With the Fate of Open Banking Unclear, What Should Banks Do? Stay the Course
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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Executive Summary
- What open banking regulations, notably data sharing, will look like remains an open question. A combination of a major court case, a new regulatory initiative, and market developments has shaken things up.
- The Consumer Financial Protection Bureau may soon reshuffle the cards, dealing out fresh hands to banks, data aggregators and fintechs.
- The major question: Whether the CFPB will change its stance on banks charging for providing data. Right now, the “final” regulation bars that, but JPMorgan Chase’s July push for compensation may have changed the game.
- On Sept. 15 Chase and data aggregator Plaid announced a renewed data access agreement that includes a fee structure. The companies did not disclose the nature of the pricing. Pricing will not change for Plaid customers — fintechs and other companies using Plaid — according to a spokesperson.
The war over the future of federal open banking regulation continues on multiple fronts, with debate increasing over the outcome of a long line of deliberations— and who the winners will be.
Many banks have been moving forward with internal development based on the initial “final” rule published by the Biden Consumer Financial Protection Bureau last year, even as matters continue to percolate in both the judicial and regulatory arenas. Meanwhile, the issue of whether banks can charge for access to consumer data is playing out both in a regulatory context as well as in the real world, with JPMorgan Chase’s blockbuster July announcement that it would begin assessing fees on data aggregators like Plaid.
“Nobody who I’ve talked to is saying, ‘You know what? We’re just going to wait this out’,” says Gary Stein, managing director in Accenture’s North American payments practice. “Some of that might be because the original implementation deadlines are still there, and so they have to be prudent as an institution to work towards them.” He says many institutions aren’t so far along that they will have to rework initial approaches. Some, in fact, are still in the midst of adopting application programming interfaces for sharing data, to move away from screen scraping, according to Stein. The latter is no good for anyone, he says.
Stein notes there is a great deal of “noise” right now, which banking institutions, data aggregators and fintech companies must interpret.
He says that the firm’s consultants are telling the banking players who are working at compliance with the existing CFPB rule that they are doing the right thing, for now. And the firm is also telling them, he says, that “the debate might actually provide a little bit of clarity about how the future could be different than what we thought it was going to be — and to make sure you are ready regardless of whichever way some of these issues go.”
We’ve been here before. In the long absence of implementing rules for Dodd-Frank’s 1033, the law effective in 2010, the market developed standards substantially on its own.
“There was a gap that provided opportunities for people to fill, and sometimes opportunities don’t present the best solutions — they present solutions that are available in the moment,” said Phil Goldfeder, CEO of the American Fintech Council, which includes bank members, during a recent industry panel. “But that doesn’t mean that we’re stuck with them forever.”
Goldfeder and others suggest that the reopening of the 1033 rule could lead to collaboration and produce a better approach.
“I know this sounds kind of hokey, but we need a ‘kumbaya moment,’ where we sit down in a room and figure it out,” said Goldfeder. He believes that a strong, viable solution demands participation across the spectrum. Something hammered out between the biggest banks and the biggest fintechs would leave many players out of the conversation and “would be wrong.”
Others are skeptical and see the regulatory review turning into an every-organization-for-itself battle.
A Noisy Run-up to Major Change
It’s been a summer chock full of noise. The play-by-play:
• In a convoluted court case filed by banking interests right after the Biden CFPB published the final 1033 personal financial data rights rule, as reported by The Financial Brand, the Trump CFPB essentially switched sides and joined the banks in asking that the rule by struck down. Subsequently, the Financial Technology Association, a fintech trade group, filled the void the bureau left by becoming an “intervenor defender.” Many fintechs rely on access to bank consumer data in order to provide their services.
• On July 11, the Bloomberg Law website broke the story that JPMorgan Chase had sent pricing sheets to data aggregators like Plaid, MX Technologies and others to begin negotiations for charging for access. Until now, the banks have delivered data for free, with aggregators charging fintechs for it.
• The CFPB announced that it would reopen the regulation, reconsider the approach taken, and attempt to devise a new approach in conjunction with multiple sides and with the interests of the public, ostensibly the party being protected by the law and the regulation. In light of the bureau’s move, on July 29 the U.S. District Court for the Eastern District of Kentucky granted a request for a stay of the case pending CFPB’s efforts.
• On Aug. 13, the banking organizations pressing the original lawsuit — the Bank Policy Institute, the Kentucky Bankers Association and Forcht Bank — filed a motion with the court seeking to clarify the status of compliance deadlines in the existing regulation. The organization’s point was that in the absence of court action, banking institutions would be working and expending funds to comply with a rule that could be superseded.
• On Aug. 21, the CFPB published an advance notice of proposed rulemaking on the 1033 matter. The bureau set out long lists of questions in four key areas. Among those areas was fees. The bureau is seeking viewpoints on the best approach to the assessment of fees by banks for data access — though this is a gathering of viewpoints and not a policy decision thus far. (The existing rule specifically bars banks from charging anything for access.) The comment period ends on Oct. 21.
• In early September, FTA, the intervenor defender, counterpunched in reaction to the banking motion. The association opposed the banking organizations’ move and accused them of interfering with the CFPB’s efforts to solicit fresh input and reevaluate 1033 implementation.
“They are essentially asking the court to pre-empt the CFPB’s rulemaking and hamstring the agency before it even hears from stakeholders,” FTA said in a statement.
Read more: What Banks Must Do While 1033 Open Banking Rules Hang in Legal Limbo
Say Hello to Open Banking Fees
In late August, Stripe, a leading fintech, filed an early comment letter with the bureau, explicitly linking JPMorgan Chase’s push to assess fees on aggregators to the pending regulatory reexamination.
