The director of the US Consumer Financial Protection Bureau (CFPB) has delivered a speech setting out the government agency’s strategy for open banking regulation, including plans to finalise rules in 2024.
Open banking aims to encourage innovation and boost competition in financial services. It refers to the use of open application programming interfaces (APIs) to enable developers to build new applications and services.
Governments worldwide are encouraging open banking at different paces and in different ways. Beyond open banking, governments are also interested in the possibilities of open finance: the extension of open banking data-sharing principles to enable third-party providers to have access, with permission, to customers’ data across a far broader set of financial fields, such as insurance and investments.
In the US president Joe Biden signed an executive order in July 2021 directing the CFPB to facilitate the portability of consumer financial transaction data so people can more easily switch financial institutions and use new fintech products.
“This week, the CFPB will launch the process to activate a dormant authority under Section 1033 of the Consumer Financial Protection Act that I expect will accelerate this shift,” said CFPB director Rohit Chopra in a speech on 25 October.
Global momentum towards open banking
“Around the world and here at home, financial services are slowly moving toward open banking and open finance,” he told the audience at the Money 20/20 USA event in Las Vegas. “A more decentralised and neutral consumer financial market structure has the potential to reshape how companies compete in the sphere.”
He said that provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) – which resulted in the CFPB’s creation – provide for personal financial data rights for Americans, but “would only have teeth after the CFPB defined the specifics through rules.”
“While not explicitly an open banking or open finance rule, the rule will move us closer to it by obligating financial institutions to share consumer data upon consumer request, empowering people to break up with banks that provide bad service and unleashing more market competition. If successful, it will also reduce the ability for incumbents to build moats and for middlemen to serve as gatekeepers. It will provide big advantages to those who provide the best products, service quality and rates,” he said.
In terms of next steps, Chopra pointed out the CFPB is subject to a rulemaking obligation “unique among financial regulators” in that before issuing a proposed rule, it must convene a panel of small businesses that represent their markets to provide input on proposals. Given this, the agency two days later (on 27 October) released two documents: a 71-page ‘Small Business Advisory Review Panel for Required Rulemaking on Personal Financial Data Rights’ publication; and 22-page ‘High-Level Summary and Discussion Guide of Outline of Proposals and Alternatives Under Consideration for SBREFA [Small Business Regulatory Enforcement Fairness Act]: Required Rulemaking on Personal Financial Data Rights’.
The agency is seeking input from “small banks and financial companies who will be providers of data, as well as the small banks and financial companies who will ingest the data”, Chopra explained, as well as input from what he referred to as ‘fourth parties’ (intermediary data brokers that facilitate data transfers).
The CFPB plans to publish a report before the end of March on input received by a deadline of 25 January 2023. “This will inform a proposed rule that we are planning to issue later in 2023. We then hope to finalise the rule in 2024 and move to implementation,” he said.
Public should ‘gain more bargaining leverage’
Chopra used the bulk of his speech to set out the benefits of open banking.
“We expect the public will gain more bargaining leverage once data holding companies must share authorised consumer data with authorised third parties, and this will lead to more shopping by consumers both because they have the leverage to walk away and because they will have access to more tailored products and services,” he said.
“For instance, individuals who want to switch providers will be able to transfer their account history to a new company, so they don’t have to start over if they are unsatisfied with the service provided by an incumbent firm. Likewise, nascent firms would be able to use data permissioned by consumers to improve upon and customise, to provide greater access, and to develop products and services. Under the current regime, nascent firms often find themselves in the position of needing to curry favour with big market players.”
He also referred to the improved data security standards; predicted that “more switching would lead to greater efforts by firms to maintain or win customer loyalty”; and said that financial companies would be able to “find new ways to underwrite and score with less bias”.
He said the open banking rollout was expected to start by requiring financial institutions offering deposit accounts, credit cards, digital wallets, prepaid cards and other transaction accounts “to set up secure methods, like APIs, for data sharing”. The regime would then expand to cover more products.
“Starting here will also mean that our jumping-off point is where industry infrastructure for consumer-authorised financial data sharing has already begun to take shape,” he said.
*** The Bank for International Settlements (BIS) this month published a report titled ‘API standards for data-sharing (account aggregator)’. The 48-page publication is the third part of a trilogy on enabling open finance through APIs under the auspices of the BIS Consultative Group on Innovation and the Digital Economy (CGIDE). The CGIDE launched in February 2020 to meet demand from BIS central bank members in the Americas.
FURTHER READING
Global Government Fintech’s open banking / open finance topic section
‘Open to possibilities: governments bank on opening up financial services data’ – our report on a Global Government Fintech ‘Open Banking and Open Finance: What Role – And Benefits – For Governments?’ webinar, which was held on 15 March 2022
 director Rohit Chopra has set out the agency’s timeline on US open banking/open finance regulation){kind=link}