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This analysis outlines key developments of open banking and finance in the U.S. at the federal level and what is to come. This includes the work currently being carried out by the Consumer Financial Protection Bureau (CFPB) to improve consumers’ access to their data and build the foundation for the U.S.’ open banking regulatory framework.
Background
The use of technology to manage finances is already widespread within the United States, with the use of digital apps, products and services. Open banking is a tool to provide tailored financial services to individual consumers via technology. Open banking grants the consumers of financial products and services ownership of the way in which their own financial account data is used and shared, allowing them to access the best financial services and products available to them. Technology is the driving force of open banking, and the use of open APIs enables third-party financial service providers to access consumer banking, transaction and other financial data from banks and non-bank financial institutions with the consent of the consumer.
Companies such as Money Dashboard and MoneyHub are examples of non-bank financial institutions that are using open banking to provide solutions to consumers, specifically in the form of budgeting apps, whereas credit rating companies such as ClearScore are demonstrating the value of open banking to their customers by improving access to credit products and more certainty that they will be approved when applying for those products as the customer’s wider financial data is available. This allows for greater transparency of options of financial products and services for consumers. Open finance allows for a wider range of products within the financial sector to be readily accessible to consumers.
The UK Financial Conduct Authority (FCA) describes open finance as “where consumers and small businesses can give access to their payment account data to third-party providers to get new services”, including giving “businesses more control over a wider range of their financial data, such as savings, insurance, mortgages, investments, pensions and consumer credit”.
Open banking has already been firmly established in the European Union and the United Kingdom, while other countries such as South Korea are successfully working on implementing and expanding their own open banking regimes. Currently, there is no mandated open banking regime within North America and the United States specifically at the moment; however, the United States is steadily putting the building blocks in place. Although the EU and UK have already introduced legislation to allow open banking applications to be accepted, there is a long road ahead to ensure the widespread use of open banking in these jurisdictions.
The open banking regime in the U.S. will be more industry-driven as opposed to the regulation-driven regimes in Europe. Due to the scale and diversity of the U.S., it would be impossible to use the regimes of the UK and Europe as a model for regulation. Rohit Chopra, the director of the CFPB, indicated in October 2021 that the U.S. needs a system that is uniquely its own. In the U.S., the finance industry has already adopted some open banking principles to open access to customer data, which has resulted in some industry guidance, but consistency in providing consumers access to their financial data and sharing it is needed across the board.
2010-Present
The legal basis for open banking in the United States comes from Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This provision was enacted by Congress more than a decade ago; however, no tangible consumer financial data rights are in place. The Act provides that, subject to the rules prescribed by the CFPB, institutions that hold financial data about a consumer must make that data available to the consumer upon request. This data includes information that relates to any transactions, charges and usage data and must be made available in an electronic format usable by consumers. In essence, this requirement lays the legal groundwork for the implementation of open banking within the U.S.
The bureau currently has regulatory and supervisory authority over most federal consumer protection laws, and open banking falls within its remit. In 2017, the bureau published the non-binding “Consumer-Authorized Financial Data Sharing and Aggregation Principles”, but since this publication, it has not taken declarative action to provide the rights that Section 1033 prescribed to consumers that would allow them to take advantage of their own financial data to advance their financial wellbeing.
In early 2020, the CFPB held a symposium on Consumer Access to Financial Records, during which experts from the Financial Data and Technology Association (FDATA) of North America explored the concepts of open banking and how the bureau can use its authority to promulgate consumer financial data rights.
Following the symposium, the bureau published an Advanced Notice of Proposed Rulemaking (ANPRM) concerning the implementation of Section 1033, which is expected later in 2022.
Consumers, in the meantime, are struggling to connect their data from their main banks to third-party applications. A study by the FDATA of North America in February 2020 demonstrated that more than 40 per cent of consumers encounter failures when trying to link their bank accounts to third-party financial applications. As highlighted previously, open banking is essentially the ability of consumers to permit access to their financial account data to third parties with ease, in order to, for example, find the best financial service or product for themselves. The lack of regulation in this field hinders that ability.
On July 9, 2021, President Joe Biden signed an Executive Order on Promoting Competition in the American Economy, which included open banking as one of the 72 policy initiatives. This executive order moved open banking up on the priority list for U.S. lawmakers and later led to the U.S. Committee on Financial Services holding a hearing to “preserve the right of consumers to access personal financial data” on September 21, 2021. Section 5(t)(i) of the executive order encouraged the CFPB to commence or continue rulemaking under Section 1033 of the Dodd-Frank Act to “facilitate the portability of consumer financial transaction data.” On December 13, 2021, the CFPB featured open banking as part of its rulemaking agenda for 2022.
