The U.S. Consumer Financial Protection Bureau promotes open banking, and the banking industry strongly rebuts.
The U.S. Consumer Financial Protection Bureau (CFPB) officially launched the American version of the Payment Services Directive (PSD2) in October 2024 through 'Section 1033', requiring financial institutions to allow consumers to access and transfer their financial data for free, including information about checking accounts, savings accounts, credit cards, prepaid cards, e-wallets, and other payment tools. This move will create up to $23 billion in business opportunities for the U.S. open banking market. The announcement of this new regulation can be traced back to the Dodd-Frank Act in 2010, which aimed to curb improper risk-taking by banks and strengthen consumer protection. The establishment of the CFPB was precisely to counterbalance the anti-competitive behavior of the banking industry, and the introduction of Section 1033 symbolizes a shift in U.S. financial regulation towards a more open and competitive direction.
The experience of the European Union sets a benchmark for the U.S.; open banking innovations have already reached scale.
The European Union adopted a revised Payment Services Directive (PSD2) as early as 2018, establishing a legal and regulatory framework for financial institutions to share customer data through application programming interfaces (APIs), laying the foundation for financial service innovation.
Currently, Europe accounts for 46% of global bank API products and leads in the open banking industry. In contrast, the U.S. is relatively lagging in developing a secure, regulated competitive data-sharing environment.
Source: Platformable Europe accounts for 46% of global bank API products and leads in the open banking industry.
However, as the largest and most innovative market in the world, the situation in the U.S. is expected to change soon. Data shows that American consumers use an average of 3 to 4 fintech applications and 5 bank accounts, reflecting a huge demand for open banking services. Although it is unlikely that the U.S. will adopt the strict General Data Protection Regulation (GDPR) like the EU, the experience of PSD2 in Europe has already proven that under the right regulatory framework, financial data can be shared securely to promote market competition.
Banking industry participants have raised questions, but the trend towards open banking is hard to resist.
Banking industry participants have strongly opposed the implementation of Section 1033 and quickly filed lawsuits, accusing the CFPB of overreach. They raised a series of questions, including concerns about data security, insufficient visibility of data usage, increased risk of fraud, and unreasonable enforcement timelines.
Especially regarding the attribution of responsibility for customer data, if data is misused by a third party, the legal liability still rests with the bank, which indeed constitutes a significant potential risk. However, in today's free society, consumer autonomy over personal data has become an irreversible trend, making it difficult for the highly concentrated and lucrative banking industry to continue maintaining data barriers.
Source: (Forbes) Banks accuse CFPB
Future prospects of the open banking ecosystem
The financial industry is facing a major transformation, and the key to success lies in how to strike a balance between openness and security. Experts point out that the true winners will be those risk managers who can simultaneously address issues of technological safety and legal liability, ensuring not only the technical security of data sharing but also establishing a sound legal framework to properly handle the transfer of responsibilities between banks and third-party service providers.
As business historian Leon Megginson said in 1963: 'It is not the strongest or the most intelligent species that survive, but the ones most responsive to change.'
This statement is perfectly suited to the current development of open banking in the United States. With the implementation of Section 1033, the U.S. financial industry stands at a crossroads of transformation. How to establish a secure and constructive open banking ecosystem that both aligns with cultural changes and protects consumer rights will be an important issue for future development.
'Will the U.S. also win open banking? Launching PSD2 to create a $23 billion financial service market.' This article was first published in 'Crypto City.'