The CFPB’s Open Banking Proposal: A Battle Between Banks and Fintechs
As the Consumer Financial Protection Bureau (CFPB) initiates its new open banking proposal, a rift is forming between banks and fintech firms. This conflict highlights the challenges of creating a regulation that allows consumers unrestricted access to their financial data. The Trump administration’s interpretation of open banking, which is currently open for public comments, is expected to introduce changes. Yet, it remains uncertain whether the rule established under the Biden administration will be entirely discarded or partially retained.
The Biden-era rule was explicit in its prohibition of banks from imposing fees and the use of data for targeted advertising. It also restricted third-party fintechs from selling or sharing the data for their benefits. As the new proposal takes shape, banks, fintechs, crypto firms, and the public are closely watching four critical issues, one of which is whether banks can levy fees to compensate the cost of providing data to third-party apps and fintech firms.
Understanding Open Banking
Open banking is a concept that empowers customers to control their data – who can access it, for what purpose, and for how long. They also have the option to discontinue the sharing of data if they wish. In the AI-driven economy, data has become a valuable currency, and open banking has complexities beyond just the control of data between banks and fintechs. It also encompasses payment systems and digital identity. Banks possess a massive amount of customer financial data, which is sought after by nonbank financial firms aiming to sell products and gain profits from the data. These firms are both competitors and partners of banks.
Penny Lee, President and CEO of the Financial Technology Association, highlighted the “twists and turns” of the open banking rule, which was authorized 15 years ago by the Dodd-Frank Act. The trade group has been defending the Biden administration’s open banking rule in court after the Trump administration expressed its intention not to defend it.
Recent Developments and Legal Intricacies
In a recent turn of events, JPMorganChase announced its plan to charge data aggregators for accessing customers’ data. In response, the CFPB requested a stay in the Bank Policy Institute’s litigation due to “recent events in the marketplace.” It stated its intention to revise the rule and initiated the rulemaking process again in August.
The open banking rule established under Chopra had forbidden banks from charging fees. However, the Financial Technology Association (FTA) took an unusual step by petitioning the court to defend the final open banking rule before Trump filed a motion to vacate the rule in May. The FTA was granted the right to intervene and, in September, filed a legal brief opposing a motion by the Bank Policy Institute to lift the federal court stay and indefinitely delay the rule’s implementation. The FTA accused large bank plaintiffs of wanting the court to limit the scope of the CFPB’s authority to restrict the forthcoming rulemaking.
Stakes are High and Time is Running Out
The close of the public comment period signalled a high-stakes moment in the financial sector, with all players moving quickly. JPMorganChase and Plaid signed an agreement in September, allowing the New York bank to charge Plaid a fee for data access, with both companies making technology investments. It is uncertain whether other large banks will follow suit and start charging data aggregators under similar deals, and whether some aggregators might lose access.
Consumer advocates are also stepping in, urging lawmakers to hold hearings on the CFPB’s decision to rewrite the Biden-era rule, which had bipartisan support in Congress.
Defining a Consumer or a ‘Representative’
The open banking rule under Biden required banks to safely share financial data on various financial products at a customer’s request. There are concerns about the reauthorization requirements for consumers, and fintech groups have urged the Trump administration to permit secondary uses of data. However, banks are trying to restrict the definition of ‘representative’ to only fiduciaries, which fintechs argue would limit open banking.
Changes in the rule may also impact the emerging cryptocurrency industry. Crypto firms, like fintechs, are also unwilling to pay fees to banks for data access and object to the Dodd-Frank Act’s definition of “consumer” that includes a fiduciary responsibility of third parties.
The current political turmoil that led to the government shutdown could further affect the CFPB’s rulemaking, particularly with the Trump administration’s hasty timeline for finalizing a rule on open banking.
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