Various agencies and entities have released guidance as a way to bridge the gap between the enactment of Section 1033 of the Dodd-Frank Act and its implementation by the bureau. On July 19, 2021, the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Comptroller of the Currency (OCC) introduced a “Proposed Interagency Guidance on Third-Party Relationships: Risk Management” with a public comment period ending on October 18, 2021. The proposed guidance aims to advise banks on managing risks associated with third-party relationships including fintech companies and vendors, effectively affecting how financial institutions will operate in an open-banking era. It would offer a framework based on sound risk management principles for banking organisations to consider when developing their practices for all stages in the lifecycle of those relationships.
At the time of writing, the guidance had not yet been officially published; however, it would replace each of the agencies’ existing guidance on the topic to ensure consistency across all three agencies. The three agencies had previously each published independent guidance to their supervised institutions addressing third-party relationships.
The Federal Financial Institutions Examinations Council (FFIEC) released its own guidance on August 11, 2021, entitled “Authentication and Access of their Services and Systems”. The guidance “provide[s] financial institutions with examples of effective risk management principles and practices for access and authentication” and addresses consumers, employees and third parties that access financial institution information systems.
Research conducted by Mastercard demonstrates that U.S. consumers are already connecting their data to efficiently manage their financial experience through various financial service digital applications. Open banking regulations will continue to help usher in new technological innovations within the financial landscape. As consumers become more inclined to use their financial data to get more out of their financial experience, financial service companies will need to take advantage of open banking solutions to drive stronger consumer engagement. The Mastercard research also highlights the appetite that consumers have for new experiences that open banking will provide, with 61 per cent of consumers being willing to use open banking to get a better holistic picture of their finances.
Future
The developments made by the different agencies and the government have laid the groundwork for 2022 to hopefully be the year that open banking regulation finally comes to fruition in the U.S. The CFPB plans to pursue open banking regulations to “address the availability of consumer financial account data in electronic form” as part of its regulatory activities through the fall of 2022. The U.S. has an opportunity to improve competition and financial access by embracing an open financing regime, as these regimes have the ability to increase access to financial services and provide a way for the “unbanked” to enter the financial system.
Karen Mills, the former head of the U.S. Small Business Administration, told CNBC in 2019 that “open banking will drive more innovation that is good for customers and the financial system”. However, it is not just the United States in North America that is gearing up for an open banking regime, as Canada also has its sights set on implementing an open banking environment. The Canadian government stated that it plans for the open banking system to become operational by January 2023. It will be interesting to see who wins the race of open banking implementation within North America.
Conclusion
Globally, open banking is still an emerging concept that has the potential to change the financial landscape, the benefits of which can already be seen in places such as the UK and Europe. The technology that accompanies open banking is transforming the way in which consumers are managing their money and financial habits.
Ultimately, consumers are at the heart of open banking and the data experience it affords. Legislators took this into consideration when enacting Section 1033 of the Dodd-Frank Act more than a decade ago and the bureau’s forthcoming rulemaking decision should bring this to fruition and establish a regulatory environment. The open banking regulatory regime within the U.S. will be mainly industry-led, with regulations from the CFPB playing catch-up to the industry. Major banks have already started using API-based technology and have contractual partnerships with third parties as a way of opening up access. This contrasts with regulation-driven regimes, such as in Europe, which require that banks develop industry-wide APIs to open the door for open banking within the jurisdiction.
In a country with fragmented and state-based banking regulations, it is understandable that it has taken such a long time for open banking regulations to come to the fore. It also may be possible that prior to the explosion of open banking regimes across other jurisdictions, the U.S. did not view open banking as a regulatory priority. Most action has taken place in the U.S. after 2017, most prominently in 2020/21, once open banking was considered successful in other jurisdictions.
Twelve years of laying the groundwork for an open finance regime within the U.S. has brought us to this critical moment in time. The enactment of Section 1033 of the Dodd-Frank Act, the bureau’s 2017 principles, the 2021 executive order, the proposed guidance from the FRS, FDIC and OCC and the published guidance from the FFIEC have all led up to the culmination in which enforceable regulations from the bureau could forever change the landscape of banking and finance.
