August 19, 2016
When observing an industry in the midst of rapid transformation, you can usually identify technological disruption as one of the primary agents of change. New technologies appear, processes change and different techniques are adopted. As players within the space continue to innovate, the need for a global standard becomes apparent to enable consistency and outcome predictability. This requires modifying existing technologies and aligning all industry players.
Historically, standardization is common in technology because of the collaborative, interdependent nature of the industry. Think about consumer electronics, for example. Bluetooth standardized the way we connect our devices while Blu-ray standardized high-definition home entertainment viewing. Now, major financial players are working together to ensure the standardization of FinTech is next.
There are major efforts underway to establish a global standard for open bank connectivity through APIs. This requires collaboration between traditional financial institutions, FinTech app developers and data aggregators, with the latter building APIs that serve as data hubs between the first two. To truly achieve global connectivity through the efficient and secure transfer of user-permissioned data, third parties and financial institutions must agree on and evangelize standards like OFX 2.2 or the Durable Data API from FS-ISAC.
Consumers have come to increasingly rely on third-party financial apps that integrate with their bank. Financial management apps like YNAB, Level Money, Mvelopes and MoneyDesktop do a better job of helping customers manage their money than traditional bank portals, while payment apps like Venmo, PayPal and Google Wallet make certain payment use cases easier than traditional, bank-offered solutions. Because of the clear demand for global financial data sharing, banks, developers and data aggregators are working to make this a reality.
When you look at the history of data aggregation, financial institutions are the original aggregators. Years ago, banks leveraged customer data to gain insight on their spending and saving habits. Such information wasn’t generally shared with third parties because there simply wasn’t a need for that. This was the era of the financial ‘walled garden.’
This walled garden approach is being replaced by the aforementioned open financial Web, where banks, aggregators and financial apps create an ecosystem of financial products for their joint customers. Banks that want to compete in the era of the open financial Web must embrace aggregators and financial app providers to create a much broader solution set than financial services of the past. The name of the game here is ‘coopetition,’ and establishing this standard for global banking connectivity will raise the bar for all parties involved.
Larger banks have been innovating for years, providing FinTech products to make their customers’ lives easier. Not all banks, especially at the regional and local level, have the necessary resources and staff to make the ideal ecosystem a reality for their customers. And that’s okay. The driving force behind the open financial Web is the idea that we can all pick each other up.
So, while the popular opinion right now is that the world of banking is ripe for disruption, the financial industry is headed more towards the crossroads of collaboration. An ecosystem of products and information sharing between banks, app developers and data aggregators will be to the benefit of all.