ESG (environmental, social and governance) will be critical to the work that banking and fintech innovators do in building open banking systems over the next several years. It’s inevitable that open banking will be part of the next wave of banking innovation – but the idealistic promise of open banking could hit big problems in a new and unregulated industry. So why does it need ESG measures built in from the start?
Gunjan Sinha is a visionary, entrepreneur, and business leader. He currently serves as the founder and executive chairman of MetricStream, a company dealing with integrated risk management (IRM) and governance, risk, and compliance (GRC).
Speaking to The Fintech Times, Sinha argued that taking early steps to ensure open banking systems are compliant, responsible, and mindful of ESG measures is essential to advancing innovation in the banking industry and avoiding detrimental setbacks:
With nearly one quarter of the world’s population disengaged from the banking world, the financial services industry has a significant opportunity to expand its reach.
The concept of open banking – building an accessible bank of the future with modern technologies that bridge the digital divide – also presents financial services organisations with an opportunity to make a positive change in the world. If the industry were to shift its focus to a world where banking becomes equal for all, the gap is likely to close between opposite ends of the spectrum; those who are ultra-wealthy and the unbanked.
Financial institutions pursuing open banking solutions have a responsibility to do more than just comply with regulatory guidelines in place. In becoming more inclusive, open banking ventures intrinsically support the premise of the “S” in ESG – environmental, social, and corporate governance.
ESG is not a fad. Future leaders in every industry, including financial services, will have ESG built into the DNA of their business. As open banking ventures expand and become more mainstream, taking early steps to ensure open banking systems are compliant, responsible, and mindful of ESG measures is essential to advancing innovation in the banking industry and avoiding detrimental setbacks.
The opportunities – and risks – of fintech innovators
The building blocks to open banking solutions are already mainstream. According to a Mastercard consumer survey, over three-quarters of North Americans use financial tools that are linked to their primary bank account. But the best open banking solutions aren’t necessarily going to come from traditional banks. Startups and fintechs are creating the disruption toward widespread open banking because regulatory measures have not caught up yet.
This presents tremendous opportunity for change and innovation, but also much risk. With gaps in the regulatory environment of fintech, it is even more important for disruptors to be aware of their risk, compliance and governance measures within their technology and process.
Bringing ESG to open banking
The next few years in banking innovation are critical to an inclusive and compliant financial future. Industry leaders and innovators should follow these three steps to ensure ESG is a key part of the growth process:
- Be Proactive
There is substantial opportunity in open banking, and hundreds – if not thousands – of experts, developers, and visionaries are rising to create the dream of a more inclusive financial system. As new fintech brands are born, more will bring ESG into the business infrastructure and brand from the start. New brands that come out of the gate as risk-aware and compliant will not only meet the expectations of regulators, but also win over consumers.
Just as good news propagates, bad news propagates even faster. It’s extremely important that open banking providers harness the power of their risks and be transparent with consumers about factors like data privacy and security measures for transactions. ESG is not just about meeting certain standards outlined by regulators. Leaders in any industry, especially in finance, must ensure their brand is seen by consumers as genuinely caring about its ESG commitments. Strong and authentic brand communication, done well and done often, can help new fintechs break out of the pack.
3. Connect profit with purpose
Entrants into open banking need to turn the challenge of ESG into a brand advantage. This is the point when companies actually start to deliver the true promise of their technology or service. It ensures people and society hold the same place of value to leadership as financial stakeholders. This will bring more value and more attention to the brand than any marketing campaign.
The imperative for good governance and a commitment to social good is here and now, as disruptors create the bridge between the banked and unbanked and narrow the digital divide. Those that come into the market with ESG and governance standards at the core of their business will be more likely to stay and lead into the future. All others will fall by the wayside.