The Consumer Financial Protection Bureau's now-final rule implementing the open banking requirements of Section 1033 of the Dodd-Frank Act is a Catch-22 for community banks. By exempting over 3,300 banks — almost 75% of FDIC-insured depositories — with assets of $850 million or less from compliance, the agency has killed them with kindness.
Yes, the technology costs of implementation may be challenging and even insurmountable for some banks. But by saying, essentially, "OK, you can sit this one out," the CFPB has relegated community banks to the sidelines of innovation, where some may die a slow death. Instead of breathing a sigh of relief, these banks need to work together to help themselves and remain in the game.
With open banking, consumers can authorize the transfer of their financial data and funds to pretty much wherever they want to access competitive products and services, whether it's a faster or cheaper payments app, loan service or non-bank investment account.
Open banking is built on the principle of financial self-determination and has taken root across the globe in places such as Europe, Australia and India. The principle enjoys wide support here in the U.S. Just as consumers should have control over their own health records, social media data or other personal information, they should also have control of their financial data. That's why the CFPB's proposed rule seemed like a welcome further step towards financial access, inclusion and consumer financial independence.
Importantly, open banking also holds the promise of allowing financial services innovation, particularly payments innovation, within the trusted regulated zone of a bank and a banking relationship without the risks of external pooled accounts common to many banking-as-a-service models. With consumer permissioned information sharing, consumer financial data and a consumer's core banking transactions occur on a bank ledger subject to bank-grade financial controls and risk management including cyber controls.
But, for community banks, the future reality of consumer-led but bank-protected innovation just got a lot darker.
The CFPB's rule assumes, rightly, that different financial institutions will face different challenges in compliantly adapting their technology, infrastructure and internal processes to the new reality of open banking. Opening up their systems will require extensive planning, time and resources. That's all true. But instead of setting up a framework under which community banks could be successful, the final rule exempts them altogether. This isn't kindness — it's murder. Open banking is the future, and one thing we do know is that if you don't meet the needs of your future customers, you're not likely to be around in the future.
Community banks have a tremendous opportunity, because they actually don't have some of the constraints that big banks do. In many respects, they can be more nimble and innovate more quickly. But when it comes to open banking, the cost of technology is their Achilles heel.
The recent 2024 Conference of State Bank Supervisors' (CSBS) Annual
It seems unreasonable to expect community and regional banks, already pushed to the brink, to undertake expensive technology projects voluntarily — but that's exactly what needs to happen if they are to survive.
There are some government initiatives that could help — early adopters could be awarded Community Reinvestment Act credit, for example. Regulators could promote tailored community bank compliance standards. We should look at these and many more options to help community banks. Just as the government had a huge role in bringing communications and broadband to rural America, it should help bring a required part of the future of banking to community banks. But however promising, given the speed with which government moves, such ideas are not likely to coalesce quickly.
Instead of acquiescing to a slow death, community banks and the technology companies that service them should come together to seize the opportunity to modernize before it's too late.
