Open banking: An open and shut case

If credit unions didn’t exist today, would someone invent them? Are they a relic in-waiting like the internal combustion engine or are they an indispensable cog in the financial ecosystem?

Let me frame this in another way. In just 10 years time, there will be two types of credit unions. Those that adopt the ecosystem of open banking and those that wish they had. This is the fundamental choice that every credit union faces today.

It is a choice between a closed system and an open system.

The Howard Hughes Strategy

In a closed system, you keep your members cut off from the outside world. You limit them to products created and managed in-house. This is the way almost all credit unions have operated traditionally.

You may have seen the 2004 movie The Aviator about Howard Hughes – the billionaire aviator – who spent most of his life trying to avoid germs. Towards the end of his life, Hughes, who is played in the movie by Leonardo DiCaprio, lay naked in bed in darkened hotel rooms as his obsessive-compulsive disorder worsened. A sad end to an incredible life.

The AppStore Approach

The open system is the AppStore model. In an open system, you offer third party products and services on your platform.

The AppStore is probably the best known example but when the first-generation iPhone arrived in 2007, all of its apps were made by Apple. It was a closed system. Why? Because Steve Jobs didn’t want third party developers in the walled garden of Apple. He wanted to control the user experience. After all, he was very good at it.

It took, then Apple board member (and now Chair), Art Levinson, a lot of work to convince Steve Jobs to launch the AppStore.

What would the iPhone be without the app store? It’s almost unthinkable.

Make Your Own AppStore with Open Banking

McKinsey defines open banking as a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace.

In other words, it’s the connective tissue in the financial ecosystem. We can now join the dots. Credit unions can take advantage of open banking to better serve members by integrating a wider selection of high quality products and services.

But…

You might be thinking that’s all well and good for Apple but credit unions are different. Open banking means opening up to outsiders. It sounds so risky. Letting outsiders access our members? What if they never come back!

You love your member community and want to protect them from poor product experiences and data breaches. Of course.

You will still want to control who comes into your credit union garden. In fact, it’s your job as a credit union to be the trusted gatekeeper. Just like Apple does, you will create standards and processes regulating who can offer services to your members, so that your members have the best user experience.

One of the leaders in this approach is the UK’s Starling Bank, founded by the former COO of Allied Irish Banks, Anne Boden. Starling Bank offers its customers an array of products and services through its marketplace (in effect, its AppStore). At the time of writing, Starling Bank offers more than 20 third party products through its business marketplace and a further 11 through its personal finance marketplace.

This is a great example of putting customers first. Instead of saying, “no you can’t have this because we didn’t make it”, you ask “how can we best serve our members’ needs”?  Starling Bank’s products co-exist with those of third party products for the benefit of the bank’s customers.

Benefits for Credit Unions

The open approach is a game-changer for smaller players like credit unions. Previously constrained by limited resources and technical capacity, credit unions can now meet all of their members’ needs.

Here are some of the key benefits of moving to this approach:.

• You can offer more products and services by tapping into the vast Fintech ecosystem
• You can offer better quality products compared to what you can currently develop in house
• You will attract a newer demographic of members and retain existing members
• You can protect members by ensuring only reputable providers become partners
• You reduce risk by evolving at the speed you want. This is the opposite of those expensive digital transformation projects that too often disappoint
• It doesn’t require significant investment and speed to market is very fast
• Over time, you will build your technical capabilities so that you can fill any gaps in the market and build products specific to your membership

A New Ecosystem

I started this article with a prediction about the two types of credit unions: Those that adopt the ecosystem of open banking and those that wish they had. Let’s be clear. Open banking will bring about an entirely new financial services ecosystem.

Where will credit unions fit in to the new order? Well, the reason credit unions exist is to serve their members. Once you view decisions through that lens, the answer becomes clear. The main task of credit unions is to understand their members needs, and defend their interests better than anyone else. Those that achieve these objectives will thrive in the new order of financial services. Those that don’t, will lose members as they find new ways to meet their needs without you.