Credit: FON's Fasai/Adobe Stock
The idea of open banking began in Europe, specifically with the Single Euro Payments Area’s Payments Services Directives (SEPA PSD1-3) was first introduced in 2007. Following its success in Europe, open banking has made its way across the Atlantic to America.
For U.S. insurance companies, the urgency to embrace an open banking transformation strategy is amplified by the impending Dodd Frank 1033 regulation, which will promote competition by allowing consumers to access and share their financial data with third parties.
Open banking’s journey from the European Union to the U.S.
It is advantageous for other regions of the world (in this case, the U.S.) to learn from another’s experience (Europe) when implementing new technologies or processes, as they have had several years to refine and troubleshoot, especially complex, large-scale initiatives like open banking.
A helpful analogy would be a younger sibling watching and learning from their older sibling as they go through high school, try a new sport or join the workforce. The American insurance market is in this position, poised to benefit from historical hindsight.
The U.S. is beholden to the Dodd Frank 1033 regulation, which outlines that data sharing must occur through Application Programming Interfaces (APIs). Starting next year, open banking – specifically, data sharing with third parties – will become obligatory, and roughly 4,500 U.S. banks, the largest of which must comply by April 2026.
If what happened in Europe is any indicator of what is to come in the United States, this open banking transformation will create enormous opportunities for the insurance industry, benefiting insurers and consumers alike.
Of course, open banking and data sharing in Europe won’t map exactly to the United States. One of the main objectives of SEPA was to standardize payments, activity and charges across all the original 28 European Union member states (now 27 in the wake of Brexit). While the United States is a federated group of states, many countries comprise the European Union, each with distinct financial service cultures, behaviors and laws.
U.S. insurance companies won’t function the same way – look no further than the Dodd Frank 1033 regulation – still, Europe should serve as a helpful model for those looking to avoid pitfalls and see where to cherry-pick the best elements of open banking transformation.
What Dodd Frank 1033 will mean for the U.S. insurance industry
Many benefits will arise from the Dodd Frank 1033 regulation – namely, richer data. This data will maximize the activity and profitability of U.S. insurance companies, allowing them to deliver services better tailored to customers’ coverage and budgetary needs.
Open banking, in particular, enables insurers to leverage diverse data sources for personalized products, enhanced risk assessment and streamlined claims processing. It will also optimize core functions, from underwriting and policy servicing to billing/collections and claims processes, fostering innovation while reducing manual processes and improving data accuracy.
For example, open banking data should help facilitate instantaneous claim payments, shortening the time between claim submission and payment. This greater efficiency helps lower operating expenses and improve customer satisfaction. Likewise, real-time data connections through APIs can immediately validate claim information against a vast network of financial and insurance databases, improving accuracy and reducing delays caused by manual processing.
Additionally, APIs can enhance fraud-detection capabilities by analyzing multiple data points in real time to spot duplicate claims, suspicious transaction patterns or inconsistencies in customer information.
Many people in the developed world are “overinsured” because of high levels of disposable income, heightened fear of potential risks, readily available insurance options, misunderstanding of coverage needs, etc. Dodd Frank 1033 will change this paradigm in the United States through better data, enabling insurance companies to give consumers exactly what they need.
Moreover, this regulation will allow consumers to compare different offerings more effectively than ever before, perhaps in real time, ultimately helping people save much more on insurance.
Preparing for the open banking transformation
The transition to open banking will not be without challenges, the most difficult being data usage. Using data intelligently is not straightforward as it requires insurance companies to merge cutting-edge FinTech technology with creakingly ancient legacy technology. Getting this old and new technology to synergize is very complicated, which is why many brands partner with digital transformation engineering companies.
A partner with experience executing high-level transformational programs will provide insurance companies with the resources and expertise necessary to untangle the knot that is new and legacy technology, empowering the intelligent and compliant usage of data.
In the end, those who get ahead of these challenges now will have a considerable lead over companies that scramble to form a solution after Dodd Frank 1033 has already come into effect.
Alistair Brown, VP, Open Banking and Payments at EPAM Systems, Inc., where he takes a consult-design-build approach across the financial services industry. With more than 35 years of experience in payments and management consulting, he is a thought leader in FinTech, open banking, instant payments, digital currencies, neobanking, data analytics and monetization, and financial cyber security. He has helped cross-train thousands of EPAM engineers and consultants to understand the complexities of PayTech, enabling several of its delivery centers with domain-aware technologists for nearshore programs. Alistair has held senior roles at American Express, Visa, MasterCard, Capgemini and KPMG.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.