2021 was a historic year for open banking, which is the process of financial institutions giving consumers the ability to use and share their financial records.
Over the past 12 months, the Consumer Financial Protection Bureau received nearly 100 public comments as it moved closer toward issuing rules to govern an open banking framework. President Biden included open banking as one of 72 policy initiatives advanced in a July 2021 Executive Order on competition, and Congress dedicated an entire hearing to “preserving the right of consumers to access personal financial data.” In December, the CFPB featured open banking as part of its upcoming rulemaking priorities for 2022.
These are welcome developments that lay the groundwork for 2022 to be the year that open banking finally becomes a reality in the U.S.
Open banking is the simple idea that consumers are the ultimate owners of their financial data, free to access and share that information however, and with whomever, they choose. The legal basis for open banking in the U.S. flows from Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires that banks make available to their customers, upon request, data concerning “the consumer financial product or service that the consumer obtained from [the bank]…in an electronic format usable by consumers” and directs the CFPB to issue rules necessary to fulfill that promise.
But more than 10 years after Dodd-Frank was enacted, such rules—necessary to guarantee consumer data access rights—are not yet in place. Consumers and small businesses still encounter connectivity failure rates greater than 40% when they first attempt to link their bank accounts to third-party financial applications. And major banks routinely make it difficult for customers to share their bank account data in order to use convenient third-party services.
These failures do not result from limitations of modern technology; they result overwhelmingly from financial institutions failing to provide reliable means of access for consumers to obtain and share their financial data.
Three Open Banking Objectives
If properly implemented, open banking will put consumers in the driver’s seat of their financial data and accomplish at least three major objectives.
Improve Competition & Consumer Choice
CFPB Director Rohit Chopra recently noted that “promoting competition, promoting choice, allowing new entrants to be able to challenge dominant players, [giving] people more options” were critical goals of the CFPB’s approach to open banking and Section 1033 rulemaking. Without open banking, financial institutions have complete control of customers’ data, making it difficult for consumers to switch banks or use third-party products that utilize bank account data.
Open banking has the potential to make our financial services industry more competitive by ensuring that consumers can use the hundreds of modern financial products and applications that provide access to credit, savings plans, personal financial management tools, free peer-to-peer payments platforms, and more.
Strengthen Consumer Privacy & Control
Open banking can strengthen consumer privacy by giving consumers complete control over where, when, and how their data is used. Currently, consumers have little insight into how financial service providers use information regarding their finances and spending habits.
If properly implemented, it can ensure that consumers have the ability to share their financial information with whomever they choose, for only the purposes they designate, with the ability to revoke that access whenever they like.
Expand Financial Inclusion
Open banking can help tens of millions of American consumers who are shut out of mainstream credit products because they don’t have a credit score, or have a score that’s inaccurate or outdated—disproportionately young, Black, Hispanic, first- and second-generation immigrants, and low- and moderate-income consumers. It can help them obtain access to safe and affordable credit.
For example, at Petal, the company I co-founded in 2016, we allow applicants to link their bank account and leverage their banking history to qualify for credit cards that they otherwise would be denied due to a poor or nonexistent credit score. The majority of our members have little to no credit history, and more than 40% were previously denied credit by a major bank or card issuer. Petal members with no prior credit history achieve an average credit score of 680 after just a few months of responsible credit use, enabling them to access mortgages, auto loans, and other financial products previously out of their reach.
Building on the promise of open banking, we launched a new product, Prism Data, in 2021 to help lenders and other financial services providers to integrate applicants’ banking history into their underwriting processes and, by doing so, expand financial access to underserved consumers.
While challenges remain, including ongoing discussions over the technology with which financial data should be shared and opposition from large institutions fearful of increased competition, the CFPB has the opportunity in 2022 to implement open banking rules that foster competition, lower costs, expand inclusion, and protect consumers.
This can be done by issuing rules to implement Section 1033 that (1) include a broad legal right of consumers to access their financial data by requiring banks, credit unions, and fintechs to enable both direct and permissioned access through trusted third-party financial applications; (2) prohibit such institutions from limiting the data elements consumers can access or the use-cases available to consumers; (3) permit the use of both emerging technologies and widely used existing technologies to ensure that the benefits of financial data access are available to all Americans; and (4) set standards to protect consumer data, require informed consent, and ensure the ability of consumers to opt out of using a service and revoke access to their financial data at any time.
Legislators in Canada have recently announced plans for a similar system to put consumers in control of their own financial data. And in the U.K. and Australia, open banking regulations are already in effect. This should be the year the U.S. joins these other nations in creating a modern and open financial system that enables innovations and puts consumers first.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owner.
Jason Gross is CEO and co-founder of both Petal, a New York-based credit card company on a mission to expand access to financial opportunity, and Prism Data. He has served as a member of the Consumer Financial Protection Bureau’s Consumer Advisory Board, and previously practiced law at Gunderson Dettmer and Sullivan & Cromwell, representing technology companies and financial institutions.