Venture capitalists are hopeful that the new rules the Consumer Financial Protection Bureau is creating about data sharing will help the fintechs they back better compete with banks.
"Most regulation that exists in the financial sphere is more done to help the incumbents," said Emily Man, vice president of Redpoint Ventures in San Francisco, at the Empire Startups conference Wednesday. "If you think about capital requirements, if you think about anti-money laundering/KYC requirements and disclosures, that is the barrier to entry for new innovators. The promise of open banking is that you can lessen that a little bit and make customer data more portable across new apps, new tools in a way that releases the stranglehold that financial institutions have on the industry today."
This is similar to the way the Telecommunications Act of 1996 allowed portability of phone numbers from carrier to carrier, she said.
"As an investor, we spend a lot of time thinking about, what are the ramifications of open banking across the industry and how is this going to enable new entrants to chip away share from the incumbents today?" Man said.
Open banking doesn't truly exist in the United States today because there are no laws that require it. Data aggregators like Plaid take data from banks and give it to their fintech clients. But true portability of data and consumer rights around that data that exist in Europe, like the right to be forgotten (in other words, have all personal data erased) by a company, do not exist here.
Section 1033 of the Dodd-Frank Act of 2010 required the CFPB to come up with rules for the sharing of financial data between companies; the agency is expected to complete them in 2024. Some people refer to these forthcoming regulations as "open banking."
"As an investor, open banking is incredibly interesting to me because of the innovation and creativity," said Elle Bruno, managing director of the Techstars Boulder Accelerator, which invests in pre-seed and seed start-ups, at the conference. "As a human, I am a big proponent of open banking because I think it will close the socioeconomic gap through everything from alternative credit scores, alternative investments to cross border payment options."
The VCs acknowledge the risks of a freer flow of bank account information, including fraud, theft and misuse of data.
"The biggest thing when it comes to open banking is with the portability of data and if you take it a step further and think about easy access to payments or instant payments, that creates an entire new ecosystem for fraud, for liability, not just data lost but also dollars lost," Man said. "The guidance so far has been very light on who ultimately will bear the brunt of that all. But what we're seeing across the ecosystem is a lot of new providers that are focused on helping mitigate some of these risks."
Increased data sharing among third parties will change consumers' risk profiles, pointed out Michael Nugent, managing director of Vestigo Ventures in Cambridge, Massachusetts.
"Any company in this space has to have everything as buttoned up as you can, because I see so many companies that want to build a shiny object but haven't thought about regulatory compliance," he said.
The cost and scope of data sharing were among bankers' top complaints, while fintechs would like fewer restrictions, a report by the Consumer Financial Protection Bureau found.
Asked how large financial institutions can avoid being disintermediated from owning customer relationships, Nugent said they need to create strong partnerships.
"Large financial institutions are battleships, they're going to take forever to evolve, to move," he said. "If they announce these partnerships, these extended capabilities, they should embrace those. That's the way they can avoid being disintermediated."
Man had a stronger view.
"This might be too VC of me, but I think the big banks should be disintermediated," she said. "I bank with Chase, it's a wonderful product, I think they've been out of the large banks on the forefront of making their digital processes better. But they pay me a cent on my deposits every year, and they don't feel the need to do more to keep me as a customer there because they know who they are from a safety and positioning perspective. How do you create more competition in the ecosystem and allow for customers at the end of the day to get better services and better products from their financial institutions? I think you do have to light a fire under them."
Bruno agreed.
"Competition breeds innovation," she said.
