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Consumers have become more aware of the security risks their data is exposed to, resulting in stricter privacy regulations that increase operating costs and slow down innovation. But with new moves toward open banking on the horizon, there’s a better, more secure way to share your data — without the worry that banks will use it for marketing purposes.
Recently, the Consumer Financial Protection Bureau (CFPB) revealed its plans to activate a dormant authority enshrined in the Dodd-Frank Act more than a decade ago. Based on the comments of director Rohit Chopra, the industry’s assumption that regulators won’t mandate banks to share customer data would prove false, which could change the banking industry for good.
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Are we entering the era of open banking?
On paper, open banking is simple: create a network where consumers, banks and non-banking financial institutions can securely exchange relevant data to create transparency, reduce fraud and improve service. In other words, providing third-party service providers with free access to consumer banking, transaction data, and other financial data from banks and non-banking financial institutions through application programming interfaces or APIs. However, with regulators scrambling over the past decade to get ahead of technology-based privacy concerns, many thought open banking was still a long way off.
At the Money 20/20 conference in October Chopra revealed a trial for exercising the authority of the CFPB under Article 1033 of the Dodd-Frank Consumer Financial Protection Act which could lay the groundwork for open banking. While the details are yet to be defined, the rule would require financial institutions to share data with consumers at their request. At the very least, this would increase competition in the industry by making it easier for consumers to pack up and switch banks for reasons like bad service. It would also take power away from service providers who try to act as gatekeepers, reinforcing the competitive advantage of those who offer the best rates, products and customer service.
Does this mean we are entering the era of open banking? It certainly means we are one step closer. Even if the CFPB doesn’t mandate data sharing, it will most likely create standards and guidelines on how to do it. Of course, these processes take time. The CFPB intends to publish a report in the first quarter of 2023 after a public comment period. It will propose rules by the end of next year, and Chopra said they aim to finalize a rule and start implementing it sometime in 2024. In other words, official changes won’t happen overnight, but that doesn’t mean financial institutions can afford to wait.
Related: How Open Banking Can Benefit Small Businesses
It’s already time to leverage consumer data
Backed by many start-ups, certain financial institutions have already started laying the groundwork for open banking by leveraging technology such as API-based collaboration. Now consumers can use a non-banking financial app, such as a budgeting tool, and link it to their spending, savings, and credit card accounts to gain insight into their transactions. The banks that support this kind of integration see it as an opportunity to improve the customer experience and even offer new services. Still, not everyone is on board yet.
Faced with open banking regulations, financial institutions always have the option of simply complying and doing nothing more, such as those who have yet to participate in the voluntary Exchange of financial data (FDX). It’s a valid choice, but it means not knowing what’s happening with customers everywhere they bank, leading to ignorance of the ecosystem.
There are other ways to view a financial institution’s role in open banking. Finding ways to share consumer data and leverage the information of other financial institutions will put a company in a much better position for developing competitive offerings, especially as the CFPB moves forward with its plans. We will examine each of these different roles next.
Since the industry is already moving toward standardization independent of regulations, such as through the FDX, it is unlikely that standards created by the CFPB will look drastically different from existing specifications. With that in mind, financial institutions have no excuse not to move on and get involved in the innovation that is already underway, presenting tremendous opportunity over regulations that overwhelm some players and leave them vulnerable to increased competition.
Related: How Technology is Shaping the Future of Finance
Everyone can benefit from open banking
The ability to securely and efficiently connect financial institutions (FI) and third parties with proven mechanisms is an exciting opportunity not only for the companies that make up the ecosystem, but also for individual and corporate clients. By using data rather than just providing it, banks can build an accurate 360-degree view of their customers, help them recommend the right products, improve service experiences and support users’ financial goals. It enables banks to be more intelligent, creating ecosystem intelligence.
It’s not just about sharing data either. Sometimes it’s about sharing opportunities via Integrated finance or Banking as a service (BaaS) solutions. For example, banks may allow third parties to initiate transactions from their front-end, such as in an accounting, billing, or ride-sharing app. In turn, the third-party provider provides an easier customer experience, while the bank acquires a new customer at a significantly lower, if not free, acquisition cost. I call this ecosystem infrastructure.
Taking it a step further and bringing it all together will allow banks to share and consume information from other FIs, fintech and third parties, opening up opportunities for business models such as marketplaces and super apps. I like to refer to this ecosystem orchestration, which allows banks to become a one-stop shop for financial services.
Financial institutions moving in this direction while adhering to emerging open banking standards will be ready to integrate with virtually the entire market while finding solutions for immediate use cases. This is a win/win with endless benefits yet to be realized for consumers, business customers and financial institutions.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.