The Consumer Financial Protection Bureau has announced its much-anticipated plans to shepherd the adoption of open banking in the United States.
Third-party financial companies are the driving force behind the open-banking model. However, regulators, including the CFPB, have expressed ongoing concerns about the growing dependence on fintech companies that aren’t required to comply with conventional banking regulations.
The new rules are designed to protect consumers while still developing a framework where open banking can flourish. Another driver behind the regulations is giving individuals the freedom to switch banks or financial services companies in much the same way that consumers can change their cellphone provider and keep the same phone number.
Once consumers can shop around for the best financial products, ideally financial institutions will have an incentive to innovate and improve customer service.
“Too many Americans are stuck in financial products with lousy rates and service,” said Rohit Chopra, Director of the CFPB. “Today’s action will give people more power to get better rates and service on bank accounts, credit cards, and more.”
Pressing Forward
The rule is the long-awaited fruition of Section 1033, a portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted by Congress after the 2007-08 financial crisis. Section 1033 has been dormant for over a decade but will be activated as the United States continues to press forward toward adoption of the open-banking system that has gained traction in the UK and the EU.
The crux of Section 1033 is that consumers will be able to transfer their data between financial institutions for free, and without encumbrances. Individuals will be given full control of their financial data, and they will be able to revoke a bank’s access to their information at any time. Another of the CFPB’s goals is to eliminate “junk fees” that are charged by banks or fintechs.
Narrowing Timeline
Another hallmark of open banking is instant payments, or pay-by-bank, which is much more efficient and cost-effective than many competing payment methods. The CFPB’s new rule is designed to facilitate instant payments adoption and build a framework where consumers, merchants, and banks will be able to move money freely among accounts.
Although the regulations are a step in the right direction, the timeline for adoption is narrow—large banks and fintechs will have two years to comply with the new rules. Smaller banks will have up to six years to conform to the regulations, and some community banks and credit unions will not be required to comply with the CFPB’s new rules at all.