Federal regulatory body announces plan for open banking framework

The Consumer Financial Protection Bureau (CFPB) has announced a long-awaited open banking proposal, aiming to accelerate the U.S.'s shift towards open banking and align with guidelines in major jurisdictions worldwide. The rule, granted by Congress under Section 1033 of the Dodd-Frank Act, forbids financial institutions from hoarding a person's data.

The new proposal requires certain banks and fintech companies to provide access to personal financial data through secure, reliable, and digital interfaces within the next four years. However, specific lists or categories of these institutions subject to this mandate have not been detailed in the available sources. The CFPB is accepting comments on the proposal until Dec. 29 and plans to finalize the rule by next fall.

The open banking proposal aims to deter junk fees and other confusing practices that consumers distrust. It seeks to move the market away from screen scraping, a risky data collection practice. Under the proposal, data providers cannot rely on screen scraping to comply with the obligation to make data available to an authorized third party accessing on the consumer's behalf.

The rule gives consumers the right to grant third parties access to information associated with credit card, checking, prepaid, and digital wallet accounts. If a consumer chooses to end the relationship, the firm would have to stop collecting and using the consumer's data, as well as delete the data it already possesses. This provision makes it easier for consumers to break up with banks that provide bad service.

Firms receiving data can only use it to provide the product the consumer is asking for and for nothing else. The CFPB is interested in covering additional product types in future rulemaking, such as mortgage, auto loans, and student loans. The proposed rule does not mention purchasing licensing rights.

The White House in 2021 urged the CFPB to launch the open banking rulemaking process. Lael Brainard, director of the White House's National Economic Council, stated that the rule will help ensure financial companies compete based on service quality and pricing. The American Bankers Association welcomes the agency's contemplated move away from screen scraping and its clarification around nonbanks' obligations to protect consumer privacy.

The Electronic Transactions Association applauded the CFPB for creating a policy framework around open banking. Penny Lee, CEO of the Financial Technology Association, called the proposal a "win for consumers." Plaid, a fintech with data sharing agreements with over 6,500 financial institutions, is encouraged by the CFPB's commitment to consumer data rights.

The rule's tiered compliance dates start at six months for the largest banks and fintechs, and extend to four years for the smallest firms. Community banks and credit unions that have no digital interface with their customers would be exempt from the rule's requirements. The CFPB's open banking proposal does not explicitly address liability and implementation costs.

In conclusion, the CFPB's open banking proposal is a significant step towards enhancing consumer control over their data, promoting competition, and fostering innovation in the financial sector. The proposal is currently under public comment, and the final rule is expected to be finalized by next fall.