Trends 2024: Consumers Will Drive Open Banking, Not Regulators

Momentum is building for U.S. financial services to operate on "open banking" principles, in which consumers control directly how their financial data is used. Yes, the government is poised to enforce new rules, but the decisive demand is coming from the marketplace. Banks need to respond.

Does the United States lag behind in the race toward “open banking”?

“Open banking” is an umbrella term to describe the idea that sharing anonymized financial data between institutions can lead to innovation and new financial products and services, and that consumers should have the ability to move their data freely from one institution to the next.

For years, the United Kingdom and Europe have mandated that banks share data, creating a longstanding perception that the U.S. is falling behind. A 2021 McKinsey report, for example, found that the U.K. was far outpacing the rest of the world in regulating third parties to provide open banking data. Moreover, some of America’s largest banks have lobbied against the idea of opening up their data.

Does Innovation Trump Regulation?

And yet, many in the financial sphere argue that this perception doesn’t reflect American reality. The U.K. and Europe, acknowledges Phillip Rosen, global chief technology officer at MoneyLion, may have taken the lead in enforcing open banking through regulation. “However, in other regards, when it comes to what companies are doing and the infrastructure that actually exists in the U.S. even though it’s not compelled or made easier by regulation, the U.S. is substantially further ahead,” Rosen argues.

The potential benefits of open banking have been evident for years. Making anonymized data about consumer behavior broadly available can give invaluable insight to banks, credit unions and other financial institutions, paving the way for new products and other marketing innovations. In particular, data aggregation is particularly useful in helping financial institutions offer personalized services.

But while Europe and the U.K. approached this issue as a legislative mandate, in the U.S. the need for open banking has bubbled up from consumer demand, especially from younger, digital native customers. “Consumers want this control,” says Alex Harris, a general partner at Fiat Ventures. “If they’re having a bad experience somewhere, they want to be able to snap their fingers and live in a better world.”

Some of the largest U.S. banks have historically resisted open banking, or at least open banking mandated by regulation. Part of that resistance is understandable: they want to protect the data relationship they have with millions of customers and see no competitive advantage in sharing it.

But there are logistical obstacles to open banking that have also slowed its acceptance from larger institutions. Sharing customer data, for example, raises concerns about data breaches and privacy. Providing data through open APIs adds another layer of complexity and compliance burden, and spooks some security executives at larger banks.

And without a clear regulatory framework, American banks don’t have clarity on their potential liabilities. Nonetheless, the U.S. open banking ecosystem has evolved on its own, with big financial players often operating through fintech partners, such as Plaid, Akoya and Fiserv.

Implementing open banking? How to Get the Most Bang for Open Banking

One of the most compelling questions about open banking is how it will be regulated, and how far regulators want to go. In the fall of 2023, the Consumer Financial Protection Bureau (CFPB) proposed a rule, based on a provision within Dodd-Frank, that focused on consumer control of personal financial data. The proposed rule, the agency claimed “would jumpstart competition by forbidding financial institutions from hoarding a person’s data and by requiring companies to share data at the person’s direction with other companies offering better products.”

For more, see 3 Steps to Ensure Open-Banking Success Ahead of CFPB Rules

The CFPB’s approach focused on the idea of empowering consumers to walk away from institutions that might be using their financial data in undesirable ways. That is one aspect of open banking, but the industry’s response demonstrates that the subject is more complex.

The American Bankers Association issued a statement of cautious support, while raising concerns about operational expenses and liability. There are also unanswered questions around which institutions, and what types of data, the rule will eventually apply to. Section 1033 of Dodd-Frank, on which the proposed rule is based, ostensibly applies to all consumer financial products and services. Yet the CFPB proposed rule appears to apply only to certain kinds of bank accounts, credit cards, and data providers.

Open Banking Beyond Banking

In this sense, some argue, the CFPB’s proposal doesn’t go far enough. For example, in its response to the proposed rule, the digital bank Chime said that it supported the idea of establishing clear rules, but that the proposal would be more effective if it included different types of financial products.

Notably, Chime pointed to payroll data as a critical piece of consumer information that is not included in the initial CFPB draft. “For most Americans, employment and employment-related income represent the central component of their financial lives, including key components in their ability to access and afford credit and liquidity products,” the company argued.

Got more open banking questions? Check out our coverage.

Chime made similar arguments for extending the rule’s coverage to data connected to products often used by lower-income consumers, such as Buy Now, Pay Later services and digital wallets.

The CFPB has indicated it hopes to finalize the rule later this year.

In the meantime, many in the fintech industry insist that open banking is already widespread, relying on consumer demand rather that government mandate. MoneyLion’s Rosen said the CFPB “went where the industry was already.” He argues that his own company has aggressively pursued the principles behind open banking: “working on making data accessible to consumers and actionable by consumers. I think the companies were already there and that this is a case of the CFPB playing catch up.”

James Ledbetter is the editor and publisher of Fin, a Substack newsletter about fintech. He is the former editor-in-chief of Inc. magazine and former head of content for Sequoia Capital. He has also held senior editorial roles at Reuters, Fortune, and Time, and is the author of six books, most recently “One Nation Under Gold.”

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