Most historians believe that Denmark’s transition to democracy was peaceful and uncontested by the last absolutist monarch ruling over the Danes, King Frederick VII. When he relinquished power by signing the June Constitution of 1849, many other countries were beginning to recognize individual liberties and shift from absolute to constitutional monarchies. But it is unlikely that Frederick gave up his power because he was simply bending to the winds of social change. Instead, it is theorized that the move was the natural, but unintended, consequence of a series of military reforms.
For generations, Denmark had been under siege from Sweden, Germany, and Britain. It was always fighting to retain its sovereignty, and those fights required more and more troops. Eventually, conscription became necessary. And when the crown asked its men to put their lives on the line, it had to cede some power to the people as well.
In research published in 2004, professor Lars Bo Kasperson of the Copenhagen Business School wrote, “[t]he constitution was not a result of a ‘peaceful but sudden change’ . . . but rather an extensive process of solving the defen[s]e problem. New reforms are closely linked to situations when external sovereignty is under threat.”
By signing the new constitution, King Frederick VII was honoring the power paradox: to retain power, leaders must sometimes give it away.
Today, banks are being rocked by a similar wave of democratization. Customers are gaining access to the financial system in unprecedented numbers via trading apps like Robinhood and special purpose acquisition companies. Untold numbers of service providers have cropped up to disintermediate other bank offerings. And customers have bold, new expectations about the ownership and governance of their financial data.
In the face of change, leaders have a choice. They can either lock down data and forge on attempting to compete with their own products, or they can embrace open finance and prospects for a different, but possibly more secure, future.
Some of the largest institutions have already placed their bets on the latter route. The most recent example comes from U.S. Bancorp, which announced a partnership with prominent data sharing fintech, Plaid, last month. All parties view the partnership as a win.
Plaid gets to keep aggregating data for U.S. Bank customers and its non-bank partners, unencumbered.
U.S. Bank gets the benefit of having all the user credentials that Plaid had stored in its environment wiped clean. The two organizations now use a token-based system they co-developed so that Plaid isn’t storing U.S. Bank customer logins.
Customers are now able to manage their money across platforms more easily, and they can control which third party apps have access to their data through both Plaid and U.S. Bank.
Despite these wins, open banking seems like anathema to many banks. Ultimately, services like Plaid make it easier for customers to move their money out of the institution. But U.S. Bank has a different perspective.
In a recent edition of the Breaking Banks podcast Gareth Gaston, U.S. Bank’s executive vice president and chief digital officer for enterprise platforms, confirmed that “about half of [U.S.Bank’s] digitally active customers are using some form of external service, which is definitely a lot more than it was a few years ago and that continues to grow.”
“Equally though,” he continued, “and I think this is really important, it's not an either/or. Of course that was sometimes the fear — that people would start using external services and the bank wouldn't keep its engagement with customers. But actually we see the opposite being true: customers are becoming more engaged with our services, and they're becoming far more engaged with our digital tools and capabilities as well.”
Gaston noted that it’s not an either/or for U.S. Bank because the institution takes pains to improve its own digital capabilities. “I think the key is engaging with the customer wherever they choose to be. The key is to try and be as good as you can be on all fronts, and then you don't have to be afraid of what will happen.”
Democratization is a sweeping force. Whether in politics or finance, the institutions that stand the test of time are the ones that recognize its inevitability and adapt.
*Amber Buker, Director of Insights for Alloy Labs Alliance