Banks are wise to monetize data as open banking evolves

When the Consumer Financial Protection Bureau (CFPB) proposed Rule 1033 late last year, designed to hand consumers more control and protection over their financial data and drive competition among financial institutions, many banks saw a threat. The American Bankers Association sent a letter to the CFPB petitioning that the rule hold all participants in the data-sharing ecosystem to the same high standard as banks.

If and when the rule is finalized, financial institutions will be obligated to provide their customers and third parties with access to account information. This would give customers more protection and liberty to consider alternate modern products and offerings outside their banks. It would also force stiffer competition between traditional banks and fintech companies. But if banks can recognize this change as an opportunity to modernize and futureproof their technology, this doesn’t have to be bad news. The change can spur them to monetize data products and services.

NatWest serves as one example of how this can be done. The major commercial and retail bank in the U.K. set up a “Bank of APIs” to share their APIs with third-party providers (TPPs) thereby successfully monetizing their APIs in payments, and other services including mortgages, lending, digital ID, real-time foreign exchange and risk management capabilities. While the CFPB rule doesn’t apply in the U.K., NatWest shows how moving toward API-first can enable banks to embrace the partner ecosystem more confidently and offer premium APIs as an additional revenue-generation channel.

To do that, more banks need to understand that APIs are the future of data exchange And to succeed in the era of open banking, institutions must adopt an API-native technology. API-first infrastructure allows for more flexible upgrades, lowers development costs and creates more scalable systems, with great revenue opportunities.

Many banks currently use “screen scraping” to access and collect data. This involves a third party requesting customer credentials to extract information, which is then provided to fintech platforms, such as payment services and personal finance management (PFM) apps. However, using screen scraping to share customers’ bank account credentials poses significant security risks and if the CFPB open banking rule comes into effect, it will look to phase out screen scraping.

Some financial services providers turn to co-providers or add middleware on top of their existing systems to get around screen scraping to enable data sharing. But that approach is short sighted. Doing so will only create outdated systems devoid of the many benefits of APIs thereby stifling their own interoperability, readiness for data sharing and ultimately kills opportunities to monetize data.

In addition to embracing more open and API-driven infrastructure, banks also need to think about several other pillars to succeed in open banking. Most important are customer consent and digital identity when exchanging data with other ecosystems. This is a challenge for U.S. and U.K. banks where digital identity doesn’t yet exist. We see how in Brazil, where about 80% of the population has a digital identity, instant payment platform Pix, as one example, can enable and track customer consent. Similar enablement in North America can create greater capabilities for banks in the future.

With API-enabled systems and effective management of customer consent, banks should look at potential changes like the CFPB’s open banking rule not as a threat but an opportunity. This is a moment to not only exchange data with other players in the financial services ecosystem, as might be obligated very soon under the proposed rule, but also monetize more offerings and provide customers with new and improved experiences they can’t find anywhere else.

Booshan Rengachari is the Founder and CEO of Finzly.