The US has historically taken a back seat to markets like the UK and EU in open banking, but that could change with the Consumer Financial Protection Bureau’s Open Banking Rule, announced in October 2022. The CFPB’s Open Banking Rule, planned to be finalized and implemented in 2024, is intended to provide more regulatory guidelines for financial data providers (banks, credit unions and card issuers) regarding consumer privacy rules and controls, data security standards, and specific types of financial information that data providers must grant access to through APIs. We examine the current state of open banking in the US, where it is heading and what financial services providers should be thinking about as the US embraces a more open data economy.
The Take
The US is moving toward a more open financial data economy, in which financial services providers can access and exchange consumer-permissioned data with greater ease via APIs. While open banking is already actively transforming financial services in the US, further adoption relies on more detailed regulatory guidelines, streamlined API integrations and, perhaps the most critical factor of all, consumer trust. Our research shows that most consumers are still hesitant to share their financial data with third-party service providers despite the prospect of an improved experience. Financial services providers should educate consumers on the benefits of open banking and empower them with data controls, which the imminent CFPB Open Banking rule should help to solidify.
Benefits and use cases
Open banking enables third-party financial services providers (e.g., fintechs, alternative lenders) to access consumer-permissioned financial data through APIs. Use cases are plentiful, ranging from identity verification and account aggregation to predicting a consumer’s probability of default. There are many benefits for financial services providers and consumers, including:
- Enhances the customer experience — Enabling consumer-permissioned data to flow more efficiently between different types of financial services providers grants more visibility into consumers’ financial health and needs.
- Promotes competition between financial services providers — One of the driving forces behind open banking is that it helps to level the playing field between traditional banks and third-party financial services providers.
- Traditional banks are increasingly partnering with newer fintechs to keep up with emerging technology and increase their speed to market. Open banking can take this trend further by unlocking greater opportunity for banks and fintechs to leverage customer data to drive revenue growth, develop more personalized and streamlined experiences, and inform their business strategies.
- More efficient and secure than screen scraping — Open banking leverages APIs to transfer data, offering far greater security and efficiency than the more outdated process of “screen scraping” (e.g., where a consumer authorizes a third-party financial services provider to log into their bank account to extract data).
Challenges
The benefits of open banking for consumers are many, yet most US consumers are still reluctant or uninterested in sharing their data with third-party providers. We find that one-quarter (24.6%) of consumers say they are very interested in securely sharing their data with third parties for an improved financial experience (e.g., faster credit approvals, budgeting across accounts) according to our Fintech & Holiday Experiences 2022 survey. Another 26% were neutral, and 44.2% were not very interested. Millennials showed higher interest in securely sharing their data with third parties for an improved experience than their older counterparts: 36.5% of millennials were very interested compared with 16.2% of baby boomers and only 3.3% of the Greatest Generation.
This is consistent with a broader trend in our research, whereby consumers overwhelmingly prioritize privacy (66.1%) over personalization (20.4%), according to our Connected Customer, Trust & Privacy 2022 survey (13.5% had no preference). To help boost consumer willingness to share financial data in exchange for greater personalization, financial services providers should focus on educating consumers on how their data is being used and protected, emphasizing specific benefits of financial data sharing and empowering consumers with controls to manage their data and permissions.
The Gramm-Leach-Bliley Act (GLBA) and the Fair Credit Reporting Act (FCRA) largely govern consumer financial data and privacy laws in the US, but regulations vary at the federal and state levels. Currently, the US lacks a unified regulatory approach to data privacy. As a result, there is ambiguity on data security standards for third-party service providers and who is responsible for data misuse or theft in an open banking scenario, how consumer data can be used and shared, and the amount of control consumers have over their data.
Open banking also relies on widespread API adoption, and a current lack of standardization remains a challenge. Smaller financial services providers might also find it more difficult to implement APIs if they have legacy infrastructure and limited resources.
Open banking initiatives in the US
Open banking is here in the US, but regulatory ambiguity, a lack of API standardization and consumer hesitancy remain obstacles to increased adoption. Several open banking initiatives are already underway in the US to address these challenges, including:
- The CFPB is developing an Open Banking Rule designed to grant consumers greater access and control over their financial data and promote competition among financial services providers.
- The Financial Data Exchange (FDX) is a nonprofit working to advance open banking in the US and Canada by providing standard tools for consumer data access.
- Data aggregators play a key role in facilitating open banking connections between financial institutions, fintechs and consumers. They serve as intermediaries by connecting consumer-permissioned third-party financial services providers with consumers’ financial institutions through APIs.
Looking ahead
As open banking gains momentum in the US, over time, access to financial data beyond just banking, such as investments, insurance and mortgage, will be imminent. This unlocks new opportunities for financial services providers to deliver hyper-personalized offers and value-added financial services to their customers.
Although the CFPB plans to issue more regulatory oversight in the next year, it could take years to work out finer details and implications. Financial services providers should strive to get ahead of regulation and double down on consumer trust by empowering consumers with data controls (e.g., the ability to view data shared across providers and easily turn on/off access) and emphasizing how consumer data is being used (or not used) and protected.
While open banking can help financial services providers access more consumer data, it cannot replace a sound data governance strategy. We believe the financial services providers most successful with open banking will have prioritized both data governance and a commitment to understanding their customers’ financial needs. Financial services providers should also consider exploring partnership opportunities with data aggregators and providers that can streamline and scale API integrations.
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