America Embraces Open Banking, Following Europe and Australia

Last month, US regulators announced measures to allow consumers’ financial data to be shared easily, following similar reforms in Europe and Australia that make it simpler to switch bank accounts and sign up for a range of financial products, according to Financial Times.

«Banks ‘know every time you tap your card, they see you got the [train], and you go get your coffee, and you’re spending your money there,’ points out Philip Benton, an analyst at tech research group Omdia and an expert on digital banking. ‘They [already] have all that data. [So] the whole point of open banking and finance is opening that up to the wider ecosystem.'»

This development in the US is enabled by the Consumer Financial Protection Bureau’s new Personal Financial Data Rights rule, guaranteeing Americans access to their data held at a bank or other provider at no charge. Customers will now have the ability to share their data with third parties, with limits on how it can be used, or revoke access to the data at any time.

“With the right consumer protections in place, a shift towards open and decentralised banking can supercharge competition, improve financial products and services, and discourage junk fees,” argues CFPB Director Rohit Chopra.

This newfound control over personal data simplifies the process of changing banks in the US, which has historically been more challenging than in the UK. John Pitts, the global head of policy for US fintech Plaid, notes that this data portability will allow consumers to select different financial products without leaving their primary bank.

Open banking originated in the UK in 2018 as part of European efforts to promote competition and innovation in personal finance. It required major British banks to share customer data with third-party fintechs. However, the impact has been limited, with Daniel Jones, a partner at law firm Orrick, stating that the potential to compare products like mortgages or pensions has not been fully realized.

The US approach to open banking is drawing attention as it mandates banks to provide application programming interfaces (APIs), similar to the UK, making data sharing more reliable than the existing method of «screen-scraping.» However, the transition could be challenging, given the large number of small and medium-sized providers in the US.

Simon Taylor, in the Fintech Brain Food newsletter, suggests a revenue-sharing model to incentivize banks to embrace open banking via third parties. Still, concerns about data security and fraud liability remain unresolved.

While there are trust issues between traditional banks and third parties, regulatory changes aim to bridge the gap. The Consumer Bankers Association welcomes the new rule for regulating fintech companies, emphasizing data security and privacy standards. The Financial Technology Association sees the rule as a step toward giving consumers greater control over their financial data.

The US is following Europe and Australia in embracing open banking, with the potential to enhance competition, improve financial products, and simplify the process of changing financial providers. However, trust issues and regulatory challenges still need to be addressed for open finance to reach its full potential.

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