If you're not deeply involved in the financial industry, you might not have heard of Open Banking. Yet, as a consumer of financial products, the upcoming changes in America will significantly impact how you manage your money and the financial ecosystem at large.
Whether you're new to open banking or seeking clarity on the topic, this four-part blog series will guide you through understanding its implications.
Part 1: Unlocking the Future: Navigating the Rise of Open Banking in America
Part 2: Breaking Down the October 2023 CFPB’s Announcement for the U.S.
Part 3: The Dawn of Open Banking in Canada
Part 4: Open Banking Use Cases: Show me the Money
What is Open Banking and How it started?
In his remarks at the FDX[1] Global Summit on April 19, 2023, the acting Comptroller of the Currency[2] Michael J. Hsu gave this definition of open banking: “open banking is understood to be about enabling consumer-permissioned sharing of financial data with third parties to empower consumers, foster competition, and expand financial inclusion.”
Although accurate, this definition might be too esoteric for a general audience. But before we explore its meaning further, let's review how this global movement began.
How and where Open Banking started?
Open Banking originated as part of a broader global movement towards financial transparency, innovation, and consumer choice, with different regions adopting the concept in various forms and at different times. The movement started with regulatory initiatives in the UK and the European Union (EU), which were among the pioneers in formalizing the concept.
United Kingdom (UK)
In the UK, Open Banking was officially initiated as a result of a review by the Competition and Markets Authority (CMA) in 2016. The review found that older, larger banks were not having to compete hard enough for customers’ business, and smaller and newer banks found it difficult to grow. To address these issues and to foster a more competitive and innovative banking industry, the CMA mandated the nine largest UK banks (often referred to as the CMA9) to allow licensed startups and other financial institutions access to their data, down to the level of transaction-account transactions, with customer consent. Note that this notion of customer consent is going to play a big role in the upcoming regulation in the US. We will get back to this later.
European Union (EU)
Around the same time, the European Union was implementing the Revised Payment Services Directive known as PSD2, which came into effect in January 2018. PSD2 required banks to open up their payment infrastructure and customer data assets to third parties, with customer consent, to drive competition and innovation in the financial services industry. This directive applied to the 27 EU member states and was a significant step towards Open Banking in Europe.
On June 28, 2023, the European Commission published its proposal for the Third Payment Services Directive (PSD3), which aims at giving a second life to its initoi9al PSD2 directive as part of the EU’s Digital Agenda, which aims to strengthen Europe’s competitiveness, innovation, and digital sovereignty.
These initiatives in the UK and EU are considered some of the earliest and most influential Open Banking regulations, setting a precedent for other countries and regions to follow. Since then, Open Banking has been gaining momentum worldwide, with countries like Australia, Canada, USA and Brazil, among others, exploring or implementing similar frameworks.
As a result, Open Banking has been adopted by various financial institutions beyond traditional banking, leading to the broader concept known as Open Finance.
The global trend towards Open Banking and Open Finance continues to evolve, and is unstoppable, with each region tailoring the concept to fit its unique regulatory, economic, and technological landscape.
So, what is Open Banking exactly?
Open Banking is a financial services concept that promotes the use of open APIs (the ubiquitous technology that fuels every digital data exchange in our today’s world) to enable third-party developers to build applications and services around financial institutions. It represents a shift from a closed banking model, where a customer's financial information is held exclusively by their bank, to an open model that allows this information to be securely shared with authorized third-party providers, with the customer's consent.
Source: Financial Data Exchange: 8-15-2023 ‘Getting Started with Open Banking’
Basically, as a consumer, you’re allowing a third party to access your financial data, with your permission (hence the term ‘consumer-permissioned sharing of financial data’) to help facilitate your financial transactions. As a financial institution, open banking enables more opportunities for them to work with fintech companies, focus on innovation and create new products faster that benefit everyone in the ecosystem.
However, as this series will show, Open Banking has significant implications for banking infrastructure, security, and legal frameworks, as it essentially transforms banks into API providers.
The value of open banking transactions worldwide reached 57 billion U.S. dollars in 2023, and it is expected to increase sharply.
The number of open banking API calls is estimated to 580 billion in 2027, signaling the rapid expansion of open banking services and their integration into various financial ecosystems.
Why?
This approach facilitates a more integrated and seamless financial ecosystem, encouraging innovation, competition, and improved customer service. It enables consumers and businesses to have greater control over their financial data, allowing them to access a wider range of services, such as more personalized banking, better financial management tools, easier comparison of financial products, and more efficient ways to conduct transactions.
What’s Cooking in the US?
On October 2022 at Money 20/20, CFPB’’s Director Chopra’s made a landmark announcement[3] by kicking-off the process to activate a dormant authority under Section 1033 of the Consumer Financial Protection Act that will accelerate the shift towards Open Banking.
A year later, on October 19, 2023, CFPB further announced the release of a proposed rule[4] requiring U.S. financial firms such as banks and credit unions that offer transaction accounts – like checking accounts, prepaid cards, credit cards, and digital wallets – to give consumers access to their personal financial data at no charge, so it can be shared with another provider.
The rule is aimed at leveling the playing field, empowering smaller financial institutions to better compete and giving consumers more freedom and access to new services.
[1] Financial Data Exchange (FDX), a non-profit organization dedicated to unifying the financial industry around a common standard for the secure and convenient access of permissioned consumer and business financial data.
[2] Office of the Comptroller of the Currency (OCC) supervises and regulates national banks and federal savings in the US.
[3] https://www.consumerfinance.gov/about-us/newsroom/director-chopra-prepared-remarks-at-money-20-20/
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