How Data Providers Can Compete and Comply: Achieving 1033 Compliance and Gaining a Competi...
December 18, 2024 | 6 min read
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By Maisie Bilotti, Sr. Director, Advocacy, MX
It’s no secret that MX is a huge proponent of Open Banking and the benefits it delivers for consumers and the financial services industry as adoption accelerates. The financial service industry’s move towards more privacy-first, efficient, and reliable connections through open banking APIs is an undeniable win for consumers, financial institutions, and fintechs.
When the financial data sharing ecosystem kicked off roughly 20 years ago, financial institutions and fintechs relied almost entirely on the practice of screen scraping to pull data from other financial providers into their own systems. This practice, while useful at the time, is far less secure, less reliable, and less standardized than open banking APIs.
Screen scraping also places a much heavier burden on developers and organizations to manage the technical complexity and cost of maintaining tens of thousands of data endpoints. By contrast, APIs streamline the process significantly by standardizing data sharing with one portal that manages data providers’ systems. Helpfully, standard-setting organizations like the Financial Data Exchange (FDX) drive consistency and efficiencies across the ecosystem by establishing clear technical standards that keep data flowing effectively and securely for consumers and businesses.
The speed of adoption and the level of benefits that financial data ecosystem participants can reap from Open Banking hinge heavily on one key concept: interoperability. This is a fundamental principle that drives the potential of Open Finance, enabling greater access, efficiency, and innovation within the financial ecosystem.
At MX, we believe building for interoperability and openly engaging with the broader ecosystem is the right thing to do to stay competitive and provide consumers with the best experience. It also meaningfully levels the playing field by making it easier for companies of all sizes to fully participate in the financial data ecosystem.
In this post, we’ll tackle key questions including:
Within Open Banking, Interoperability ensures that data flows easily and securely between data providers – often banks and credit unions – and third-party data recipients (i.e., fintechs and other providers of financial products and services). In practice, this means building products and collaborating with the ecosystem in a way that leads to seamless consumer experiences when connecting accounts from one bank or fintech to another, even if the other entity is your competitor.
This means consumers can share their financial information with authorized parties, such as budgeting apps or payment processors, without compromising privacy or security, and without being locked out depending on which financial provider they choose to use. By promoting a standardized approach to data sharing, interoperability removes the barriers that traditionally exist between different financial entities, fostering innovation and enhancing the customer experience.
This becomes incredibly important at high-impact moments in consumers’ lives. For example, quick, accurate, and secure identity and account verification is crucial when a consumer is getting their first mortgage. Similarly, the ability to easily send funds to a foreign bank account is essential for a bank customer whose child is studying abroad. Interoperability makes these processes much easier for both the consumers engaging in these transactions and the banks and fintechs that initiate them.
On the flip side, connection roadblocks can drive consumers crazy. An MX colleague recently tried moving money from a crypto exchange to her bank, only to find the connection wasn't available. She had to jump through hoops — getting account and routing numbers, using an intermediary platform — just to complete the transfer. This terrible experience will push customers to switch banks.
For Open Banking to reach its full potential, interoperability is essential. It enables consumers to access a broader range of services, facilitates competition among providers and recipients, and, ultimately, leads to better, more tailored financial products.
Without interoperability, the promise of Open Banking — creating a more inclusive, transparent, and efficient financial ecosystem — would be limited.
Before Open Banking became a formal concept, the financial services industry was traditionally closed. Banks and financial institutions controlled access to customer data, limiting how third parties could gain valuable insights to innovate and offer more compelling consumer products. Over time, however, the growth of digital banking, fintech start-ups, and mobile payment solutions led to a need for greater openness in financial services.
On the regulatory front, interoperability and data portability mandates have become increasingly prevalent in the healthcare and consumer technology industries around the world, and the financial services industry is no exception.
And, it’s with good reason. Interoperability and data portability put the consumer in control of their data destiny, and remove market power from would-be gatekeepers. Pressure from consumers and governments have incentivized data holders, processors, and recipients to retain customers by providing optimal services — instead of trapping consumers and their data for their own gain.
Interoperability delivers competitive benefits and new opportunities for innovation to both large and smaller players in the financial ecosystem.
It can make it easier for small- and medium-sized financial institutions to offer the same level of secure, high-performing consumer experiences as large financial institutions by connecting seamlessly to add-on services and insights that larger institutions are capable of providing in-house.
For larger financial institutions, interoperability allows them to position themselves as leaders in data sharing and Open Banking initiatives. This can grow their business by attracting tech-savvy consumers who value transparency and ease of access. Embracing interoperability can also establish them as trusted providers with consumers, increasing trust and customer loyalty.
For fintechs, interoperable platforms and connections can increase market reach, lead to faster integrations and reduced time to market for product launches, generate partnership opportunities, improve scalability, and lead to cost savings.
While competition and innovation are beneficial to businesses and the overall economy, they should always prioritize the consumer. Financial data is extremely sensitive. We must ensure that it is used responsibly and ethically to benefit both consumers and businesses. If consumer data is exploited, trust in Open Banking will erode, and people may reject data sharing and its benefits.
To achieve interoperability across the financial sector, several key strategies should be adopted:
Advancements in technology, such as artificial intelligence (AI), blockchain, and quantum computing, will likely play a significant role in enhancing interoperability in the open finance space. These emerging technologies have the potential to further streamline processes, improve data sharing, and facilitate smoother interactions between financial institutions.
Alongside these, the evolving regulatory landscape will also shape the future of Open Finance. Regulators across the globe are pushing for interoperability standards that support cross-border collaboration and ensure a unified framework for financial services. Moreover, Open Finance has become a key driver of financial inclusion, with global economic development organizations and nonprofits such as CGAP, BIS, IMF, UNSGSA, and the World Bank collaborating to create guidelines that help countries build open banking frameworks that promote economic inclusion.
Finally, evolving consumer expectations are accelerating the shift toward interoperable financial services. As consumers become more tech-savvy, they increasingly demand seamless, integrated experiences, pushing the financial industry to adopt more collaborative models that meet these expectations and foster greater efficiency in service delivery.
Interoperability is a cornerstone of Open Finance. Without it, consumers would face fragmented systems that limit their access to a full range of financial tools and opportunities to meet their financial goals.
For Open Finance to truly flourish, stakeholders must prioritize interoperability in their designs, collaborations, and future innovations. Open Finance has tremendous potential to transform the global financial landscape. With interoperable systems, we can unlock new opportunities for individuals, businesses, and entire economies — driving better outcomes for businesses, better tools for consumers, and greater financial inclusion.
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