Part One

A headline in CUToday’s June 11 newsletter: “Headed to the U.S.? Stripe Intro’s Open-Banking-Powered Payments in the U.K.”  This is one example of how Open Banking will revolutionize (disrupt) the financial services industry. Credit unions are not exempt from this disruptive wave.

What is Open Banking?

#Open Banking is a financial services innovation that allows third-party providers (TPPs) to access bank customers’ financial data through secure APIs (Application Programming Interfaces) with the customer’s explicit consent. This access fosters a more competitive and efficient financial ecosystem by enabling the development of new services and products tailored to customer needs. By allowing third-party access to financial data through secure APIs, Open Banking promises innovation, a level playing field for all sizes of financial institutions, and customer-centric solutions. These are the products and services most likely to be disrupted by Open Banking.

What is Distributed Ledger Technology?

#Distributed Ledger Technology (DLT) is a decentralized database technology that simultaneously records transactions across multiple locations. Each participant in the network has access to an identical copy of the ledger, and changes to the ledger are made by consensus among participants. DLT ensures that transactions are securely recorded, transparently verified, and cannot be altered or deleted once added to the ledger. Blockchain is a type of #DLT, but other variations exist, such as Directed Acyclic Graphs (DAGs) and Hashgraphs. DLT has various applications beyond cryptocurrency, including decentralized financial services.

Disruption of Personal and Consumer Lending

• Competitive Loan Offers: Third-party fintech companies can use customer financial data to offer highly competitive and personalized loan products, often at lower interest rates due to their lower operating costs and advanced risk assessment technologies.
• Instant Loan Approval: Open Banking allows real-time access to comprehensive financial data, enabling instant loan approval processes that may outpace traditional credit union methods.

Adaptation Strategies:

• Enhance Personalization: Credit unions can leverage Open Banking to offer more personalized loan products by analyzing member data. By leveraging Distributed Ledger Technology (DLT), credit unions can offer more tailored, efficient, and secure lending services that meet their members’ unique needs. Through comprehensive data integration, real-time credit assessment, smart contracts, and improved member experience, DLT will transform how credit unions approach lending, ultimately leading to higher member satisfaction and loyalty.
• Streamline Processes: Implement automated and instant loan approval processes to compete with fintech offerings. DLT will streamline the credit union’s instant loan approval processes. DLT enhances data transparency, automates processes through smart contracts, and improves collaboration with third parties. Embracing DLT means faster loan approvals and increased member satisfaction, which is a competitive advantage in the financial services market.

Disruption of Payment Services:

• Instant Payments: Open Banking facilitates instant payments and real-time account transfers, where credit unions may need to catch up to tech-savvy competitors.
• Alternative Payment Solutions: Third-party providers can offer innovative payment solutions, such as peer-to-peer payments, international transfers, digital wallets, and cryptocurrency transactions.

Adaptation Strategies:

• Invest in Technology: Upgrade payment processing systems to enable instant payments and seamless transfers.
• Partner with Fintechs: Collaborate with fintech companies to offer cutting-edge payment solutions and integrate digital wallets. DLT holds significant promise for improving payment services by enhancing security, speeding up transactions, increasing transparency, reducing costs, and improving the overall member experience. DLT will help credit unions remain competitive and meet their members’ evolving payment needs.

Disruption of Financial Advisory Services:

• Automated Financial Advice: Robo-advisors and AI-driven financial planning tools can provide personalized financial advice at a lower cost, challenging traditional advisory services.
• Aggregated Financial Insights: These third-party apps can aggregate data from multiple accounts. This aggregation provides holistic financial insights that surpass the capabilities of many credit unions.

Adaptation Strategies:

• Hybrid Advisory Models: Combine human advisors with AI-driven tools to offer a personalized, cost-effective advisory service.
• Leverage Data: Integrating Open Banking and DLT can significantly enhance a credit union’s ability to provide personalized and comprehensive financial advice. Credit unions can offer innovative financial services that meet their members’ unique needs by leveraging the secure, real-time access to financial data provided by Open Banking and the reliability and automation capabilities of DLT. Utilizing these technology enhancements will improve member satisfaction.

