The US Lags Behind Other Countries in Open Banking Regulations

March 15, 2021
Kourtney Manley

Open banking is when a financial institution (FI) enables another bank, fintech, and/or a third-party provider (TPP) to access a customer’s data through application programming interfaces (APIs), provided the customer has given their explicit consent. Historically, customer data is considered secured information that is owned by the FI and is used only at the FI’s discretion, typically to deepen the relationship and increase profitability organically. However, the explosion of digital banking, contactless transactions, and mobile apps is forcing heightened awareness and applying pressure on the reluctant FIs to conform to this customer-centric process.

Currently in the US, when a customer downloads a mobile app and permits access to their bank account so the app can execute the desired action, they may learn that their bank will not relinquish their financial data, standing firm on the agreement between the customer and the FI when the account was initiated that the FI owns the customer’s data. But with most customers conducting financial transactions using handheld devices at their convenience via mobile apps, the customer wants to dictate who has access to their financial data. And for those that have accounts at multiple FIs, want seamless, single-point access to all accounts so they can easily monitor and manage their financial portfolio. Open banking enables the customer to approve another bank, fintech, or TPP to have access.

There are some data privacy and protection risks for FIs to consider when sharing data, such as an increased opportunity for hacking or phishing scams. These incidents can be minimized by implementing stringent digital authentication protocols and creating agreed-upon policies between all parties involved to ensure data security. Effectively communicating the security of the process to the customers, along with the benefits and features, will ensure their confidence in utilizing open banking to enhance their self-service capabilities.

Globally, open banking has been widely embraced, often due to governments with the common belief that a customer should control who can access their financial data, therefore passing regulations that mandate open banking. The UK led the challenge by establishing regulations that mandate open banking innovation, and other countries such as the EU and Australia quickly followed suit. US regulators see the value in open banking and have created loose guidelines but are hesitant to issue formal regulations mandating the process out of concern for data security. Until the financial industry stakeholders present the challenge to regulators to create a structure allowing open banking, it is unlikely to be a priority. Until then, it will continue to be the individual FI’s choice if they agree to participate in open banking and unfortunately, resistance will create a lull in the digital banking transformation in the US.

Written by Kourtney Manley, Business Analyst at OnlineApplication

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