Across the world, governments, regulators, banks and fintechs are talking about open banking, and also trying to follow the progress and success of UK Open Banking. They sense excitement, threat and opportunity, and there is much talk about innovation, security, standards and risk.
But are we all talking about the same thing? What is ‘open banking’?
FDATA North America has published a submission to Finance Canada’s Open Banking Review.
FDATA Responds to Finance Canada Open Banking Submission Final
Steve Boms
first appeared on Morning Consult
While the U.S. government hobbles from one crisis to the next — the partial shutdown is just the latest example — policymakers in several other countries are staking out long-term positions that embrace financial technology innovation for the benefit of their citizens.
On open banking, we must catch up, and there’s hope we can. Despite partisan gulfs on so many other major issues, there’s broad bipartisan excitement about open banking.
Richard Cordray and Mick Mulvaney were ideologically far apart, but the last two heads of the Consumer Financial Protection Bureau agreed the agency should nurture innovators developing technology to empower open banking. Rep. Gregory Meeks (D-N.Y.), who likely will chair the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, authored a bill requiring federal regulators to study open banking.
And in its July 2018 report on financial technology regulation, the Treasury Department acknowledged the importance of open banking (and warned the United States is falling behind). Craig Phillips, counselor to Secretary Steve Mnuchin, has said open banking is needed to maintain U.S. global competitiveness in financial markets.
Open banking — the process by which consumers can access and share their financial information with third-party, technology-powered tools — allows individuals and small businesses to track all their accounts in one place, manage expenses or gain access to affordable credit.
The emergence of these platforms is a natural evolution of the market. For decades, consumers and businesses have shared their receipts and paper bank and investment statements with their financial advisers, accountants and underwriters to file tax returns, manage investment accounts or submit loan applications. The technology tools on which today’s end users rely simply digitize this process.
The United Kingdom already has implemented an open banking regime. At the behest of parliament, the Canadian Department of Finance recently kicked off formal consultations on the matter. Australia, India and South Africa, among others, also are well on their way.
The U.S. regulatory landscape for consumer financial data access is much more complex than in other countries. The first step toward open banking here is to remove obstacles that prevent individuals and small businesses from using or getting the most out of them.
The predominant barrier is that the United States has no legal requirement that compels a financial institution to make the consumer financial data it holds available to a third party. This is true even when customers provide affirmative consent asking the institution to help share their data. As Treasury also noted in its fintech report, amidst an ambiguous regulatory regime that never envisioned financial data as a commodity, some financial institutions are reluctant to grant this permission.
Changing this system won’t be easy.
One of the systemic disadvantages facing U.S. policymakers compared with lawmakers and regulators in other countries is the immense regulatory fragmentation that exists here. In the UK, for example, two agencies represent the totality of regulatory authorities required to implement open banking. There are at least eight U.S. federal regulatory agencies — the CFPB, the Comptroller of the Currency, and the Federal Reserve among them — with jurisdiction over at least some portion of financial data access. There also are state regulatory authorities.
In its fintech report, Treasury affirmed that Dodd-Frank Section 1033, which calls for financial institutions to make customers’ own financial data electronically available to them, includes third parties properly authorized by consumers, as well. The CFPB has the authority to — and should immediately — address existing regulatory fragmentation by adopting a rule that formalizes this interpretation of Section 1033.
The CFPB also must work with the private sector to develop best practices on disclosures and terms and conditions regarding consumers’ use of products and services powered by consumer financial account and transaction data provided by data aggregators and financial services companies. It also must work with other prudential regulators to harmonize bank vendor and third-party guidance and remove ambiguity stemming from the third-party guidance that discourages banks from moving to more secure methods of data access.
Solving these issues is imperative. As other countries implement open banking frameworks, the U.S. market is at risk of losing pace internationally with the development and delivery of new, innovative financial tools for consumers.
Globally, the fintech market attracted more than $31 billion in 2017, with the United States attracting more than half the investment in the market. Greater domestic coordination that provides harmonization, rather than divergence, would spur more innovation and improved consumer and small business financial outcomes.
