Open banking is here, but consumers need to know why it matters

The long-awaited arrival of open banking is ushering the United States into the era of data-sharing, a watershed moment that finally gives consumers the power over which financial institutions get their data and — more importantly — win their business.

Yet there are barriers to adoption that need to be addressed for the banking industry to seize this opportunity to strengthen relationships with their consumers. While it’s imperative for companies to continue addressing security risks, one of the biggest priorities will revolve around showing consumers that open banking is a safe practice that’s designed to work in their favor.

As a result, the banking and fintech industry needs to come together to not only advise consumers on how to safely harness their newfound power, but also to improve the industry’s ability to take effective action that will ensure that open banking’s potential isn’t squandered by consumers’ skepticism or misunderstanding of its value.

The promise of open banking hinges upon how well financial institutions can demonstrate that data-sharing is safe for consumers. Open banking isn’t necessarily new, as consumers have previously used it if they’ve granted another app’s automated program interface, or API, access to their bank account and details within it such as transaction and payment history.

About 27 million adults in the U.S. used open banking in 2023, yet that sizable figure pales in comparison to the estimated 68 million Americans that manually input account and routing numbers, according to PYMNTS Intelligence research. Unsurprisingly, almost half of the consumers who didn’t use open banking said it was because they weren’t familiar with the payment form, while 56% specifically attributed it to security concerns.

Considering this disconnect, accelerating the adoption of open banking will require the industry to clearly communicate data safety measures that not only assuage consumers’ apprehension, but also increase awareness by educating them on its benefits. As they likely won’t read lengthy terms and conditions agreements to understand what data is being disseminated — let alone to which third-parties — there needs to be clear communication about which data aggregators will receive consumers’ data, how long they’ll have it and steps they can take to easily revoke access.

Even though large firms have until 2026 to update their interfaces, the time is now for the industry to educate consumers, especially as younger Americans lose trust in financial institutions. According to a recent survey published by FIS, 40% of Generation Z and 36% of millennials are getting their financial advice from social media, with only 25% of the cohort getting that counsel from their bank.

While consumers should rightly use all resources at their disposal, this trend highlights a major opportunity for financial institutions to pair education with regulation to build trust in their broader efforts to deepen relationships with existing and prospective customers.

Open banking isn’t merely a matter of companies getting their hands on consumers’ data. Rather, it’s a chance for the industry to hyper-personalize its customer service. Having access to data means that companies can provide a banking experience that’s tailored to consumers’ specific needs and financial goals. This level of customer-centricity will inevitably come with various benefits, whether its financial recommendations in real-time, targeted marketing or fraud mitigation.

Such a promising value proposition can’t happen in a vacuum though, which is why it’s critical that we convey the significance of open banking to make it more appealing to consumers.

Beyond education, the industry needs to place a greater focus on determining how it will open data access and — in the worst-case scenario — who’s liable for the information that’s freely flowing to third parties that also need to be verified.

Financial institutions can partly solve this issue by adopting technology with suites of APIs that can securely share consumers’ data and ensure compliance. However, a broader solution will require a more comprehensive framework around the open banking ecosystem altogether.

Considering the U.S. is a late adopter of open banking, established protocols in the United Kingdom can serve as a compass to guide the industry’s steps toward governing what will become a vast ecosystem.

For instance, the U.K. has its own governing body, the Financial Conduct Authority, or FCA, which is responsible for authorizing third-party providers that can share consumers data with other financial institutions. As part of this authorization, providers need to comply with data-sharing requirements outlined in the Payment Services Regulations 2017, which was published ahead of open banking’s formal launch in January 2018.

Yet regulations are only as effective as the organizations in place to uphold them. To that end, the U.K. Competition and Markets Authority set up Open Banking Limited to develop standards and governance protocols as the system was implemented across the country. Further, Open Banking Limited not only serves as a platform to help consumers understand the concept of open banking, but it also has a regularly updated directory of authorized third-party providers to ensure that consumers aren’t blindly giving their data to nefarious actors.

In the U.S., the Financial Data Exchange, or FDX, has set the tone in this respect, committing to serve as an industry-led body to protect safe data-sharing in partnership with regulators, banks, fintechs and third-party providers. As FDX is the first group to apply as a standard-setting body for open banking, industry players should be encouraged to maintain this collaborative approach, as this level of harmony will propel us into the future of finance.

As money moves faster and more seamlessly than ever, such a simple but effective approach can go a long way. The potential for open banking to increase competition means that every industry stakeholder will want to capitalize on this opportunity to win over new consumers. But we can’t let the prospect of business growth distract us from the most important element of open banking — consumers’ trust and safety.