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The CFPB Moves on Open Banking

The CFPB proposed a landmark “open banking” regulation last week that could change how U.S. financial services are delivered.

Same story, different week. While the U.S. House of Representatives spent the last week speaker-less – and therefore was still unable to conduct any work – federal regulatory agencies continued to march policy forward.

And last week was a big one for regulatory rulemakings. The Consumer Financial Protection Bureau (CFPB) released its regulation implementing Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. (For those of you who are counting, that means the proposal came a full 13 years after Congress approved the bill!)

This rule also is often referred to as the CFPB’s “open banking” regulation.

While fintech firms have been among the most eager to see this rule introduced, all financial services companies should pay attention since, once implemented, the rule will have a profound impact on the entire industry and on consumers in general.

Let’s take a look at what the draft regulation includes, what it left out, and what the rule’s impact could be after it crosses the finish line. But first: what in the world is open banking?

What Is Open Banking?

Today, dozens of countries have open banking regulatory regimes in place. The United Kingdom (UK) was one of the first jurisdictions to embrace open banking, so let’s look there for the easiest definition.

“Open banking is a simple, secure way to help [consumers] move, manage, and make more of their money,” explains Open Banking Limited, the entity in the UK responsible for managing its open banking regime. Open banking accomplishes this goal by putting consumers in control of when their financial data is shared electronically, and with whom.

While this idea might not seem groundbreaking — indeed, many consumers might believe they already are in control of when and when not to share their financial data — that is not always the case. A consumer’s bank can, for example, refuse to share that consumer’s data with an online lender, a budgeting app, or any third party it believes could be unscrupulous – or even compete with the bank’s offerings. Or they can just make it so difficult that sharing information is not worth the hassle of dealing with your bank.

As the CFPB correctly noted in its press release announcing its open banking rule, the fact that institutions, not consumers, are in control of financial data results in an uneven playing field for families, small businesses, and any other entity that is saving, investing, or moving money. “Currently, people’s access to their financial data is inconsistent from one financial institution to another. Even among companies that do share data at a customer’s request, the terms of the sharing vary greatly,” explained the CFPB. “This lack of norms in the market allows incumbents to play games to their own customers’ detriment — including hiding or obscuring important data points like prices.”

The current playing field also protects incumbent financial institutions by undercutting “the ability of small or upstart institutions to compete with incumbents, even when people want their data shared,” the CFPB argued.

What Would The CFPB’s Section 1033 Rule Do?

The overarching purpose of the CFPB’s open banking rule is to give consumers “the power to share data about their use of checking and prepaid accounts, credit cards, and digital wallets.”

It would accomplish this goal by:

  • Granting consumers a legal right to grant third parties access to information associated with their credit card, checking, prepaid, and digital wallet accounts.

  • Giving consumers the right to revoke access to their data at any time and for any reason.

  • Requiring banks and other providers make personal financial data available at no charge to consumers and through dedicated digital interfaces that are safe, secure, and reliable.

  • Ensuring consumers can walk away from bad services and products.

  • Requiring the companies, or third parties, that consumers authorize to access data agree to certain conditions. For example, under the CFPB’s proposal, these third parties could not collect, use, or retain data to advance their own commercial interests through actions like targeted or behavioral advertising. Indeed, third parties would be “obligated to limit themselves to what is reasonably necessary to provide the individual’s requested product.”

  • Moving away from screen-scraping, a practice that often requires people to share their usernames and passwords with third parties to share data.

For consumers worried about the security of this program, the proposed rule also creates strong data security and privacy standards to ensure consumers are protected wherever they choose to manage their finances.

One important note: while this rule would pertain to most consumer financial data, the CFPB did exclude information pertaining to mortgages, auto loans, and student loans from the purview of covered accounts under the rule. The CFPB is considering adding those accounts in a subsequent rulemaking, however.

Once the rule is finalized, its requirements would take effect rather quickly — at least for the largest institutions. The CFPB has proposed that companies with at least $500 billion in total assets for depositary institutions and $10 billion in revenue for non-depositary institutions comply within six months. Depositary institutions with less than $850 million in revenue would have four years to comply.

The public has until December 29, 2023, to comment on the rule, though that period could be extended.

How Could Open Banking Change The Financial Services Landscape?

The legal team at Jenner & Block makes it clear the CFPB’s open banking rule, which, again, is only a proposal at this point, would affect any entity that holds consumer data. This not only includes financial institutions like banks, credit card issuers, and digital wallet providers, it encompasses any “consumer-facing entity that holds consumer financial data.” That bucket is a deep one and could include debt resolution companies, retailers, and more.

Most observers believe this regime will significantly improve consumers’ financial lives. The venerable magazine Consumer Reports praised the rule. “The CFPB’s proposed rule gives consumers the power to take control of their financial data and prevent it from being monetized and manipulated to their detriment,” Delicia Hand, director of financial fairness for Consumers Reports says. “It will encourage banks and financial institutions to compete more by offering higher quality products at more affordable prices and enable consumers to break up with unsatisfactory companies and find better opportunities.”

Some experts believe the new competition landscape open banking rule could spur innovation in financial services, especially from community banks and credit unions.

Open Banking Limited has provided cases studies from the U.K. that outline examples of how empowering consumers to share their financial data has improved the general economic landscape across the pond. It notes that:

  • A fintech company used open banking to help small businesses get paid by their customers faster.

  • A plumbing and heating supply distributor used open banking to reduce its payment card transaction fees.

  • An online car retailer used open banking to help consumers buy secondhand cars.

OBL also notes open banking has helped U.K. consumers:

  • Keep on top of their bills and avoid incurring late charges.

  • Letting consumers see all their savings accounts in one place.

  • Predict earnings so consumers can stay out of debt.

The rule also could improve customer service. That is because, as the Rhode Island Lawyers’ Weekly notes, the rule would “empower consumers to break up with banks that provide bad service by forbidding companies from misusing or wrongfully monetizing the sensitive financial data obtained from individuals.”

Advocates in other countries took note of the CFPB’s announcement. The editorial board at Canada’s Globe & Mail even urged that country’s ruling party to “abandon its plan for new taxes on the financial industry and instead push through pro-consumer reforms, such as open banking, that will bring much-needed competition and lower fees to the [banking] sector.” (Canada is currently contemplating its own open banking regulatory regime.)

Not everyone is happy, of course. The traditional financial institutions that control consumer data are not happy with the CFPB’s proposal, arguing they are “concerned with the significant implementation costs our members will face.”

Americans seem eager for a different type of regime, however. While only 10% of U.S. consumers have confidence in the country’s banking industry, 67% of Americans said they trust digital wallets and mobile banking apps.

Clearly there is an opening for open banking.

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