Following the issuance of a new executive order by President Biden, Section 1033 of the 2010 Dodd-Frank Act may finally be implemented.
Section 1033 — which calls for the Consumer Financial Protection Bureau to issue regulations detailing financial data access and sharing — has been on hold for as long as the CFPB (also created by Dodd-Frank) has existed.
The proposed rule seemed to gain some traction when the CFPB issued an advanced notice of proposed rulemaking in October 2020. Yet nothing happened after the agency closed its public comment period in early February 2021. This prompted a group of 18 consumer financial advocacy groups to send a letter to the CFPB in May 2021 demanding the agency officially greenlight the section. Still there was no response.
Now, however, Biden’s July 9 executive order “encourages” the CFPB to issue rules implementing the data-sharing section. Specifically, the order states that the CFPB Director “is encouraged to consider commencing or continuing a rulemaking under section 1033 … to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products….”
The administration believes one of the most significant issues people face is not being able to easily transfer their financial data.
“Even where a customer has multiple options, it is hard to switch banks partly because customers cannot easily take their financial transaction history data to a new bank,” Biden said, adding it increases the cost of a new bank extending credit to customers.
Ten+ Years in the Making:
Section 1033 has been a long time coming and Biden’s encouragement could secure its approval once and for all.
Fintech data company MX was quick to applaud the White House effort to advance CFPB’s rulemaking. In a statement, the company said it believes every American “regardless of where they choose to bank, make payments, or borrow, should have access to modern connectivity that safeguards their data and their deposits.”
Siamac Rezaiezadeh, Director of Product Marketing at GoCardless — a payment software company based in Europe, but with an American footprint — says Biden’s move could be the “first step along the path to a truly competitive, open banking ecosystem in the U.S.”
He adds that the U.S. government “has now recognized that customer banking data is precisely that — the property of the customer.”
The old approach, Rezaiezadeh comments, was very “laissez-faire,” because traditional financial institutions had no true incentive to share consumer data with third-party providers.
In a response to the executive order, the American Bankers Association says it — and its members — support the initiative allowing people to access their own financial data.
“We have been working with the CFPB since 2017 on how to ensure consumers remain protected when they share their financial data outside of the secure banking ecosystem.” says ABA CEO Rob Nichols in a statement. “The bureau’s early decision to establish guiding principles has allowed banks and technology companies to collaborate on tools that are already facilitating access to financial data in a way that protects and empowers consumers.”
That’s in contrast to the U.K. and Europe, where regulators created rules mandating banks to share data with third parties with consumer consent. In the U.S., data sharing took a different path, relying largely on so-called screen-scraping technology, opposed by most financial institutions. More recently, however, various private-sector initiatives built around APIs have been picking up speed, as detailed below.
Where Does the Cost Factor In?
In line with Biden’s point about increasing costs, the June 9 executive order cites a report written by the Center for American Progress (CAP), a public policy research and advocacy organization. In it, authors Divya Vijay and Andy Green write that switching banking providers is expensive — both monetarily and time-wise. They describe the process as arduous: “Switching automated features usually requires customers to contact the third parties that initiate transactions, update their account information, and wait for automatic transfers to start going in and out of the new account.”
They then go on to explain the process can be intimidating to anyone who is looking to transfer multiple accounts with numerous automatic deposits and bills.
The CAP report suggests solutions, highlighting one European policy — called the Current Account Switch Service. Instituted in 2013, it introduced the idea of “account number portability,” meaning a consumer has a single bank account number that can be easily transferred to another institution.
A Conflict in Terms?
Completion of Section 1033 rulemaking would ensure banks and credit unions would implement data sharing technologies into their digital banking infrastructure — sharing with both chartered financial institutions and third-party providers.
“What this order means in the near-term is more competitive retail banking in the U.S. by making it easier for customers to switch providers.”
— Siamac Rezaiezadeh, GoCardless
GoCardless, for one, recognizes this as an open door. Rezaiezadeh says the executive order could get open banking rolling in the U.S., adding it will “enable even greater competition.”
“What this order means in the near-term is more competitive retail banking in the U.S. by making it easier for customers to switch providers,” he says. “However, we hope that it will also spur innovation which will make it easier for third-party providers to access customer data via APIs.”
At the same time that Biden’s order encourages data sharing, it also targets big tech companies for gathering too much personal consumer information.
“Many of the large platforms’ business models have depended on the accumulation of extraordinary amounts of sensitive personal information and related data,” the order reads.
More and more people are asking for access to their financial information so they can share it with fintechs. Although Biden’s order encourages that, he is also cracking down on big techs’ use of financial data.
As a result, Biden says he is also encouraging the Federal Trade Commission to “establish rules on surveillance and the accumulation of data.”
The New Republic tweeted that — while the executive order is vital, “the guideline seems incredibly belated,” because big techs already have a “20-year head start on mining our data.”
Why Legacy Providers Are Concerned
Although data sharing between fintechs and financial institutions (and between different banking providers) seems like an easy win for the consumer, the concern has been that it could break down security implementations banks and credit unions rely on in the digital world.
If the Section 1033 finally makes its way through the CFPB, banking providers would need to take new precautions to ensure the safety of their customer’s private financial lives, which could take time to fully develop.
As mentioned above, Section 1033 has lain dormant for the last decade. And Biden’s order does not ensure the CFPB will take another concrete move.
However, even if the CFPB does not institute data regulations to ensure financial information can be freely and securely exchanged at the consumer’s direction, the private sector has already created several alternatives, already in operation.
For instance, the Financial Data Exchange (FDX) — an industry consortium of financial institutions, fintechs, data aggregators and others — believes consumers own their data, not the institution. As a result, they’ve created an API solution which facilitates data sharing between institutions for free.
The Clearing House (TCH) likewise started the Streamlined Data Sharing Risk Assessment, along with TruSight by IHS to standardize and streamline risk evaluations of data aggregators and financial apps.
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How CFPB Data Rules Could Be a Plus
As of the time of the Biden order little was known about how the CFPB data-sharing rules will shape up. As with any set of rules, there will be issues.
Yet there could be value for financial institutions in a fully implemented Section 1033, according to MX. The company, which responded to CFPB’s earlier request for comments, believes “there are enormous benefits to the whole ecosystem” from clear data-sharing rules.
Some of these benefits include decreased risk and “a fundamental shift to the creation of new revenue opportunities from API based services, like Banking as a Service (BaaS).”
The data company recommended Section 1033 regulations include the following:
- Establish consumers’ right of ownership of their data.
- Ensure financial institutions and fintechs cannot block access to data (unless under clear and defined exceptions such as concrete instances of fraud).
- Provide regulatory oversight of financial intermediaries and data aggregators.
- Provide clear guidance on liability in the event of a breach, so that financial institutions do not bear the full brunt as now, under Regulation E.