Late October saw the Consumer Financial Protection Bureau’s (CFPB) director, Rohit Chopra, announce that the Bureau will push ahead with its plans to finalise rulemaking on personal financial data rights in the US, outlining key areas of focus and the Bureau’s
“new approach to regulation.”
The same week, the
White House announced that the CFPB would issue guidance to help banks avoid charging
illegal junk fees on deposit accounts.
Earlier that month, the CFPB took action against
Choice Money for failing to provide accurate fee, exchange rate and other information for money transfers. Just two weeks later, five Senators, including Elizabeth Warren,
penned a letter to the CFPB, urging the Bureau to revise the Remittance Transfer Rule (Remittance Rule) for greater prepayment transparency.
These updates seem natural coming from a Bureau whose aim is (among other things) “to make consumer financial markets work for consumers, responsible providers, and the economy as a whole,” yet, with Chopra committing to this new approach to regulation,
the industry is beginning to buzz with anticipation around the potential new payments landscape that Chopra’s CFPB may just usher in.
Will the CFPB’s rulemaking will enshrine the ‘open’ in open banking?
While we may be reprimanded for using the term ‘open banking’ in the US context, it feels acceptable to carry on doing so until the rule is made official and bestowed with an official title. The CFPB has publicly stated its intention to release the proposed
personal financial data rights in late 2023, with the final rules slated to be published in late 2024.
Chopra took to the Money 20/20 stage in Las Vegas,
confirming to an eager industry that Section 1033 of the Dodd-Frank Act would no longer remain dormant, but instead provide the key to building a regulatory scaffold for an open banking model in the US.
During his remarks, Chopra stated: “While not explicitly an open banking or open finance rule, the rule will move us closer to it, by obligating financial institutions to share consumer data upon consumer request, empowering people to break up with banks
that provide bad service, and unleashing more market competition. If successful, it will also reduce the ability for incumbents to build moats and for middlemen to serve as gatekeepers. It will provide big advantages to those who provide the best products,
service quality, and rates.”
Open banking in the general sense very much exists in the States, with thousands of fintechs and millions of Americans using data sharing technologies in the same or similar ways as is done in the UK, Europe and other markets with a more mature open banking
landscape.
However, a lack of official standards to regulate the space has left companies without the seal of approval and certainty that regulatory oversight provides. Most importantly for the CFPB, without regulatory certainty consumers are also at greater risk.
John Pitts, global head of policy for Plaid, explains that they are very encouraged with the announcement and especially pleased by the strong focus on consumer data rights and focus on fostering competition. As with all rulemaking processes, he notes that
this will take over a year until it is complete and they will be following developments closely. Plaid and others in industry are encouraged by the CFPB’s
recent announcement that the agency plans to move away from overly complicated and tailored rules so that they are simple to understand and to enforce.
Rather than adopting prescriptive rules, it appears that Chopra will focus on building out a strong data right, aiming to support competition in the marketplace.
How will US regulators bake-in competition
SBREFA’s outline of proposals clearly states the challenges and objectives it seeks to achieve by embedding competition within its rulemaking:
While the CFPB is encouraged by some of the competitive effects of market-driven data access occurring today, it has become clear that these gains cannot be guaranteed until disagreements over consumer-authorised information sharing are addressed through
rulemaking.
Action is also needed to ensure that consumer-authorised information shared with third parties is not used for purposes not requested by the consumer or obtained using misleading tactics, particularly by firms whose surveillance revenue models incentivise
them to use and abuse consumer data. Such practices have contributed to a lack of trust among market participants, and a growing sense of powerlessness among consumers.
Nick Catino, global head of policy and social impact at Wise, hopes that US rule makers will learn from the UK’s experience, that “unless incumbent financial institutions are required to open up consumer data with fundamental rights for consumers to have
direct access, many will not. If opened up safely and securely, customers will embrace the technology.”
He adds that the issues seen abroad were often due to traditional financial institutions that were allowed to “get away with not fully implementing” open banking obligations. “This is why the rulemaking from the CFPB is essential, and we’re hoping that the
Bureau helps put standards in place that enshrine those customer rights, access and outcomes.”
There are around 10,000 banks and credit unions in the US, however, most CFPB rules include exemptions and safe harbours which would exclude some of the smaller players without the technological capabilities from having to share data.
Catino is unphased by this, as being able to bring even a handful of the largest financial institutions in the jurisdictions within the remit, means that the vast majority of the market is captured. “This means that consumers are going to become comfortable
with the idea, allowing it to become a common expectation for the financial services experience and bring wider adoption.”
The Financial Technology Association (FTA), a US fintech trade group is excited by the vision laid out in the CFPB’s announcement, particularly its commentary around open finance. In response to the announcement, the CEO of the FTA, Penny Lee
stated: “We applaud the CFPB’s action today to strengthen consumer data rights, which are foundational to a vibrant open finance ecosystem. We look forward to working with the Bureau to ensure that the final rule supports ongoing innovation and competition
in the marketplace. Open finance in the US and around the world has led to more inclusive, competitive financial systems for consumers.”
The
FTA argues that while regulators should prioritise section 1033 rulemaking, “embracing an open finance future in the long term will deliver even more consumer benefits. Open finance would extend consumer data rights a step beyond open banking to encompass
even more financial services and more fully reflect consumers’ financial lives. Full adoption of open finance would increase competition in the marketplace, drive greater financial inclusion, and create more consumer choice in the long term.”
