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.