The Consumer Financial Protection Bureau’s (CFPB) recent shutdown caused a ripple across the industry and calls into question many regulations, including the status of the October open banking ruling.
As the situation continues to evolve, CI caught up with Aaron Byrne, Head of Financial Services at L.E.K. Consulting, to discuss the CFPB’s closing, its implications, and why banks, especially smaller and regional banking institutions, must continue to push forward with open banking to gain a competitive advantage.
Our chat with Aaron Byrne is shared below.
Crowdfund Insider: Can you provide a clearer picture of what open banking entails and its significance in the global financial landscape?
Aaron Byrne: Open banking enables consumers to share personal information with other financial institutions. Essentially, it serves as the system through which banks open their application programming interfaces (APIs) and allow third-party entities to access account holders’ financial information, with their express permission, so they can develop new apps and services. Open banking also increases transparency for banking customers.
The move to open banking truly represents a paradigm shift in consumer banking and eventually Commercial Banking. It’s fueled by the burgeoning data economy and a push towards greater consumer empowerment in financial services.
Open banking is quickly gaining momentum in various regions, including the E.U. and U.K., which have embraced it via the Open Banking Standard and Payment Services Directive, as well as parts of Asia and Australia. Consumer demand for more personalized services and the pressure on banks to continue to innovate are contributing to a more intensive open banking dialogue in the U.S.
Crowdfund Insider: In light of recent political and legal shifts in the U.S., why should banks continue to prioritize open banking?
Aaron Byrne: U.S. financial institutions might feel tempted to view open banking as optional due to some regulatory pullbacks and legal challenges earlier this year, as well as the now-tenuous status of the Consumer Financial Protection Bureau, which worked to enshrine open banking by passing Section 1033 in October 2024.
But that more reserved perspective overlooks the fact that open banking actually aligns with the current D.C. administration’s emphasis on financial innovation, as well as the inherent marketplace demand for open banking.
In addition, the adoption of the Financial Data Exchange standard signifies a notable movement towards standardizing secure data sharing practices, which likely removes concerns certain parties in the U.S. have had about open banking. In short, bank’s ignoring the move toward open banking could miss out on strategic growth opportunities.
Crowdfund Insider: Turning to consumers, what trends in customer behavior are driving U.S. banks to adopt open banking?
Aaron Byrne: There is a strong consumer pull towards personalization everywhere, and that stands true for banking services. Research shows over 70% of U.S. banking customers express a desire for more tailored services made possible through the use of personal data.
Today’s consumers are better informed about the value of their data and increasingly demand control over it. Big banks know this and have taken advantage of it. But there is still untapped potential here, via open banking, which will ignite a new wave of personalization. The global data economy is worth an estimated $3 trillion annually, but it will grow with the implementation of open banking.
Crowdfund Insider: Who will benefit the most from embracing open banking?
Aaron Byrne: In addition to consumers and account holders, regional and smaller banks will benefit the most if they can successfully deploy open banking. Some might feel that open banking is a massive undertaking – but the strategic benefits are immense. These types of institutions possess strengths that play well with open banking. They are customer centric, the community is loyal to them, and they can build more authentic, stronger relationships with customers than larger financial institutions can.
Open banking offers a pathway to leverage these characteristics to offer even more enriched customer experiences and expanded service offerings. By adopting open banking, regional and smaller institutions can enhance their competitiveness against larger players who may already be leveraging such forward-thinking technologies.
Crowdfund Insider: How should regional and smaller banks strategically move toward open banking? What are the must-dos?
Aaron Byrne: These banks need to become more data-centric. This will help them combat the inevitable increased customer churn that will result from open banking.
To do this, they must build capacity to analyze and synthesize customer data to tailor products more insightfully. Additionally, innovation cannot just be a buzzword, but a real practice; creating customized and innovative offerings that meet a spectrum of customer needs is essential. Regional and small banks cannot just settle for one-off solutions. They must create diverse, personalized experiences that integrate seamlessly and make their customers’ experiences better and easier.
In that context, banks should be careful to not underestimate the power of partnerships. Collaboration with fintechs can be particularly synergistic. In addition, working with non-financial entities can also lead to better value for customers.
Diversifying revenue streams beyond traditional fees to include quick loans, early pay access, credit bundling tools and so on will increase both revenue and reach.
Thinking creatively about resource allocation to extend geographical reach and customize marketing strategies will be also pivotal. This is possible given open banking’s digital nature, which allows smaller banks to provide their offerings on a wider scale.
Crowdfund Insider: With fintech companies rapidly changing the financial services landscape, how critical is the timing for banks to engage with open banking?
Aaron Byrne: The time is now. The technology and customer expectations for banks are evolving at a breakneck speed. Banks that adopt open banking early have the advantage to truly set the stage in the ecosystem, defining how they interact with fintechs and other financial service providers to deliver comprehensive solutions.
This is not just about keeping up – it is about taking a proactive stance to shape and lead in the banking sector.
Crowdfund Insider: Lastly, what do you foresee as the potential future scenarios for banks that embrace open banking versus those that resist it?
Aaron Byrne: Banks embracing open banking are likely to thrive. They’ll be better positioned to respond to customer needs dynamically, innovate more effectively, and compete in a digital-first world.
But banks resisting this shift may ultimately struggle to maintain customer loyalty as the market moves toward more transparent, responsive and personalized banking services. The path banks choose today will fundamentally influence their future roles – and success.
This is particularly important for smaller banks that can leverage open banking’s capabilities to strengthen their existing differentiators – loyalty, personalization and customer service – to better compete with the legacy players and up-and-coming fintechs that are challenging the market. This will also help them expand their offerings to different audiences, including business owners and industry verticals.