The Future is Open: The U.S. Turns to Open Banking

FPF is pleased to work with a broad set of stakeholders on concepts around privacy and open banking. For more information on our new Open Banking Working Group and related projects, please contact Jeremy Greenberg: [email protected].

• Open banking is a concept that describes banks and other financial institutions, such as credit unions, providing rights to customers over their financial data, including the ability to access, share or port data to third parties for various services. 

• The inherent tensions found in open banking between privacy, competition, and data portability requirements mirror similar concerns across the spectrum of Big Data. 

• Current challenges to a widespread and healthy open banking ecosystem in the U.S. include a lack of harmonized rules and principles for maintaining strong privacy protections involving financial data and an absence of standardized technical architecture. 

• The Consumer Financial Protection Bureau (CFPB) will take the lead on facilitating open banking in the U.S. and crafting rules regarding data protection and security; the CFPB should consider lessons learned from international approaches.

• Open banking proponents and policymakers should be mindful of the unique sensitivity of financial information and the complex data protection risks raised by increased sharing of banking data—even when sharing is directed by consumers.

Introduction

In July 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy. The Executive Order takes a “whole of government approach” to enforcing antitrust laws across the economy, with clear implications for data protection and privacy. Notably, the order encourages the Consumer Financial Protection Bureau (CFPB) to consider crafting rules under section 1033 of the Dodd-Frank Act in support of open banking with the goal of making it easier for consumers to safely switch financial institutions and use novel and innovative financial products while maintaining privacy and security. 

The Order’s callout signals that the Biden administration views open banking as an important initiative for promoting consumer choice, fostering competition, and protecting consumers’ privacy. The debate around open banking highlights tensions between privacy and competition along with a number of privacy flashpoints including: data portability, access, sharing, transparency, control, and interoperability. 

Open Banking Can Provide New Rights and Benefits to Consumers and Help Spur Competition, But Technical and Privacy Challenges Remain

Open banking is a concept that describes banks and other financial institutions, such as credit unions, providing rights to customers over their financial data, including the ability to share data or permissions over their data with third parties for various services. These rights include the right to access their financial data, port their data and switch financial institutions, and grant permission to third parties to carry out transactions and provide financial services to best meet a customer’s needs. For example, individuals could grant access to their financial data to a third party to complete an automated payment or provide tailored financial planning advice based on a consumer’s individual finances or credit history. Proponents of open banking argue that another benefit is increased competition among financial institutions. Firms entering into the financial sector may offer novel services that spur competition across the industry. 

One current challenge to a widespread and healthy open banking ecosystem in the U.S. is a lack of harmonized rules and principles for maintaining strong privacy protections involving financial data. As a result, some traditional banking institutions concerned with maintaining strong customer privacy might be hesitant to support an open banking ecosystem that lacks clear and strong privacy rules and principles that equal, or exceed, the current financial privacy and security protections afforded to consumers by regulations such as the Gramm-Leach-Bliley Act (GLBA) or the Fair Credit Reporting Act (FCRA).

Another roadblock to widespread and privacy-protective open banking is the need for standardized technical architecture—particularly interoperable APIs— to enable the safe portability of financial data. A standardized and interoperable API would allow third parties to carry out their services on behalf of customers without accessing certain personal information, such as various login credentials. In the absence of widely adopted secure APIs, third parties sometimes turn to screen scraping to perform services, while collecting customer login credentials and other personal information, leading to potential privacy and security risks such as exposing consumer information in the case of a data breach and consumer impersonation. While current industry efforts such as the Financial Data Exchange’s (FDX) API are underway, a lack of standardized rules and technical standards, such as machine readable file rules, can lead to less privacy-protective methods of third parties accessing data. 

The CFPB Will Continue Taking the Lead on Facilitating Open Banking in the U.S, While Considering Lessons Learned from International Approaches

Prior to the Executive Order, the CFPB has taken some preliminary steps to promote safe open banking in the U.S. In 2017, the agency released a set of broad non-binding principles intended “to help foster the development of innovative financial products and services, increase competition in financial markets, and empower consumers to take greater control over their financial lives.” Key areas of focus include: data access (enabling consumers to obtain financial information in a timely manner without being compelled to share account credentials with third parties); informed consent (in which consumers understand terms & conditions with the ability to readily revoke authorizations granted to third parties); payment authorization (in which third parties are required to obtain specific authorization for distinct activities); efficient and effective accountability mechanisms (incentivizing stakeholders to prevent, detect, and resolve unauthorized access, sharing, and payments); among several other areas.

The CFPB next weighed in on the issue in 2020 when it held the CFPB Symposium: Consumer Access to Financial Records where experts discussed many of the concepts highlighted in the agency’s principles. Following the symposium, in October 2020, the CFPB initiated an Advanced Notice of Proposed Rulemaking on consumer access to financial records and how the agency might develop rules for implementing section 1033 of the Dodd-Frank Act. This is the same rulemaking effort highlighted in the Executive Order. The agency sought comments on the costs and benefits of open banking, and how the agency might handle many of the data protection-related concepts outlined in its 2017 principles, including: access, control, privacy, security, and standard setting. The CFPB has not issued a final rule or concluded the rulemaking, but the agency recently listed data sharing in its current regulatory agenda. Other than the CFPB, The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a Proposed Interagency Guidance on Third Party Relationships: Risk Management, focusing on banks managing risks in their third-party relationships with fintech companies, vendors, and other affiliates. While other regulators are involved in this space, the CFPB appears poised to return to their rulemaking effort as a near-term priority for the agency.

While the U.S. is serious about responsibly regulating and setting standards for open banking, other international models are well down this path. In 2015, the EU released an updated Payment Services Directive (PSD2), which went into effect in 2018. PSD2 aims to promote competition, privacy, and data transfer between EU countries and institutions. However, some PSD2 requirements, such as rules around consent, can significantly differ from requirements found in the GDPR and other European laws, leading to a lack of harmonization and confusion for consumers, regulators, and financial institutions. Other leading open banking approaches include recent efforts in the UK, Australia, Brazil, Israel, India, Canada, Mexico, and others. The technical standards and requirements around open banking will likely have to be harmonized between different regimes to promote the international and cross-border nature of the global economy.

Open Banking Highlights Broader Questions about Data Portability, Competition, and Cross-Border Data Flows

While the Executive Order sends a trumpet blast to regulators, consumers, and financial stakeholders that open banking is a priority area for the current administration, many of the data protection themes at play are much broader than open banking and touch multiple industries. The inherent tensions found in open banking between privacy and competition—such as the need to keep data private and in trusted hands vs. new players obtaining access or control over data for various purposes–exists across the spectrum of Big Data. Further, open banking helps animate the current debate and recent interest around data portability requirements from agencies such as the FTC. Ultimately, the need for interoperable rules and technical measures are not only necessary for beneficial and safe open banking, but for other international and cross-border data exchanges. 

*Image by Jozef Mikulcik from Pixabay