Open Banking and Opportunities for Community FIs

Over the past few weeks, I’ve had several FI, fintech, and other tech-nerdy friends start to tune in on the increasingly hot topic 🔥 of Open Banking, and where it could impact community banks and credit unions. With the expectation that the CFPB will finalize its rule-making this Fall on CFPB Section 1033 regarding financial data and open banking, there are a lot of ways community banks and credit unions can benefit — but may not be thinking about yet. 🤔 Yes, there will be new compliance obligations as a result of this rule but when you think about it, it’s actually a really exciting time in banking.

Simply put, Open Banking allows consumers to share their banking data, including transactions, payments, and other financial data, with third-party providers (TPPs) via application programming interface (API) connections. As consumers, we experience this today when we sign up for a fintech app or service and link our financial accounts. This happens primarily through data aggregators (e.g., MX (where I work), Plaid, Yodlee, Finicity, etc.) who connect with our financial data providers via API — when available — but sometimes must rely on traditional connections (such as screen scraping) because not all FIs in the U.S. have the ability to allow their consumers to share financial data via an API yet. While Open Banking is not a new concept, the CFPB’s Section 1033 rule is the first major regulation that will standardize and mandate the use of APIs across the industry.

Perspectives across the industry (and there are many!) generally agree that consumer-permissioned data sharing is great for consumers, but opinions are mixed on the benefits for community FIs. I think that if community banks and credit unions are thoughtful and proactive in advance of the implementation of Section 1033, they can take advantage of the opportunities that come with it. 

To that end I'm sharing some curated resources below that identify ways community FIs can benefit.

💡 PaymentsJournal hosted an inspiring Open Banking podcast a few weeks back on where community FIs should think about where they can leverage Open Banking, playing on their unique strengths. 🦸

“Consumers won’t have to open another account elsewhere, because they can obtain the products and services they need from their primary financial institution. Open banking levels the playing field and creates opportunities for community banks and credit unions to compete with their larger counterparts.” —Vladimir Jovanovic, VP of Innovation at Velera

I love this perspective. It emphasizes relationship banking as a strength of community FIs and, where they leverage this strength, they win. But community banks and credit unions need the right tools, like analytics that provide data visibility and enable them to understand and take action on their data. As I've mentioned before in other posts, those of us within the fintech community have a responsibility to ensure we continue to provide the tools and the support enabling community FIs to evolve and thrive with these new market trends.

🔨 Earlier in the spring, The Financial Brand posted a great myth-busting article on Open Banking and Community Banks authored by Shanda Purcell , Senior Director of Open Banking at CSI . Purcell focuses on the fact that open banking can be a game changer for all FIs, not just big banks:

"The beauty and value of open banking don’t rest on the sweeping technological changes that revolutionize a bank’s entire operations and growth potential. They rest in a bank’s ability to explore applications and technologies at a pace they’re comfortable with." —Shanda Purcell, Senior Director of Open Banking at CSI

Purcell clarifies that while yes, this could include tech modernization initiatives, "For most, it comes in the form of incremental investments in a specific area of the tech stack that align with the broader growth strategy." Again, while this emphasizes that community FIs should recognize and take action on recent market and regulatory changes, they have the opportunity to do so at a pace and scale that aligns with their broader growth strategy.

🏦 I recently posted about why community FIs should be paying attention to Open Banking, especially those considering Embedded Finance fintech providers as a partner. If you’ve not checked out Jason Henrichs ' Breaking Banks podcast on brokered deposits, find it here. A colleague recently asked me, "Who actually are partner banks and how many of them are there? Is this a thing?" — and yes, it is. So I made this infographic to highlight which type of FIs most often partner with fintechs (spoiler: community FIs!), why they partner, and the biggest opportunity — compliance.

💡 Another well-written article is from earlier in the year, this one published by Ascent Platform Co-Founder Arjun Sahgal on "The Loyalty Imperative: Seizing the Open Banking Moment for Credit Unions & Community Banks." Sahgal emphasizes what community FIs do best — build and grow great relationships.

"The key advantage they [community FIs] have over mega-banks is relationships. Open banking makes basic service offerings table stakes, but institutions that leverage technology to provide complete, convenient and customized experiences will win on loyalty." —Arjun Sahgal, Co-Founder Ascent Platform

🏇 Love that sentiment. It's so true. And wow, I really love what ICBA is doing with their ThinkTECH Accelerator — kudos to Stephanie F. for what she and ICBA are building in Atlanta. It's awesome to see continued innovation in these types of platforms, geared toward helping community FIs succeed through leveraging technologies like Open Banking!

🔷 Finally, I’d be remiss if I didn’t call out the wealth of resources my own employer, MX , has written on Section 1033. While not specific to community FIs, MX does a good job outlining key areas of opportunity, common areas in the rule that data providers (including community FIs) may need to start working on now, and more. Learn more at mx.com/1033, or reach out and I'll introduce you to my colleague and open banking consultant Nicole Klein .

What Community FIs Should Be Doing Right Now

With Open Banking, community banks and credit unions have a lot to be optimistic about! That being said, what should community FIs be doing right now?

1. It's fine to start small, but make progress. If you don't yet have an API strategy, work with your trusted consultant, partner, or digital banking provider to develop one. The strategy should align back to your overall goals as an FI, such as increasing engagement, growing deposits, lending for small businesses within the community, etc.
2. Know your data. Or rather your customers' data. Use whatever analytics tools you have or can get — for example, MX offers a great set of tools with Customer Analytics — in order to understand how your customers bank with you and why they are banking elsewhere. Those types of transactions — e.g., payments to auto loans with another FI, etc. — are opportunities for you to assess if you are best meeting the needs of your market. Your community needs you!
3. Ask for feedback from your customers and prospects. What goals are they trying to accomplish that you can help them achieve through partnerships or vendor relationships through your FI? Working capital? Merchant services? Inventory management? What would your relationship with your small businesses and consumers be like if they could achieve these goals through your FI?

🦸 Treat this as the opportunity it is to evolve, meeting the changing needs of local relationships community FIs are so good at building, in order to help both the community FI and their own communities thrive!

Chris Wilson , Commercial VP, Partnerships, leads MX's digital banking referral partnerships ecosystem. For FIs or digital banking partners who want to learn more about how they can benefit from Open Banking or schedule a demo of MX's Open Banking products, reach out to Chris via LinkedIn or at chris.wilson@mx.com.

Sources from my Infographic:

1. Bobby Button - FedFis | May 2024
2. S&P Global | The role of banks in powering the fintech industry
3. Bloomberg | Majority of Fintech Partner Banks Report Losses Over Compliance