Steve Boms is the executive director of the Financial Data and Technology Association of North America.
Steve Boms
First appeared in The Globe & Mail
Collectively, the fintech members of the Financial Data and Technology Association of North America provide approximately 3.5 million Canadians – about 15 per cent of the country’s adult population – with access to new, technology-powered financial tools that help them manage their finances. Despite an ambiguous regulatory environment that can sometimes lead to blockages and restrictions from their banks, these consumers and small businesses have voted with their smartphones in favour of financial technology.
While fintech adoption in Canada continues to grow, an unclear regulatory environment prevents millions more Canadians from fully accessing the benefits of these technology-based tools. Finance Canada, though, has formed an Open Banking Advisory Committee and recently kicked off a formal open-banking consultation, inviting input from the public and market stakeholders across the country.
For the 85 per cent of adult Canadians who are not today benefiting from these new technology platforms to help them manage their finances, it is well past time. Britain and the European Union already have implemented open banking frameworks, and India, Australia, Mexico and South Africa are making strides. Consumers here risk being left behind.
Based on Britain’s experience, we know open banking stimulates investment and innovation in platforms and programs that will help consumers improve their financial well-being. Services will be more insightful and intuitive. With more competition and transparency, products will be better priced. Financial inclusion for less sophisticated consumers will improve. Frustration in linking with or switching service providers will be radically reduced. Best of all, if done right, open banking can achieve this all while ensuring consumers’ and small businesses’ risks are properly managed by fully regulated market actors who are prepared to make them whole if something goes wrong.
In short, consumers will be able to trust the new ecosystem and avoid bad actors.
It’s not only individual Canadians who will benefit. Small businesses, able to use their financial data with whatever well-regulated technology provider they choose, will have access to automated banking and accounting tools; affordable, cash-flow underwritten capital; more efficient, quicker payment platforms; and other benefits.
To achieve these outcomes, Finance Canada first must recognize that customers, not banks, own their financial data. In Canada today, there is no legal requirement that financial institutions allow their customers to share their account data with other service providers. These institutions can decide whether a customer is permitted to share data with third-party financial technology firms, or anyone else who might assist with managing their finances. As a result of regulatory ambiguity and, in some cases, security concerns, financial institutions can currently restrict or even prohibit third-party access to customer data, even when their customer explicitly requests their information be shared.
Although most fintech is new, the underlying need to share financial data with service providers has existed for generations. Consumers and small businesses have had to take paper statements, receipts and financial information to advisers and accountants to prepare their taxes, manage investments or file loan applications. The promulgation of fintech tools has merely made these processes more efficient and widely accessible. Ultimately, open banking is the 21st-century equivalent of a process that has existed in financial services for centuries: With their consent, consumers and small businesses can affirmatively grant access to a trusted third-party financial provider of their choice to receive a product or service of their choosing.
To ensure consumers and small-business owners are protected in this modern system, open banking will require a third-party provider to obtain explicit consent from a consumer, using disclosures that can be plainly understood. Consumers and small businesses will be permitted to opt out of using a service – and sharing their data – at any time. And all parties in the system will be appropriately regulated to ensure the protection of their customers. Most importantly, no financial institution will be able to dictate to its customers whether or not they are able to take advantage of third-party tools to improve their finances, just as they can’t dictate to their customers with whom they can share their paper statements.
Canadians today hold nearly $600-billion in non-mortgage debt. Interest rates are rising and delinquencies could increase along with them. With better access to fintech platforms, millions of Canadians could better manage their financial lives. As Finance Canada formally kicks off its review of open banking, it’s time to empower the 85 per cent of Canadians who are not yet benefiting from financial technology.
Click below to see FDATA Europe’s response to the Financial Conduct Authority’s Consultation paper 18/25 – Approach to final Regulatory Technical Standards and EBA guidelines under the revised Payment Services Directive (PSD2).
Click below to see FDATA Europe’s response to the Financial Conduct Authority’s Consultation paper 18/25 – Approach to final Regulatory Technical Standards and EBA guidelines under the revised Payment Services Directive (PSD2).
