America prides itself on leading the way in innovation, but when it comes to financial services, the United States trails behind much of the world in embracing open banking.
The open banking story began in Europe, where the European Union’s Payments Services Directive 2 (PSD2) went into effect in 2018. The legislation laid the legal foundation for requiring financial services organizations in Europe to give the consumer control over their financial data. Banks could no longer deny consumers the ability to connect or export their financial data from any financial institution to any other financial service. One result of the open banking legislation in Europe was the explosion of fintech challenger banks and payments services which relied on open connections between their new offerings and consumers’ primary accounts.
Despite the lack of such legislation in the United States, the demand for mobile-first fintech services has also blossomed here. While U.S. banks have begun working to incorporate open banking concepts, the lack of nationwide standards has resulted in a patchwork of approaches that leaves the customer with no single experience. The increasing demand for portability of personal data has prompted the Consumer Financial Protection Bureau and federal regulators to consider mandating open banking standards similar to PSD2.
The White House recently signaled its commitment to open banking. In July, President Biden signed an executive order that pushes for the creation of fair competition for finance companies. The order directs the CFPB to develop rules regulating the sharing of consumer data between banks and other financial services providers.
Much like PSD2, the new regulations would enable individuals to have greater control over their information. A federal approach would also help standardize the rules several states have already passed. If banks have been putting off open banking initiatives, these developments make it clear that banks must work now to adopt open banking solutions.
One thing banks will need to consider is that the CFPB will have to address both consumer access and data portability while incorporating data security protections. To date, the most common approach to providing application programming interface connections between banks and other providers has been to rely on screen scrapers. While convenient, screen scraping is not as secure and reliable as a direct API. Banks and fintechs alike will have to navigate any regulations concerning data access and portability, especially if screen scraping is curtailed or banned.
Open banking will also require banks and fintechs to make customer trust the top priority. Despite the growing demand for open banking capabilities, many consumers are still confused about what exactly open banking is or how it benefits them.
A September 2021 study by Morning Consult found that 63% of Americans worry that increased sharing of data between financial institutions will lead to more fraud. As banks partner with fintech providers, they must ensure that they build cybersecurity standards that can keep personal data safe while also creating the tools that will enable consumers to use their data the way they wish.
Regardless of what any final legislation looks like, financial institutions, fintechs and payment providers must work together to build a seamless experience. Banks can also take a closer look at how customer data is stored and shared to ensure that they have the appropriate levels of security.
Next, they must communicate to their customers to better clarify how the standards benefit them.
Finally, banks should closely monitor the CFPB rulemaking process to ensure that they account for any new regulations that will govern open banking.
At the end of the day, open banking means more choice and more competition, which benefits banks looking to build a stronger customer base and more competitive fintech products.