“If Chase is allowed to do an end-run around the process by charging fees during the interim,” Stripe wrote, “it will cause significant damage to the marketplace and consumers.”
The company suggested that “allowing the largest banks to upend the existing framework through extortionate pricing will have serious and lasting impacts on the marketplace before the CFPB can complete its rulemaking process.” Stripe’s comment letter said that “thousands of products and businesses” had evolved with reliance on fee-free access to consumer data.
The company asked the bureau to consider a range of steps to bar Chase from going ahead with its plan.
Several leading fintechs told Forbes in late August that if the bank’s fees to aggregators were high enough — it was assumed they would be passed along to fintech clients — that they would most likely in turn pass the costs on to consumers.
During a roundtable discussion during the Finovate Fall conference, one participant speculated that Chase’s ultimate purpose is to use the pass-along fees to move consumers’ relationships back to the bank.
“They want them to come back to the mother ship,” the executive suggested. In its letter Stripe said the bank “is trying to quash growing competition from fintechs and the threat that pay-by-bank poses to its profits from legacy, more expensive credit or debit card payments.”
Accenture’s Gary Stein believes that no matter how you feel about Chase’s move, it may have advanced the debate. “Chase’s action is forcing some issues to come into the limelight and that may get us to a steady state faster than if nobody had acted.”
On Sept. 15, after this article was initially published, Chase and data aggregator Plaid jointly announced a renewed data access agreement that includes a fee structure. The companies did not disclose details. A Plaid spokesperson said there would be no change in pricing for Plaid customers — not consumers but the fintechs and other companies that pay to use Plaid products.
In a statement on the joint announcement, the Financial Technology Association said that “this development underscores the anti-competitive ability of the nation’s largest banks to set a new market floor during a period of regulatory uncertainty.” FTA reiterated its view that bank-imposed fees are barred by current law.
Observed commentator Ron Shevlin of Cornerstone Advisors, in a LinkedIn post: “Chase isn’t charging for the data — it’s charging for access to the data. You might think I’m mincing words — but that’s what lawyers do.” Shevlin added that Plaid has the profits and product range to make up the impact of paying for access.
“Paying Chase will probably force other aggregators — who may not have the breadth of products Plaid has — to pay for the access to the data,” Shevlin wrote in his post.
Read more: Open Finance Is Exploding Globally. Why is the U.S. Lagging?
Could Charging for Access Backfire?
Stein says there’s a potential risk for banks that decide to charge for data access, because it could introduce friction to the process for consumers. Let’s say a consumer customer of a bank uses a fintech that they especially like, but the company either passes on the bank’s charges (through the data aggregator passing it along) or declines to pay for the data. Either way, the consumer is either paying for, or losing, the service they liked using the fintech for.
But consumers may not sit still for that, says Stein, especially if some other bank makes a business out of saying that it will facilitate data sharing and not charge.
“That could become a deposit magnet,” says Stein.
He adds that he can envision circumstances where banks could turn on each other. In a related vein, Stein points out that some banks are already introducing account switcher tools. This could abet competition with both banks and fintechs.
“So, there are risks if you were to play hardball,” says Stein. However, he finds it interesting that Chase, the nation’s largest bank, made the move. Smaller institutions would not be able to charge if larger players didn’t, he points out.
During the panel discussion referred to earlier, Jim McCarthy, founder and chairman at the McCarthy-Hatch consulting firm, noted that banks like Chase spend huge amounts on compliance and risk programs for the accounts underlying the consumer-fintech relationship.
“There’s an argument that they have to be compensated for the trust layer,” said McCarthy, a former CFPB official in the bureau’s early days. “I’m not saying that they should charge, but I’m saying that Jamie Dimon had every right to do it. There’s a happy medium here, but I don’t think we’re there yet.”
Read more: Citizens Bank Is Out to Dissolve Account ‘Stickiness’ – And Steal Your Customers
Could Assessments for Access Play Out Differently?
Beyond the matter of fees , there’s an issue of what happens to consumer data on its journey between bank and fintech. The bureau’s advance notice addresses questions to data privacy and security.
Martin Kleinbard, founder of the Granular Fintech consultancy and a former CFPB fellow, believes the U.S. approach went astray when it became a zero-sum game, one in which each player sought to get all the juice out of data sharing.
Kleinbard, speaking in the panel discussion, said that a better start would have been for all players to adhere to a “value-added framework, where all the players in the ecosystem understood that when they added value, they were compensated for that, and when they were receiving value, they would be paying for that.”
“We have the chance to change that now,” Kleinbard says. He envisions a setup where a fintech could look at the pricing on offer and decide if it wants the data at that price or if it can obtain it in some other, less costly way.
McCarthy believes that a new final regulation ought to step away from the existing approach categorizing participants as banks and fintechs. Instead, he advocates looking at who is the provider of data and who is the user of the data. This recognizes that consumer data usage can be a two-way street.
Accenture’s Gary Stein says that if and when banks are permitted by the CFPB to charge for providing data, a subtle but meaningful shift will occur. He points out that fintechs will then be customers of the bank. This will lead them to evaluate paying recipients of data under some variation of know your customer practices. That could lead to interesting new business relationships.
Read more: Why Banks Can Lead — and Win — the Open Banking Revolution
Should CFPB Split Its Revised Final Rule in Two?
The present 1033 rule packs a lot into one package, and Kleinbard favors a split of that into two regulations.
Currently, the rule covers two key areas: one involving payments and one involving data sharing.
“Those two use cases have nothing to do with each other,” says Kleinbard, “but for the sake of expediency, they were commingled in the original rule.”
“Moving money around is not the same thing as moving data around,” says Kleinbard.
