Banking

Open banking must be a two-way street

With the Consumer Financial Protection Bureau mulling data-sharing rules, the digital finance industry needs to answer a fundamental question: Who counts as a financial data provider to consumers, only banks or also fintech companies?

For the past decade, the answer has been only banks. This is partly due to historical accident — fintech data didn’t exist when open finance kicked off 10 years ago. But with so many Americans now relying on both banks and fintech to manage their money — 40%, according to McKinsey — it’s clear that the role of consumer-permissioned financial data provider should know no category.

Consumers stand to benefit from a digital finance ecosystem where they can control their fintech data. Budgeting tools including digital wallet balances would be more holistic; cash flow underwriting would be more accurate where consumers share peer-to-peer payments alongside bank transactions. Financial institutions would benefit, too, from the ability to leverage similar data as their upstart competitors.

Alternatively, maintaining the status quo of one-directional data sharing doesn’t just limit consumers; it puts banks in a bind that incentivizes a worse ecosystem. When banks are never recipients of consumer-permissioned data, they might be more inclined to see data sharing as a cost to mitigate, not an opportunity to compete. The downsides are playing out now in the United Kingdom, where last month regulators approved a standard allowing banks to charge customers a fee to share certain information via application programming interfaces. Rather than provide any new consumer value, these “premium APIs” strangely put a price on information that was free to consumers a month ago.

Fortunately, regulators in North America have already signaled they envision open finance as multidirectional. The Office of the Comptroller of the Currency’s Project REACh encourages banks to ingest cash flow data to underwrite thin-file borrowers. The CFPB’s advance notice of proposed rulemaking on Section 1033of the Dodd-Frank Act called data providers and recipients “not mutually exclusive in theory or practice.” Canada’s Department of Finance emphasized “data reciprocity” in its open banking consultations. These views make sense when you start with consumers and look to build a regulatory framework around their access to their data, wherever it lies.

But the industry shouldn’t wait on rulemaking to deliver more value to consumers. One of the strengths of open finance in the U.S. has been the industry’s drive to solve as much as it can in the market while anticipating regulations to reinforce what’s best for consumers. Critically, some of the largest fintechs are investing in data-sharing capabilities, giving their customers more control of their data and more choices in their financial lives, and showing banks an early view of how they can benefit from an open finance world where data flows in both directions.

It is a start, and by committing to this open finance model now, the industry can give it momentum and avoid the “free data for the select, premium APIs (or nothing) for the rest” model framework that is miring open banking in Europe. This will take effort from both public and private actors, with regulation ensuring all financial data is treated as accessible to consumers, and technology enabling the secure transmission of consumer-permissioned data.

As the industry awaits potential rules on financial data sharing, it faces two potential paths: continue with one-sided data sharing at increasing cost to consumers, or unlock consumer data from all financial services providers and build an ecosystem where consumers have more control and benefit from fair competition. The choice for openness is clear.



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