Key takeaways:
- Open banking creates a platform opportunity for banks.
- It also opens a new revenue opportunity: identity verification is a small example.
- Instead of relying on third party providers, banks can query their databases to confirm the legitimacy of information, charging companies for the service.
- This is accomplished through a data vault offering where banks hold customer information securely, similar to what they already do with savings accounts for a customer’s money.
Too much discourse on open banking is about taking away from banks to benefit individuals.
Let me be clear: I’m a full-throated supporter of open banking. I’ve written about its fantastic benefits for individuals, namely people owning and controlling their data.
What bothers me though, is the assertion that banks all stand to lose so that’s why they won’t support it.
While there may be some politics and status-quo support going on, I don’t feel this is a fair argument because it creates a false dichotomy of bankers-versus-everyone. It also serves to belittle some genuine security concerns about open banking that need to be addressed and dealt with rather than used as an excuse for inaction.
Instead, I want to posit a different opportunity: not only is open banking not taking away from banks, it actually makes banks stronger. Indeed, it opens at least one new revenue opportunity in the form of identity verification.
Open banking turns banks into platforms
Open banking empowers a secure open source-style ecosystem where all kinds of businesses can build their commerce apps on top of bank infrastructure. It breaks down (some of) the walled garden in banking. Yes, banks still need to keep information secure. However, the sharing and movement of that information—along secure open banking rails—becomes much easier.
When data sharing is easier, companies can monetize it as platforms like Shopify, Google, Oracle, and Salesforce (among others) have demonstrated. All the while, federal open banking security frameworks ensure that customer data remains safe throughout the process. If you’re curious, I wrote about this topic more in-depth in another article.
In this way, I see customers remaining protected through security frameworks that banks will abide by. Once that’s in place, banks are not relegated to the background while startups build new apps on the rails of open banking. Instead, banks can become active players in the world of app-building, expanding their own footprint into new territory.
Data sharing enables banks to generate billions of dollars in value for themselves and other businesses, much like Shopify, Google, Oracle, or Salesforce do with their app exchanges.
A new opportunity: identity verification
One of the biggest opportunities for banks is in the identity verification space. In short, banks have a unique edge here because of how proprietary data enters an open banking ecosystem. That is, it enters through the bank itself.
While customers have autonomy over their data, including sharing with any third party they want, it doesn’t necessarily mean the information is true, accurate, or correct. This is where banks come in. Companies that receive information via open banking rails still need to verify its accuracy for their own purposes.
In the past, this might have been done through additional steps like a selfie with your passport or even in-person verification. However, banks can step up and play the verifier.
To make this work, banks would need to pre-verify data. So it’s not a situation where a company receives information and then the bank verifies or not. Instead, it’s a situation where banks offer a stamp of approval that any data coming from a given person is accurate. This can be done through a data vault offering which is free for end users but could charge a service fee to any third party that wants data verification services.
Everyone can win
So much about open banking is highlighting all the places banks lose. What concerns me about this discourse, beyond what I feel is its inaccuracy, is that it attempts to use guilt to push forward open banking.
In short, the commentary subtly suggests that banks won’t support open banking because it harms them, essentially publicly shaming them into giving in. I don’t think that’s necessary at all.
The purpose of open banking is to make life better for customers by giving them autonomy over their data. Yes, for generations banks have profited from walled-off data. But instead of whacking them over the head with the idea of lost profits, I’d rather show how everyone can benefit.
