Upcoming Rules for Open Banking: Protecting Consumer Data while Fostering Innovation

The Consumer Financial Protection Bureau (CFPB) has unveiled its plans for guiding open banking in the United States. Third-party financial companies play a crucial role, but regulators have concerns about increased reliance on fintech firms that aren’t subject to traditional banking regulations.

The new rules aim to safeguard consumers while promoting an environment where open banking can thrive. One of the primary drivers is giving individuals the freedom to switch between banks or financial services providers just as they would change their cellphone provider and retain their number.

This shift is expected to incentivize financial institutions to innovate and improve customer service, addressing issues such as poor rates and subpar service for many American consumers. Rohit Chopra, Director of the CFPB, stated, “Too many Americans are stuck in financial products with lousy rates and service. Today’s action will give people more power to get better rates and services on bank accounts, credit cards, and more.”

Activating Section 1033

The rules stem from the long-dormant Section 1033, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted after the 2007-08 financial crisis. Section 1033 enables consumers to transfer their data between financial institutions freely, giving them full control over their information, which can be revoked at any time.

The CFPB’s objectives also include eliminating unnecessary “junk fees” charged by banks and fintechs, promoting transparency in consumer finance.

Instant Payments and Financial Efficiency

A hallmark of open banking is instant payments or pay-by-bank, which offer greater efficiency and cost-effectiveness compared to other payment methods. The CFPB’s regulations are designed to facilitate the adoption of instant payments and create a framework where consumers, merchants, and banks can move money seamlessly among accounts.

While large banks and fintechs have two years to comply with these new rules, smaller institutions may take up to six years. Some community banks and credit unions might be exempt from compliance entirely.