infrastructure of a mature bank. The Federal Reserve even acknowledges that keeping up with due diligence is a huge burden for smaller banks, that’s why the “Due Diligence Guide” was built to reduce the burden by offering some tips and tricks.

What Should Sponsor Banks Do for FinTech Due Diligence?

Based on the new proposal guide, there are four main suggestions for sponsor banks to keep up with required FinTech due diligence:

1. Review the Current Due Diligence Process Against Suggested Process

The first and foremost step is to conduct a high-level assessment of the current due diligence process against all the suggested areas in the proposed guidelines. Regulators don’t want the process to be exactly as they suggest, but comparing your current due diligence process against their suggested key areas can help enhance the process in the future.

This is also a great opportunity for businesses to review their contracts as the due diligence guide offers suggestions and examples of ideal contracts between sponsor banks and FinTechs. These contractual guidelines will help in mapping out the bank’s oversight and FinTech’s responsibilities.

2. Build a Due Diligence Process based on the Maturity of FinTechs

The second step for better FinTech due diligence as proposed by the guidelines is to tailor build the due diligence process based on the FinTech you’re partnering with. Sponsor banks should review their process for FinTechs that have several levels of maturity.

Let’s say a FinTech company is taking its baby steps, its projected financials won’t have as much weight, and it won’t have a perfect management team and a stable source of funding. Understanding these things as a sponsor bank can help build better and secure bank-FinTech relationships.

3. Your FinTech Partnerships Should Act Like a Portfolio

The FinTech due diligence process is the best way to understand how a FinTech can help in making your relationship portfolio stronger. Similar to a portfolio manager that assesses the correlation and concentrations on their investments, sponsor banks also have to evaluate whether their FinTech partnerships are focused on specific customer segments or specific industries.

For community banks that are always full of deposits, having a better understanding of balance sheets and regulatory ratio impacts can become an essential part of the due diligence process.

4. Learning When to Say No

Both the guidance and the Federal white paper revolved around a key factor “aligning the sponsor bank’s diligence and decision-making on partnerships.” In the Federal White Paper, there’s an example where a bank refused to partner with a FinTech solely based on how they handled customer data.

Each bank needs to have core principles and regulations regarding the type of FinTechs they’re open to partnering with. These principles can be based on product type, industry type, maturity, and level of sophistication. Sponsor banks should also be ready to present their concerns to regulators about why they turned down a deal due to certain findings or simply due to misalignment of business goals.