By Anthony Walton
Iliad Solutions
The approach to open banking in the United States is shifting, thanks to a new regulation anticipated later this year that will require financial institutions to share customer data upon request.
The Consumer Financial Protection Bureau (CFPB)'s Personal Financial Data Rights Rule represents the long-awaited implementation of section 1033 of the Dodd-Frank Act and comes in response to growing public appetite for mobile banking and payments apps.
Heralding a switch from industry-led open banking adoption to a regulation-driven model, the aim of the rule, according to CFPB Director Rohit Chopra, is to "supercharge competition, improve financial products and services, and discourage junk fees".
In theory, it should empower individual consumers and lead to increased data sharing after its implementation in the autumn.
In other parts of the world, legislation-driven open banking is nothing new. For example, the EU's PSD2 regulation set the framework for both the bloc's 27 members and the UK eight years ago. This is due to be strengthened by the forthcoming PSD3 rule.
But despite Europe's regulatory head start, accurately gauging who is winning the global open banking race is no mean feat. Statistics on regional penetration vary by source. Yet one thing's for sure: the trend for data sharing between large financial institutions and fintechs is one of growth.
And this leads us to a question. Following a challenging few years in the fintech sector, could the CFPB's open banking rule spur a wave of innovation and growth as third-party providers, or TPPs, race to build out products and services?
The answer is yes. That's because the move is another milestone in the digital transformation of financial services. Not to mention the fact that it's the world's biggest economy signaling that open banking matters and is here to stay.
However, as far as banks are concerned, this represents both a challenge and an opportunity. On one hand, large financial institutions will be required to connect to many more fintech APIs over time, increasing complexity in a payments ecosystem composed of legacy and modern platforms.
It will also create further imperatives for banks around reducing fraud and improving financial literacy among customers. Additionally, there will be a need to develop new customer retention strategies as it becomes easier for people to switch providers.
Yet on the other hand, the rule should create a fertile environment in which banks and fintechs can deepen partnerships to deliver more customer-centric user experiences through the use of digital technology.
To make the most of these opportunities and overcome the challenges presented by the new rule, it's sensible for banks to review and optimize their ability to integrate with modern systems. By becoming open-banking ready, U.S. banks will be well-placed to deliver innovation quickly and securely when the CFPB rule goes live.
Knowing exactly what readiness for open banking will entail remains to be seen. But what we can say for sure is that with any new system, comes new standards.
And in recent weeks the CFPB has been engaging the financial sector on the criteria organizations need to meet to become a recognized standard-setting body. These institutions will play an important role in setting technical standards for banks and third-party providers to follow when the data sharing rule comes into force.
It will thus be essential for banks to test above and beyond industry-set standards. Such an approach allows financial institutions to simulate extreme scenarios and test products and services to destruction, minimizing the chances of a damaging outage post launch.
Another consideration with open banking innovation is the increasing number of API calls financial institutions are having to make between internal and external endpoints. For instance, in the UK last year, there were some 14 billion API calls, as one in seven consumers took advantage of open banking tech.
Therefore, it makes sense for financial institutions to work with a testing partner who has the technology and know-how needed to conduct seamless testing across a range of separate departments and third-party providers.
As we move toward implementation of the CFPB's Personal Financial Data Rights Rule, details about standards will become clear. Thankfully, U.S. innovators can feel reassured that software is available to enable effective testing right from the start of this new era in open banking.
Note: The following sources were used in researching this article:
Anthony Walton is the CEO of Iliad Solutions, which has extensive experience in implementing new systems—from Faster Payments in the UK to FedNow in the United States, as well as ISO20022 at global level. To find out more about Iliad's approach to supporting payments innovation through world-class testing and certification, email .info@iliad-solutions.com
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