US banks prepare for the open banking era of consumer data sharing

US BANKS will now have to give customers access to their financial data after the top consumer watchdog finalized a long-awaited rule aimed at fueling more competition for financial products and services.

Under the Consumer Financial Protection Bureau’s (CFPB) open banking measure, consumers will be able to request, download and transfer their much-coveted data to another lender or financial services provider for free. The rule aims to make it easier for consumers to shop for better rates and switch providers, which in turn will help lower the price of loans and improve services by increasing competition, CFPB Director Rohit Chopra said Tuesday (22 of October).

“Many Americans are stuck in financial products with lousy fees and service,” Chopra said. “Today’s action will give people more power to get better rates and services on bank accounts, credit cards and more.”

Even if consumers take no action, they could still benefit as lenders proactively offer them better service or rates to prevent consumers from jumping, Chopra said. The rule could also prompt lenders to consider different and newly accessible data in consumer loan applications, he added.

The move effectively breaks banks’ control over crucial data on savings patterns and checking account data for rent payment history, a setting that some firms made more difficult to change to help boost benefits, according to Chopra. The effort stems from the financial crisis when Congress enacted the Dodd-Frank Act with Section 1033 giving consumers the right to access their financial data. A first proposal was made public last year.

Banks and credit unions with more than $850 million in assets must comply with the rule. Larger institutions have until April 2026 to join, while smaller institutions have until April 2030. Non-depository firms of any size must also comply, according to the CFPB.

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Fintechs benefit

Fintechs like Venmo and PayPal Holdings’ Betterment are poised to benefit from a more connected ecosystem of consumer financial data. Consumer advocates and the fintech lobby have long called on regulators to make it easier for people to fire a financial services provider that doesn’t satisfactorily meet their credit needs, whether through discrimination, some other unfair, deceptive act or practice , abusive or simply poor service, as a way to strengthen competition.

Plaid, which connects consumers’ bank accounts with fintech apps and services, said the rule puts consumers in the driver’s seat.

“This rule will ensure more people have safe and reliable access to their financial information and accelerate innovations that benefit consumers,” said Plaid’s global head of policy, John Pitts.

Wall Street industry groups, however, have argued that the CFPB rule could expose them to liability if a third party is compromised, among other concerns. The rule requires banks to set up and maintain interfaces that allow third parties, where consumers have permission, to access their data. A spokesman for America’s biggest bank, JPMorgan, called the move “anything but” safe.

“This is not open banking, it’s open season for more fraud and scams,” said Trish Wexler, a spokeswoman for JPMorgan. “By requiring banks to hand over sensitive customer account data to any third party that has caused someone to click ‘I agree’ on their application, this rule handcuffs banks’ ability to hold third parties to high security standards” .

Privacy Concerns

Chopra said the rule institutes strong privacy safeguards. Any company authorized by a consumer to access their data can only use that data to provide products or services that the consumer requests, he said during a speech at a conference on Tuesday.

“It’s pretty simple,” Chopra said. “A company that ingests consumer data may use the data to provide the product or service that the consumer requests, but not for unrelated purposes that the consumer does not want.”

The final regulation would cover checking and prepaid accounts, credit cards and digital wallets, but not mortgages, student loans or auto loans. Chopra said it is considering a number of other use cases, including how to reduce costs and complexity when it comes to originating mortgages.

Many companies, both banks and fintechs, have already signed data sharing agreements to end the less secure option of “screen scraping,” whereby consumers share their usernames and passwords with third parties. This rule also strengthens protections by accelerating the move away from this practice, which risks sharing inaccurate data and propagating login credentials, according to Chopra.

An additional benefit could be for small business owners or freelancers, who can use their existing data as verification to access financial products or capital, Chopra said.

“The nature of how this might work might not be obvious to consumers, but it might provide that boost that I think on the margins will help a lot of people,” he said. BLOOMBERG