By Adam Atlas
Attorney at Law
Some people think #openbanking and #neobank are just a couple of hashtags, but they are more than that. They are important terms that represent a transformation in banking taking place right now. Open banking allows third-party financial service providers open access to consumer banking, transaction and other financial data from banks and nonbank financial institutions through APIs. A neobank is a bank that allows clients to access its services by electronic means only.
Merchants using merchant services sold by ISOs are being solicited daily by open banking solutions providers and neobanks; it is therefore worthwhile to take stock of key considerations of these new financial service providers. Open banking has already matured in Europe, and 2020 is looking like a year when it will become quite a bit more common in the United States. Visa's recent purchase of open banking platform Plaid is one example of open banking making a great start to 2020.
Three key payers are driving open banking or neobanking. First, are financial institutions such as banks or trust companies that are willing to open their systems to APIs. Some popular examples of U.S. banks and trust companies that are part of this new market are Evolve Bank & Trust, through a technology partner, Synapse, Prime Trust, BBVA and Bitgo.
Financial institutions such as these have invested in their systems' ability to interact in a secure manner with third-party data platform services. Together, these financial institutions and the third-party platforms come together to provide more creative and user-friendly access to financial services.
Second, are the technology platforms that sit between financial institutions and fintechs providing the tools by which the fintechs can create business models that make creative use of technology, banking and their own added value. Some technology platforms in this space include Synapse, Plaid and Central Payments. Finally, fintech startups themselves build business models that take advantage of new platform technology and obtain sponsorship by willing financial institutions to deliver a new generation of financial services. There are dozens of fintechs, but several of them, in no particular order, are Rabbet, Relay, Rhove, Rent to Earn, Sedera, SeedFi Inc., Sendwave, Simple and Snowball.
The financial services offered through open banks and integrated platforms and fintechs cover the full spectrum of financial services including demand deposit accounts, savings accounts, prepaid issuing, acquiring services, money transmission, crypto exchange services, brokerage accounts, insurance and more. Imagine banking as a browser extension or plugin – that's what open banking is doing to financial services.
Acquiring services for businesses has become increasingly a purely digital offering that can be easily integrated with other technology or financial service platforms. The advantage of incumbent ISOs is that they already understand the merchant underwriting process – something that cannot be learned in coding school. ISOs with sufficient technology can easily orient their merchant services offering to be integrated with a broader set of services offered by a fintech or open banking platform.
For better or for worse, new fintechs tend to have great confidence in their ability to conquer each market segment into which they enter. For typical open banking or neobank startups, acquiring is but one of a number of services they wish to provide.
For an ISO to collaborate with such an entity, the ISO should be mindful of whether they are there on a temporary basis simply to teach the fintech about acquiring. By building a robust relationship of the ISO to the fintech, the ISO can perhaps secure its status as the preferred provider of merchant services for the whole fintech platform.
Another significant risk emerges from the unique obligations of ISOs to adhere to Visa and Mastercard branding requirements. ISOs are obligated to solicit merchants for merchant services under a name that is registered with the payment networks. Each open banking/fintech platform will wish to build its own brand and may have to either register itself, become a registered sub-ISO of the ISO, or accommodate some exception so that the ISO can be true to the payment network rules and continue to use its own name.
On the flip side, the fintech may lean on the ISO to sell other services such as banking services or money transmission services for which the ISO would, in turn, have to learn specific disclosure requirements so as to keep the providers of those services in line with their respective rules and regulations.
Yes. The speed by which a company can go from having no accounts to having a full suite of financial service accounts that includes a checking account, prepaid card, credit card and merchant account is astonishing, as it can be reduced to minutes or even seconds. In the past, each of these accounts took pages of paperwork, visits to branches and encounters with salespeople. That is all gone now, and the whole package can be rolled out quickly as part of a very friendly user experience.
In the short term, clients (like me) are awestruck by the speed and ease of accessing financial services through these new platforms. This initial "aha" streak will drive a lot of sales. As the ease of opening accounts becomes more the norm and less of a novelty, the real promise of open banking is that clients will be able to opt in and out of financial services in the way that we install or remove apps from our phones.
Transfer of financial services-related data to the cloud will also allow for more transparency and, theoretically, greater competition in financial services.
In Europe the driving force behind open banking was to foster competition between banks as well as innovation amongst fintechs. That increased competition is yet to be apparent in the United States, but 2020 looks like a year when it might begin in earnest.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by email at firstname.lastname@example.org or by phone at 514-842-0886.
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