If you work in banking in the US, you should care about Open Banking.
To help argue the case, I’m going to look at the legal changes in the US that will likely push towards an Open Banking standard, in a similar way to the UK. Drawing on evidence from the UK, I’m also going to argue that implementing Open Banking can reduce your regular operational costs as a bank – meaning that, regardless of regulatory change, it’s worth doing.
The impact of Open Banking in the UK
Open Banking has been a reality in the UK since 2018. It has enabled a whole range of innovations, including:
Credit Scoring based on Open Banking (see for example Credit Kudos, which has now been bought by Apple)
The addition of card balances to Apple Wallet using Open Banking APIs
Savings and investment apps like Plum which help you invest and save based on your Open Banking data
Start-ups like Attention Exchange, which provide focused advertising based on Open Banking
The UK legal framework for Open Banking
Two primary laws have been driving Open Banking in the UK:
The Revised Payment Services Directive (PSD2): An EU directive, implemented in the UK through the Payment Services Regulations 2017
The Competition and Markets Authority (CMA) Order: In 2017, the CMA ordered nine of the UK’s largest banks to implement Open Banking
The success of the initiative – which has been celebrated by the UK government – has opened up competition in the banking sector and given customers more control over their financial data. This success has seen other countries around the world looking to formalise their Open Banking activities with similar laws.
These two laws have together created a strong legal framework for Open Banking in the UK. They have compelled banks to implement Open Banking APIs and, importantly, these have been created to shared standards. The public accessibility of these APIs has encouraged the development of a thriving ecosystem of Third Party Providers (TPPs) which use the APIs to access customers’ accounts in order to provide the kinds of service I described above. It’s important to note that the banks involved in the Open Banking initiative see these services as adding value to their customers, rather than being in direct competition with the banks.
The future of Open Banking in the US
Open Banking in the US has largely been voluntary until now. Unlike the UK’s centralised legislative framework for Open Banking, the US approach is currently more fragmented and industry-driven. This means there’s no single law mandating Open Banking nationwide. However, several key regulations and initiatives are paving the way:
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act): Section 1033: This section grants consumers the right to access their own financial data from banks and credit unions. However, the Consumer Financial Protection Bureau (CFPB) hasn’t yet implemented specific rules to operationalise this right, hindering its practical impact.
Consumer Financial Protection Bureau (CFPB) initiatives: The proposed Personal Financial Data Rights rule, if finalised, would give consumers more control over their financial data and require banks to share it with third-party apps with consumer consent. This rule is currently under development and expected to be finalised in 2024.
State-level initiatives: Several states, including California, Colorado, and New York, have passed laws or issued regulations related to consumer data access and Open Banking. These laws vary in scope and implementation, but they generally aim to give consumers more control over their financial data and promote competition in the financial services industry.
Industry-led efforts: Several industry groups, such as the Financial Data Exchange (FDX) and the Open Money Initiative (OMI), are working to develop Open Banking standards and protocols. These efforts aim to create a more consistent and interoperable Open Banking ecosystem in the US.
Federal Trade Commission (FTC): The FTC plays a role in enforcing consumer protection laws that could be relevant to Open Banking, such as the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act. The FTC has also expressed support for Open Banking initiatives that promote competition and consumer choice.
If the proposed CFPB initiative is finalised, it’s likely that a formal Open Banking standard for the US will be produced. Given that many countries, including the UK, have several years’ experience of Open Banking, it wouldn’t be surprising if the US standard were initially based on the UK standard (or equivalent).
The potential of Open Banking APIs
If or when there is a formal Open Banking standard in the US, there is a strong argument for implementing Open Banking APIs. Many banks say privately that implementing these APIs has enabled their businesses to save money – both by reducing customer service overheads (as they have fewer issues) and by reducing development time for their own engineering teams who can make use of these pre-existing, public APIs in building new products and services.
A clear example of this in the UK is Natwest, which has gone a step further than the Open Banking APIs, creating what they term discretionary APIs. Through NatWest’s Bank of APIs initiative, it has opened up a range of new services, while providing all the data required by the Open Banking standard.
With all this potential, that’s why it’s worth thinking about Open Banking now if you are a US bank. Based on the UK’s experience, it can be a great enabler of opportunities, a chance to reduce operational costs, and something to keep the regulators happy if the CFPB initiative lands.