U.S. Regional Banks Must Adapt or Be Left Behind in the New Global Era of Open Banking

New L.E.K. Consulting Report Recommends Sharp Focus on Customer-Centricity, Data Governance and Innovation as New CFPB Rules Take Effect

BOSTON, Nov. 14, 2024 /PRNewswire/ -- Open banking – which gives customers control of their data and provides for data sharing among financial institutions and third-party service providers – threatens to reshape the banking industry, increasing competitive intensity, redesigning the value chain and impacting customer primacy. It represents a seismic shift for financial institutions, one fraught with risk but also ripe for opportunity – especially for regional and superregional banks.

While the shift to open banking is already underway, it may be sharply accelerated by the Consumer Financial Protection Bureau's recently finalized 1033 rules, due to be implemented in phases beginning in 2026.

Uncertainties remain, however, including the outcome of a lawsuit filed by banking industry representatives challenging the CFPB's rule making authority, and the impact of the U.S. 2024 presidential election, which may alter the CFPB's agenda in ways yet to be determined.

Nevertheless, regional banks should plan now for how to rise to the challenge of open banking and seize the opportunity. According to a new report from global strategy consultancy L.E.K. Consulting, Thriving in Open Banking: A Blueprint for Regional Banks, savvy regional banks will invest in technology and adopt a new competitive mindset.

"While details of the path forward and the pace of change may be unclear, the main point for the industry to remember is that open banking is already here – the U.S. is among the last to adopt it," said Aaron Byrne, Financial Services and FinTech Leader at L.E.K. "And it has immediate and long-term implications for industry growth, innovation and competitive advantage."

"The new CFPB rule has the potential to flip the script on financial regulation by forcing new market dynamics. But the bigger consideration is continued momentum toward open banking, which will place consumers in control of their own data while making banks compete on a whole new playing field. There will be a wider set of competitors in play. Choice, personalized experiences and digital savvy will be paramount. Regional and super-regional banks will need to adapt or be left behind. The winners will be those who seize this opportunity to redefine their future position proactively," said Byrne.

The shift to consumer choice will transform industry dynamics

At face value, the changes are aimed at giving consumers greater rights, privacy and security over their personal financial data. But the new rules also promise to unlock consumer choice – and drive increased competition – since banks and other financial services providers will soon be required to transfer customer financial data to other providers for free if requested, empowering consumers to shop the market for better rates and services more freely.

Regional (less than $300 billion in assets) and superregional banks (more than $300 billion) are uniquely positioned to thrive in this new paradigm, but only if they think beyond compliance obligations and look to capitalize on their customer-centricity to deliver unique value propositions that will carve out a strong position in the shifting marketplace.

Steps that savvy regional and superregional banks should take

To thrive in this new paradigm, L.E.K.'s experts contend that financial institutions – and, in particular, regional banks – will need to focus intently on:

• Prioritizing customer retention. Regional banks should leverage their deep understanding of their customers to craft compelling value propositions that persuade customers to let them serve them more broadly. Banks must transition from relying solely on interest and fee charges for revenue to offering innovative features such as flexible, no-fee installments and extended checkout periods. Banks that prioritize reducing friction and enhancing customer experience will be rewarded with customer loyalty. Data-driven marketing efforts will also be key.
• Embracing the opportunity to educate and inform. Regional banks should look to educate their customers and demonstrate the value of open banking. Consumers need to know how their data is used and how sharing it enhances products and services, particularly as competing banks and fintech companies vie more aggressively for their business.
• Creating personalized solutions instead of one-off products. An outdated mentality has banks mass-marketing products while a new generation is championing personalization and delivering unique solutions for key customer moments. Regional banks must learn that customer propositions are more important than product propositions.
• Addressing data governance. Open banking will up the ante on data governance, challenging regional banks to export and ingest financial data to glean insights and capitalize on opportunities. Those that can effectively absorb data can drive growth by customizing services based on fresh insights.
• Improving organizational efficiency through innovation and collaboration. The decision for regional banks is no longer whether to build or buy, but rather whom to build with and buy from. Accordingly, forming partnerships will be crucial to compete in this new ecosystem. Equally important is recognizing which partnerships can best enable specific use cases. By partnering, companies can reduce the high infrastructure costs of building capabilities.

L.E.K. also recommends that regional banks explore the strategies of like-kind institutions in more developed open banking markets (e.g., in the U.K. and Europe) to glean a better understanding of paths that have led to success (or failure).

While the urgency of compliance demands that banks move swiftly to adapt to open banking in the coming months and years, those that ultimately succeed will do so by embracing innovation methodically, strategically and – most importantly – with a customer-centric mindset.

About L.E.K. Consulting
We're L.E.K. Consulting, a global strategy consultancy working with business leaders to seize competitive advantage and amplify growth. Our insights are catalysts that reshape the trajectory of our clients' businesses, uncovering opportunities and empowering them to master their moments of truth. Since 1983, our worldwide practice – spanning the Americas, Asia-Pacific and Europe – has guided leaders across all industries, from global corporations to emerging entrepreneurial businesses and private equity investors. Looking for more? Visit www.lek.com.

About L.E.K Financial Services
We are committed to elevating Financial Services in areas of growth, customer, business and operating model shift, digitization/data analytics, M&A, and broader sector evolution. Our priorities focus on the game-changing forces of consumer financial services – banking, payments, wealth management, insurance and fintechs – disrupting the industry at every turn. These sectors aren't just shaping the future; they're redefining the very foundation of how businesses and consumers interact with financial services, pushing boundaries and unlocking unprecedented opportunities.

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SOURCE L.E.K. Consulting