Open Banking - A Challenge for the U.S.

In a December 20th article titled, “Without Open Banking regulation, banks and fintechs clash in the US” (*), we get a taste of the first issues that are arising in the U.S. of trying to work in a somewhat open banking space without regulation. One of the issues mentioned in the article relates to aggregators in the U.S. being blocked by banks that are upgrading their security features from accessing account holder data. This is, in turn, preventing fintechs from delivering services that use these aggregators to obtain data from the banks of which the account holders have granted these fintechs permission to do so. Account holders are now upset with the banks for making these security changes. But the question that is coming to the forefront in the U.S. is who actually owns client data? The banks or the customers themselves? As there is no regulation in the U.S. yet to determine this, it is unclear. In the United Kingdom this is clearly stated under open banking regulation.

It has long been debated if regulation is truly needed with many out there that still believe that it is not needed. The U.S. is the one country that needs regulation more than any other. Why? Because the U.S. is more divided and geographically challenged than any other country in the world.

(*) Reference - https://econsultancy.com/without-open-banking-regulation-banks-and-fintechs-clash-in-the-us/

Geographical Challenges of the U.S.

Let’s go on a quick trip of the U.S.

• Fintech Hub - In the West, we have Silicon Valley which is still the heart of where the most (and influential) fintechs exist.
• Banking Hub - In the north East, specifically New York, we have Wall Street, the heart of the financial sector.
• Government – Also in the East, but slightly south, we have Washington D.C. the epicentre of U.S. politics, legislation and regulation. 

To put this in numerical perspective:

• 2937 miles separate Wall Street from Silicon Valley.
  • From a LATAM perspective, this is roughly the distance between Mexico City and Bogota crossing 7 countries in total.
  • From a Europe perspective, this is roughly from Copenhagen to Tel Aviv crossing 12 countries.
  • 225 miles separate Washington DC from Wall Street
    • This is roughly the distance from London to Paris.
    • Or from Kuala Lumpur to Singapore.

In comparison to other “open banking” countries:

• Australia
  • 153 miles separate Canberra, where the Australian government is placed, and Sydney where the financial and fintech sector can be found.
  • Mexico
    • Government, financial and fintech sector are all in Mexico City.

• United Kingdom
  • Government, financial and fintech sector are all in London within 2 square miles!!
  • Canada
    • When (yes when not if) Canada joins the open banking movement, they have their primary government situated in Ottawa, their financial sector primarily in Toronto and the fintech sector divided between Ottawa and Toronto. The distance between the two cities is only 279 miles. 

Distance is certainly relevant when trying to bring the three key players together on such an important movement. 

U.S. Regulators (*)

To add more complexity to the U.S., they have, as we know, 52 states which have independent laws and regulations. Having said this, the financial sector in the 52 states must follow federal and/or state regulations. 

The federal regulations are divided into 5 regulators:

• Federal Reserve System (FRS) – regulates state-chartered member banks, bank holding companies, foreign branches of U.S. national and state member banks and state-chartered U.S. branches and agencies of foreign banks.
• Office of the Comptroller of the Currency (OCC) – regulates national banks though they must also be members of the FRS.
• Federal Deposit Insurance Corporation (FDIC) – provides the oversight and insuring deposits across U.S. banks.
• National Credit Union Administration (NCUA) – regulates, charters and supervises federal credit unions.
• Office of Thrift Supervision (OTS) – regulates, under the Department of the Treasury, all federal chartered and state-chartered savings banks and savings and loans associations.

At state level, each state has an office(s) or agencies that are charged with supervising and regulating state-chartered banks and thrifts.

*Reference - https://www.frbsf.org/education/publications/doctor-econ/2006/november/commercial-banks-regulation/ 

What does the Above Tell Us?

Taking into consideration the geographical and regulatory challenges in the U.S., it is very unlikely that the entire U.S. will be able to adopt open banking without a single open banking regulation that clearly stipulates the core structures that were implemented in other open banking countries:

• Overarching regulation
• Common data standards (this is a topic on its own)
• A desire for true innovative collaboration between banks, fintechs and regulators

This is, unless, each state or a small number of states create an alliance in which they share the above bullet points and begin to influence other states. This, in turn, may create the use cases necessary to convince other jurisdictions and financial institutions to follow suit, but it will take time. 

Risks

The risks that may exist in the U.S., as collaborative innovation continues and banks as well as fintechs realise and jump on the “open” movement, are:

• Customers will continue to be frustrated with banks as they continue to enhance security features resulting in even lower confidence in the financial sector.
• Consumers will continue to feel frustrated that they may not avail of the many innovative payment solutions, for example, that an “open” movement will bring to neighbouring countries like Mexico and Canada.
• Consumers may find it a challenge (or not?) to jump from the current payment capabilities to the ones offered by open banking or even to the rest of the world. Today, over 60% of retail payments are made by cheque (*). If the A side does not start using innovative payment solutions, then the B side won’t feel obliged to do so either.

(*) Reference - https://www.theverge.com/ad/16774328/american-checks-currency

• Independent groups continue to work on creating certain rules and data standards that are not in line with global practices (which is already occurring). The risk here is that the U.S. (or parts of) may end up isolating itself from either other parts of the country or with other open banking countries creating a higher development cost in the future to benefit from true cross border opportunities for banks, fintechs but mainly for consumers.
• The U.S. will remain behind the rest of the world as it relates to technology and innovation in the financial sector. Let us be reminded that:
  • the U.S. still depends heavily on cheques with 28 million cheques processed daily of which each one has to go through an average of 2.5 banks to process. In the UK, less than 350 million (and declining) were processed in the year 2017. Sweden and Denmark stopped accepting cheques in 2017.
  • Credit cards became contactless in the U.S. only in 2019 while in the United Kingdom it started in 2007.

Opportunities

The U.S. has a population of over 329.45 million, according to the 2019 census. This makes the U.S. a formidable market not only for fintechs but also for financial institutions if they can adopt open banking. With the U.S. having one of the most active retail markets in the world with e-commerce sales alone totalling USD 154,543 million per quarter in 2019 which is approximately 8.9% of overall retail sales valued at over USD 5 trillion, there are certainly opportunities for new products and services to leverage these numbers.  

With a growing trend in e-commerce sales brought on by millennials and simply convenience (7,4% in 2015 versus 8.9% in 2018), this is where we may see fintechs realise the opportunity of open banking to facilitate payment products and services not to mention a mobile phone penetration of 103%.

Summary

The U.S. has always faced challenges in the adoption of global payment services in the financial sector as mentioned above. But will consumers finally push banks and regulators into open banking due to the unstoppable force of innovation? With global travel becoming more appealing to US residents and with some of the largest fintech firms based in the US jumping on the “open” movement, it seems that this may finally be the push needed. Like other countries with large populations, the US is certainly an appealing commercial venture, but its main hurdle is simply all of the red tape and geographical challenges surrounding it. 

While some independent efforts are on the way within the US, it will be interesting to see what the actual trigger will be that will cause the US to adopt open banking.