Federal regulators want to make it less of a pain to change your bank — but first, it looks like they’ll have to win a battle in court.
On Tuesday, the Consumer Financial Protection Bureau (CFPB) unveiled the final version of its highly anticipated open banking rule, which aims to create more competition between financial services companies by making it simpler for customers to transfer their personal data between them.
The measure is in part designed to relieve some of the common headaches familiar to anyone who has ever tried to move their checking account or upgrade to a better credit card — a process that can require manually resetting a number of automatic bill payments and may mean losing years' worth of transactions history.
Those kinds of inconveniences are known to keep many consumers from shopping around for better deals. One survey found that the average American has had the same checking account for more than 17 years; about 10% of consumers say they haven’t switched mostly because of the hassle involved.
During a speech in Philadelphia, CFPB Director Rohit Chopra said the agency’s new regulation, officially known as rule 1033, would help remove some of those “roadblocks.” Under the measure, banks, credit card issuers, and payment apps will be required to provide customers electronic access to their account data, including by giving third parties of their choice permission to collect it — making it seamless for fintech firms and other institutions to plug in and transfer over key information.
“That means you can more easily walk away from mediocre products or services,” Chopra said. He compared the changes to rules that allowed cell phone customers to take their numbers with them when they changed service providers, which made jumping to a new plan far easier.
The rule has drawn fierce criticism from banks, however, who argue that it will be unfairly expensive for them to implement and expose customers to serious fraud risks. On Wednesday, industry groups filed a federal lawsuit in Kentucky aiming to halt the regulation, accusing the CFPB of “overstepping its statutory mandate.”
CFPB Director Rohit Chopra testifies during a Senate hearing on June 12. (Bill Clark/CQ-Roll Call, Inc via Getty Images) ·Bill Clark via Getty Images
What’s really changing
For many consumers, the new open banking rule might not seem to change much at first glance. According to the CFPB, at least 100 million Americans already let third parties access their various financial accounts, using apps like Plaid to connect their banks and brokerages to personal budgeting software and services like TurboTax. That’s led some to downplay the significance of the agency’s new regulation.
“In a lot of senses, 1033 is just a formalization of the digital finance economy as it already exists,” Plaid CEO Zach Perret, told a crowd at a fintech conference Wednesday.
But regulators and outside supporters argue that the open banking rule will make important behind-the- scenes changes benefiting consumers. Today, they note, banks can pick and choose which companies they let touch their customers’ data, and on what terms. Tech firms that they refuse to work with often resort to workarounds like “screen scraping,” which are widely considered security risks.
The new rule will force banks to give access to any third party that customers want using a formal portal, as long as they meet certain standard requirements. It also creates privacy rules about how data can be handled once it’s ported over so that the information can only be used as the customers intend.
“At its core, the rule that the CFPB put out says that it’s not up to the bank, it’s up to you,” said Steve Boms, executive director of the Financial Data and Technology Association of North America. “Your bank can’t stand in front of you and say, ‘no we don’t think so.’”
How consumers could benefit
Beyond making it more convenient to hop between banks, advocates say the new data rules open up new, consumer-friendly ways to make everyday purchases and apply for credit that could shake up big swaths of consumer finance.
One type of service that could potentially see growth: Pay-by-bank apps, which let customers buy things or cover bills directly from their checking account, rather than via a debit card or paper check. Retailers are already cheering that possibility, since those services could save merchants the so-called swipe fees that banks and other card issuers collect on each transaction. Some could eventually offer discounts to customers who use a pay-by-bank option instead of whipping out a Visa or Mastercard.
“Open banking could cut out these middlemen and create competition that would benefit small businesses and consumers alike,” National Retail Federation general counsel Stephanie Martz said in a statement this week.
Experts also say the data rules make it easier for some Americans to get access to loans via cash-flow underwriting, where lenders assess creditworthiness by looking at an applicant’s history of paying their rent and bills on time. That could be especially helpful to immigrants and young people who tend to have thin credit files.
Banks have raised a number of complaints about the new data rules, starting with the expense.
The regulations will ban financial institutions from charging any fees to fintech firms for accessing customer data, while requiring they pay out for new compliance costs. They also argue that the new rules don’t do enough to shield them from legal and financial liability if a third party isn’t careful with the information they gather, or misuses it. That’s an especially acute problem, the industry says, since allowing more third parties to pick through data increases the odds of a bad actor slipping through.
“It’s just another vector and another chance for fraud to really be magnified,” said Brian Fitzsche, associate general counsel at the Consumer Bankers Association.
In its lawsuit filed Wednesday, the Bank Policy Institute argues that regulators went well beyond the authority outlined in the 2010 Dodd-Frank Act, which called for the data regulations. “This is a case about a federal agency overstepping its statutory mandate and injecting itself into a developing, well-functioning ecosystem that is thriving under private initiatives,” the complaint states.
It’s asking the courts to overturn the rules entirely — or, failing that, to let banks charge fees to all those fintech firms that will be clamoring for access to the data.
Jordan Weissmann is a senior reporter at Yahoo Finance.