FDATA North America has published a submission to the Global Financial Innovation Network’s (GFIN) consultation, via the Bureau of Consumer Financial Protection.
FDATA North America has published a submission to the Global Financial Innovation Network’s (GFIN) consultation, via the Bureau of Consumer Financial Protection.
FDATA North America has published a submission to the Global Financial Innovation Network’s (GFIN) consultation, via the Bureau of Consumer Financial Protection.
Please click here to read an article by FDATA North America’s Steve Boms on National Newswatch.
The full text is also below.
The national budget passed by Parliament this February requires the Department of Finance to offer findings and recommendations for a move toward open banking. Lawmakers didn’t set a deadline, but Finance Canada is already engaging with industry stakeholders to solicit input.
Canada’s movement toward open banking cannot come soon enough.
The march toward open banking is well underway globally, from Europe to Australia, and India to the Middle East. Market stakeholders in all of these jurisdictions are now beginning to realize the significant advantages open banking frameworks provide. In the name of consumer and small business financial empowerment, and also for the sake of global competitiveness, it’s time to advance the revolution in Canada, and we are encouraged by our initial engagement with the finance ministry and members of parliament.
At the center of this debate are questions about user-permissioned data access: the right of the consumer or small business to affirmatively grant access to the third party tool of their choice to connect to or see the financial data required to provide them the product or service for which they have provided their consent.
In Canada today, financial institutions control individual customers’ account data. It is therefore difficult for consumers to share their information with third-party technology tools that can assist them in managing their finances—even though they choose to—since financial institutions can heavily restrict or even prohibit third-party access to customer data.
In practice, this impasse has led to a disparate market for consumers and small businesses, with different outcomes depending on the financial institution with which they have their primary banking relationship. Further, in the absence of clear standards regarding whether and how end users can use third-party, technology tools to help them improve their financial wellbeing, the market currently relies on credential-based authentication, which some institutions — and even some regulators — argue violates the terms and conditions to which customers agree when they enter into a relationship with a bank.
One need only look to Europe to see there’s a better way.
The United Kingdom’s Open Banking architecture relies on standardized data feeds implemented by financial institutions, which provide a uniform method of accessing data on behalf of the consumer or small business. The system includes prescriptive consent flows that ensure that a consumer’s or small business’ experience granting or revoking consent to access their data to any third party in the open banking environment is uniform. Accordingly, consumers in the open banking ecosystem experience the same consent-granting process across every third-party application they use, regardless of the financial institution with which they have their primary banking relationship. Offboarding is similarly uniform.
One key issue that must be resolved to create an open banking ecosystem is accountability; the question of who makes an end user whole in the event of financial loss and how. In the United Kingdom’s framework, a vibrant cyber liability insurance market, implementation of objective traceability, and regulations that require minimum security thresholds for all players, in addition to the modernization of existing laws and regulations such that any entity responsible for consumer financial loss is also responsible for making the consumer whole, address the issue. In exchange, no financial institution is permitted to restrict access to a financial services provider that meets or exceeds the requirements for entry into the open banking system.
Under this regime, individuals and families would have more choices about whom they bank with or lend from, would gain access to a broader array of credit providers and financial advice tools, and would have enhanced visibility into their financial state. Regulators and financial institutions would gain significantly more visibility into the third-party ecosystem. Financial institutions wouldn’t be held liable for fraud that didn’t happen under their watch, and, with their scale and existing customer relationships, would be well-positioned to bring their own technology-based tools to market.
An open banking regime that provides standards for liability, privacy, technology, authentication, and consent will significantly increase the deployment of fintech applications to the benefit of consumers and small businesses. With the UK, Australia, and other countries moving quickly to make these changes, Canada risks being left behind. Finance Canada’s efforts to push this issue forward are as timely as they are important.
Boms is a member of the board of directors of the Financial Data and Technology Association, which played a pivotal role in crafting the design and implementation of open banking standards in the United Kingdom and Europe, and is executive director of the organization’s North American chapter.