Open banking’s regulatory environment

The Consumer Financial Protection Bureau has already unveiled an open banking rule that would require financial firms offering transaction accounts such as checking, prepaid cards, credit cards and digital wallets to give consumers access to their personal financial data. The rule is intended to allow customers to more easily share or transfer the data to another provider. .Final Section 1033 regulation is expected this year. Under the rule, firms cannot use financial data for algorithms for activities such as targeted advertising and marketing. Companies would also be banned from monetizing the data by selling the information to data brokers following the customer-permissioned service. The rule would also bar firms from holding onto personal financial data indefinitely or using the data to train AI "that manipulates consumer behavior.".CFPB Director Rohit Chopra currently sees consumer financial markets as restricting the agency of consumers. Last fall, he said financial firms have realized they don't need to provide outstanding rates or customer service for sustained periods and can instead attract customers with "teaser rates, change them whenever they want, and make it bureaucratically difficult to switch.".Chopra said Section 1033 "would help address many of the root causes of sticky banking — by giving people more power to walk away from bad service and enabling small community banks and nascent competitors to peel away customers through better products and services with more favorable rates." .Open banking doesn't currently exist in its truest form due to the disparate regulatory environment between fintechs and banks, said Dave Mayo, CEO and president of data analytics and strategy system FedFis. .Know-your-customer requirements are more stringent at banks, Mayo added, which forces them into "an unfair playing field" where they inevitably lose customers to fintechs. While fintechs that attract customers from banks know they will have access to valid information, banks attracting customers from fintechs can never be sure they are getting accurate info due to the lack of regulations nonbanks face. .To Mayo, open banking also heightens the risk of more mass deposit outflows, which is especially concerning to him following the failure of Silicon Valley Bank one year ago. Customers withdrew $42 billion from the bank in the 24 hours before it failed. "We need guardrails and we need system protection," he added. .In November, the CFPB announced that it wants to supervise large nonbanks that offer digital wallets and payment applications. The proposed rule would cover companies handling more than 5 million transactions per year, including payment processors such as Amazon, Meta, Google, Square and PayPal. .Work is also underway to make open banking standards that meet regulatory requirements. Nonprofit FDX is one such standard-setting body, whose goal is a "common, interoperable and royalty-free technical standard for user-permissioned financial data." Near the end of last year, FDX announced that 65 million consumer accounts were actively using its API for open data sharing.