When Rohit Chopra, the director of the Consumer Financial Protection Bureau, proposed an open banking rule last year, he framed the proposal as an opportunity for small banks
"The business opportunity is about how you can steal the lunch of your bigger competitors — that is going to be key," Chopra said last October, the day after the CFPB
Chopra has envisioned open banking — known as the 1033 rule, for the section in the Dodd-Frank Act of 2010 that mandates bank customers retain control over their financial data — as a way to potentially level the playing field for small community banks and fintechs, allowing them to better compete with the largest banks that make up a greater share of the consumer banking market.
Open banking would give consumers control over their own financial data, including their ability to share that data with other banks or financial institutions, thus making it easier to switch banks. Increased competition should allow companies to create and offer new and different financial products once a final rule is issued in late October.
Yet Bill Demchak, the chairman, president and CEO of PNC Financial Services, threw cold water on the theory behind the proposal earlier this month. Demchak argued that once the rule is finalized, large and regional banks would be able to draw customers from smaller competitors.
"We'll pull market share out of smaller banks who won't have the technology to be able to take advantage,"
Demchak said regulators are "doing this because they think they're going to lower switching costs. All they're going to do is drain [small] banks of accounts by big banks who have the technology."
Many experts dismissed Demchak's remarks, largely because the $557 billion-asset Pittsburgh bank has been considered
PNC and 10 other big banks created Akoya in 2018 to provide an interface between banks and third parties. But PNC caused a brouhaha at one point by
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David Silberman, senior advisor at the Financial Health Network and the Center for Responsible Lending and a former acting deputy director at the CFPB, challenged the notion that consumers would leave their existing banks en masse, given that many are loyal to community banks and credit unions. Changing direct deposit and manually moving direct debits and bill-pay are hurdles, he said, and "1033 doesn't make it materially easier."
"I think 1033 has a lot of potential benefits for consumers, but the notion that it's going to lead to a lot of account switching is greatly overstated," said Silberman, who is also an adjunct professor at Georgetown's School of Public Policy and at Harvard Law School. "There is a lot of friction involved in switching accounts, particularly for folks who are living on the edge."
The Independent Community Bankers of America is concerned that the open banking rule would impose costs on community banks. The trade group wants the CFPB to exempt depositories with less than $850 million of assets from a requirement to create and maintain third-party developer interfaces and to permit all banks to charge a reasonable fee for providing access to consumer information to third parties.
"It is true that open banking will make it easier for customers to change who they bank with," said Mickey Marshall, ICBA's assistant vice president and regulatory counsel. "This is both a risk and an opportunity for community banks, who are also leveraging technology and working with fintechs to create greater efficiencies and remain competitive."
While Chopra has said that smaller banks can offer uniquely tailored loans and services with better rates to compete with bigger banks on credit cards and business loans, many experts think large banks already have an inherent advantage since they hold the bulk of consumer data.
Jane Barratt, chief advocacy officer at MX, a Utah-based fintech provider of data aggregation and analytics, said companies that provide the best customer experience would have a competitive advantage regardless of size.
"If you're an institution that hasn't invested in technology and you've been relying on third parties to keep your customers happy, you're already a generation behind," Barratt said.
Marshall at ICBA agreed, saying that banks that offer the best customer service and rates will have an opportunity to gain market share.
"We think that puts the customer-focused approach of community banks in a strong position," he said.
The CFPB's tiered, four-year compliance timeline gives large banks six months to comply once the rule is finalized. The smallest providers will be given up to four years, depending on their size. The timeline for compliance also could be a competitive advantage for large banks.
"That four-year rollout is necessary because of the technology lift, and there are many, many institutions in that third and fourth tranche that don't have control over their technology," Barratt said. "If you're reliant on old technology to do some pretty basic things like account verification and [account] balance checks, these things are absolute table stakes in the industry now, and if you can do it for some accounts and not others, that's a gap."
Jason Rosen, founder and CEO at Prism Data, a New York provider of analytics and cash flow underwriting, said that while the intent of the CFPB's proposal is to level the playing field and ensure a more competitive ecosystem, ultimately the onus is on smaller banks to develop a strategy and capabilities to take advantage of that landscape. Without a plan, the rule itself is unlikely to close that gap, he said.
"It doesn't necessarily follow that the largest financial institutions stand to gain the most from the rule, nor do I think that smaller participants are set up to be big winners here," Rosen said. "If a small institution has the best possible product for a given consumer, the best rate, then the small institution stands to gain. If PNC has the best product for a given customer, then they win as well. Ultimately I think of it as more of a level playing field than something that benefits just one constituency or another."