Disruption to Savings and Investment Products:

• Micro-Investment Platforms: Platforms that allow users to invest small amounts of money automatically could attract members who might otherwise open savings or investment accounts with credit unions.
• Enhanced Investment Tools: Third-party providers can offer sophisticated investment tools and products that outperform traditional credit union offerings.

Adaptation Strategies:

• Innovative Savings Products: Develop new savings and investment products that incorporate the ease of use and accessibility of micro-investment platforms. The first step is to review the entire deposit suite of products. The credit union should evaluate every product’s relevance, utilization, and competitiveness (RUC).
• Remove Saving Product Friction: By integrating Open Banking and DLT, credit unions can significantly enhance their deposit and savings products, offering their members more personalized, secure, and efficient services. These technologies enable comprehensive data access, real-time processing, and automation, paving the way for innovative financial products that meet the evolving needs of credit union members. Through strategic implementation and member education, credit unions can leverage these technologies to remain competitive and deliver exceptional value to their members.
• Educational Resources: Provide financial education and tools to help members make informed investment decisions. By integrating Open Banking and DLT, credit unions can provide their members with the tools, insights, and automation needed to make better decisions regarding their savings products. These technologies offer secure and easy-to-use fund transfers, real-time insights, enhanced security, personalized advice, and increased transparency, empowering members to achieve their financial goals.

Disruption of Account Aggregation Services:

• Single View of Finances: Open Banking allows third-party providers to offer account aggregation services, giving users a single view of their finances across multiple institutions. Members using third parties will potentially reduce reliance on any credit union.
• Budgeting and Financial Management: Apps that aggregate financial data can provide superior budgeting tools and financial management insights. However, the “loading” of all financial data into the aggregator’s site is arduous, time-consuming, and prime for disruption.

Adaptation Strategies:

• Offer Aggregation Services: Credit unions can develop or partner with fintechs to offer account aggregation services.
• Enhance User Experience: Open Banking and DLT make account aggregation easier, more secure, and more efficient. Open Banking facilitates seamless integration with third-party financial services, allowing account aggregation platforms to offer a broader range of tools and features, such as investment tracking, budgeting tools, and financial planning services. Open Banking integrations enhance the functionality of account aggregation services, providing members with a more comprehensive financial management experience. DLT enables the creation of decentralized applications that can be integrated with account aggregation services, offering innovative solutions such as peer-to-peer lending, decentralized savings accounts, and blockchain-based loyalty programs. The decentralized nature of DLT creates an interconnected financial ecosystem where data is securely and efficiently exchanged between different platforms and services. By providing these standardized technologies, account aggregation services’ functionality and user experience are enhanced.

Disruption of Member Engagement and Loyalty Programs:

• Personalized Rewards: Fintech companies can use detailed financial data to offer highly personalized and dynamic loyalty programs, challenging traditional, less targeted credit union loyalty schemes.
• Customer Engagement Platforms: These third-party providers can engage users with innovative platforms that credit unions struggle to match.

Adaptation Strategies:

• Data-Driven Loyalty Programs: Use data analytics to create more personalized and appealing loyalty programs. By integrating Open Banking and DLT, credit unions can significantly enhance their member loyalty programs, making them more personalized, secure, transparent, and engaging. These technologies provide the tools to create dynamic, real-time, and interoperable loyalty programs that reward members for their financial behaviors and foster deeper engagement and trust.
• Enhanced Member Experience: Improve digital engagement platforms to keep members engaged and loyal. By integrating Open Banking and DLT, credit unions can significantly improve the member experience in their loyalty programs. These technologies enable personalized, secure, transparent, and efficient loyalty rewards, creating a more engaging and satisfying experience for members. These technologies improve member satisfaction and engagement and strengthen member loyalty, helping credit unions build long-term, trust-based relationships with their members.

Open Banking and DLT present challenges and opportunities for credit unions, but these technologies will disrupt many of our products, services, and revenue streams, so they must be taken seriously. Services and products such as personal loans, payment services, financial advisory, savings and investments, account aggregation, and member engagement are particularly susceptible to disruption. However, by embracing technological advancements, fostering strategic partnerships, and prioritizing member-centric innovations, credit unions can mitigate these disruptions and enhance their service offerings to remain competitive in the evolving financial landscape.