Open Banking in the US
As data becomes an ever more critical element of the modern financial industry, banks are waking up to the idea that the future of the business lies in a more open and transparent method of sharing information.
This has led to the rise of open banking – a system of financial services provision which allows for the controlled flow of data from banks to third parties through APIs. Open banking aims to increase competition within the industry by allowing fintechs and other companies easier access to customer data which can then be used to develop new products and services.
However, while until recently the US banking business has adopted a more market led approach to open banking, there are signs that is about to change and brands in the space are going to adopt a more proactive approach in the future.
An Evolving Regulatory Environment
In July 2021, President Joe Biden signed an executive order designed to promote competition within the American economy. An integral part of this order was a clause which will allow banking customers to switch provider more easily and therefore increase the need for bank to improve their service or risk losing clients.
An essential element of this executive order is that it encourages the Consumer Financial Protection Bureau to craft new regulations under section 1033 of the Dodd-Frank Act. It is hoped that by ensconcing open banking in US financial regulations, it will make it simpler for customers to switch financial service providers and make use of third party fintech products, while ensuring the continued privacy and security of their data.
"A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers,” wrote President Biden in the executive order.
Challenges Ahead
Clearly, when discussing the concept of open banking, the number one concern among customers is going to be whether their privacy will continue to be protected in this new era of open data sharing. While increased focus on open banking is intended to improve choice for customers, it does on the surface seem like it would make data more vulnerable to breaches.
In fact, one of the biggest roadblocks to creating a landscape of widespread open banking adoption is the US’s lack of harmonized rules and regulations regarding the protection of financial data. While markets such as New York and California have already implemented stringent data protection regulations akin to the EU GDPR, other states are much farther behind when it comes to these kinds of rules.
"One of the major causes for confusion in the US is a lack of open banking regulation that lays out very specific requirements for banks to stay compliant,” reported Forbes ahead of the executive order. "In Europe, there is a clearly defined regulatory framework mandating access to data banks hold through initiatives like PSD2. While the road has been bumpy, Europe has by now rolled out open banking across the continent. Absent similar regulation in the US, institutions are left to decipher the concept for themselves.”
This means that many financial institutions – not to mention customers – are hesitant to fully support an ecosystem of open banking when they are unable to guarantee the universal protection of data across the country. In order to create the environment imagined by President Biden’s executive order, these issues will need to be addressed in good time and in proper order.
The other main issue standing in the way of open banking adoption is again related to universality. However, instead of being an issue of differing regulations, this is related to technological infrastructure.
Because the APIs used for open banking are often not interoperable, third-party companies must open resort to screen scraping to perform their function. This method of data collection is primitive and can lead to privacy and security risks such as exposing consumer information in the case of a data breach and consumer impersonation. By standardizing APIs and ensuring their interoperability, third parties can conduct their services on behalf of customers without accessing certain personal information.
Final Thoughts
Open banking aims to create a fairer and more competitive financial environment which should improve the customer experience for banking service users. However, until the US has standardized regulations for data security and privacy and improved the interoperability of technological architecture across the industry, we are not likely to see the kind of widespread adoption we would like.
Open banking is sure to be part of the conversation at CXFS Connect 2022, taking place in December at the Marriott Hilton Head Resort & Spa.
Download the agenda for more information and insights.