On Banking Innovation, the U.S. Lags Behind
Updated: Aug 19, 2019
Having just returned from meetings with policymakers in Brussels and London, I thought it might be of interest to briefly discuss the policy landscape for banking innovation and consumer data access elsewhere. As a result of several factors, including both a fragmented regulatory structure and the sheer number of financial institutions in the United States (the Federal Deposit Insurance Corporation provided deposit insurance to 5,980 US financial institutions as of September 2016), America’s regulatory framework with regard to the right of the consumer to access and permission their financial data lags behind several other countries and territories.
In the United Kingdom, Her Majesty’s Treasury (HMT) in 2014 published a report on APIs and open data in UK banking and asked the public for comments regarding what benefits an increase in open data and banking could bring to consumers. In February 2015, HMT released a consultation on open data and data sharing via APIs and ultimately determined that an Open Banking Working Group comprised of experts, thought leaders, financial institutions, and fintech companies, should be constituted to explore how data could be used to help consumers transact, save, borrow, lend, and invest money via an open API. In early 2016, the Working Group concluded that bank data, including information about products and services, should be made available as open data so that consumers could benefit from better financial services and deeper relationships with their financial services providers. Importantly, the Working Group also concluded that an open API should be created to enable services to be built using bank and customer data.
The British government effectively endorsed these views and implementation of Open Banking in the UK now rests with the Open Banking Implementation Entity, which is responsible for drawing up the standards to launch an Open Banking API that will be used with personal customer transaction data on a read-only basis in 2018 and full implementation, which will include business, customer, and transaction data, in 2019. Put another way: in the next two years, the UK will have transitioned to a banking environment in which customers will have full control over their financial data through a standard API, empowering them to take advantage of innovative and powerful technology-based tools to improve their financial wellbeing.
The Eurozone has been similarly forward-thinking on the benefits to consumers of open data. In 2009, the EU implemented the first Payment Services Directive (PSD), which was designed to establish a European-wide legal framework for payment services by setting the information requirements and the respective rights and obligations of payment service users and providers. In October 2015, the European Parliament adopted a proposal to revise the PSD to better protect consumers, promote the development and use of innovative online and mobile payments, and to make cross-border European payments safer.
Though it is incredibly broad, the fundamental goal of PSD2 is to encourage new players to enter the payments market to the benefit of consumers. The directive therefore mandates that banks must provide consumer-permissioned access to customer bank accounts to third parties such as tools that provide investment advice or budgeting assistance and automated savings platforms. Each member state of the European Union has until November 2017 to fully incorporate PSD2 into their national policy frameworks.
Beyond the Eurozone and the UK, other countries across the globe are similarly moving towards an open banking environment while US policymakers consider their next moves. For example, the Monetary Authority of Singapore last year published its first set of data APIs, instituted a regulatory sandbox, and released an API Playbook that calls on financial institutions to make standardized APIs available to enable technology-based tools for consumers’ benefit. And in Australia, a Parliamentary committee has called on banks to implement a standardized API by July 2018 that would allow consumers to reap the benefits of tools offered by other financial institutions and fintech firms.
So, as policymakers in the US have only recently started to wrestle with how best to enable consumer-centric innovation in the banking sector, they could certainly look to many areas throughout the rest of the world for direction.