This perhaps marks a welcome point of distinction from open banking standards abroad (such as the UK), where certain elements were “overly prescriptive” and had to be revisited and refined.
Pitts also notes that industry led bodies such as the Financial Data Exchange (FDX) are working to provide alignment around a potential common API data standard, and is a preferred approach over technical standards from the government, which may favour one
technology or curb innovation for consumers into the future.
“At its core,” explains Pitts, open finance “is about putting consumers in control of their own data and allowing them to use it to get a better deal.”
He furthers that while open finance has already support more inclusive, competitive financial systems for consumers and small businesses in the US and across the globe, there is room to do much more. For instance, the National Consumer Law Center recently
put out a new report that looked at consumers providing access to their bank account data so their rent payments could inform their mortgage underwriting and help build credit.
“This is part of the promise of open finance. When people can easily switch to another company and bring their financial history with them, that presents real competition to legacy services and forces everyone to improve, with positive results for
consumers.”
Catino states that the company has long been a supporter of open banking in the UK, being one of the first adopters to authenticate customers and initiate payments. “We’re also thinking about an open finance roadmap that includes payments initiation. An
initial element of this is the open APIs that will come from open banking, to allow things like international payments, information on data, pricing, and fees to create a more competitive marketplace.”
“If we could see what all the different international payment providers in the market (banks and payment companies) are pricing on different routes, that would spur a lot of competition and help lower costs. But ultimately, it's about consumer control and
transparency. So the benefits are clear.”
The CFPB is currently undertaking a consultative process to collect input early in the process, from small entities which are likely to be impacted by the rulemaking. This requirement is set out in the Dodd-Frank Act, which compels the CFPB to comply with
SBREFA, by convening a Small Business Review Panel to consider input from the market. Market participants will be announced publicly, and panellists will include representatives from the CFPB, the Small Business Administration’s Chief Counsel for Advocacy,
the Office of Information and Regulatory Affairs in the Office of Management and Budget.
Pitts adds that the announcement has generally been received in a positive light by the industry, and that many financial institutions recognise that consumer data access is critical to their customers who want to use fintech apps and service. Pitts reinforced
that industry is aligning around the move towards APIs. For instance, Plaid is an API first company with the majority of its traffic already on APIs. This underscores an important evolution in the US, which moves away from screen-scraping toward the more consumer
friendly (and technically efficient) API-first model.
At the same time, FTA and others in industry highlight that the movement away from screen scraping could present a challenge for smaller institutions in the US. These institutions may need more time to adjust to APIs so that their consumers are not cut off
from access to the apps and services they want to use. The move to APIs will likely be addressed in the rule.
Beyond API access, privacy rights will be an area that the Bureau will need to further hone ahead of the final rulemaking. Liability is another issue which
some financial institutions are raising with respect to the CFPB decision making, however the Bureau has not included this within its October outline.
It is possible that the CFPB did not address the liability question in the outline as it has already provided its position in an
FAQ on electronic transfers published in 2021. The document states that if consumers provide account credential to a data aggregator that is subsequently hacked, banks are liable for the unauthorised charges made.
The CFPB released guidance last year addressing liability for electronic fund transfers and has made clear there are other legal tools such as
Regulation E, fraud and payments within the space that they are weighing to address consumer
liability issues.
There is a possibility that the CFPB will use its powers to write a larger participant rule later on in the rulemaking, bringing data aggregators like Plaid under the same level of supervision as large financial services companies.
Industry appears to be supportive of this approach, and Pitts says that this indicates an encouraging alignment in the industry already.
Will the Remittance Rule get the same CFPB treatment?
Central to Catino’s work is consumer education around hidden fees and lack of pricing transparency in remittances. This is of course, the widely cited origin story of Wise founders who were trying to get a better rate to transfer personal funds internationally.
Wise’s transparency model shows upfront what the cost for transfer will be for the consumer, providing certainty and a significant competitive edge. You need look no further than Wise’s
exchange rate comparison page to see which firms are pushing the envelope.
On top of this now “industry standard approach”, Catino notes that as policymakers and regulators around the world start to examine junk fees in financial services we’re likely to see significant movement in the space.
Not only did the Biden-Harris Administration flag its intent to
take action on junk fees, supporting the CFPB’s work in drafting rules and guidance, but the follow up call to action
from Senator Warren (and others) underscores a foundational shift toward placing attention on the protection of the consumer, rather than focusing solely on the perpetuation of the US’ incumbent-dominated status quo.
Notable also, is the European Commission’s
September announcement that it would introduce cross-border remittance transparency, to stop certain players from taking advantage of individuals in their efforts to transfer money internationally, leveraging the pricing volatility caused by the war in
Ukraine.
Catino adds: “The US and Europe are now focused on this idea of eliminating hidden fees in international payments. It’s incredibly rare to see consumer groups, fintech associations and of course regulatory bodies all supportive of a single cause. We are
very supportive of this movement, and think that this is going to receive a lot of attention in the months ahead.”
If the recent slew of announcements and resounding industry support is anything to go by, it’s looking increasingly likely that 2023 could very well be the watershed year for consumer banking that the US has been waiting for.