If information is power, then banks and credit unions are in control.
That’s because every morsel of customer financial data, from spending patterns to credit reports, is owned by the bank, not the customer. Which makes it difficult – and sometimes impossible – for customers to switch banks or share their information with third-party platforms.
But change is coming.
The Consumer Financial Protection Bureau recently published a set of documents outlining how the switch to a form of “open banking” could work. While still in the early stages, the Oct. 27 proposal marks a significant step toward putting customers – not banks – in charge of their financial data.
Advocates lauded the proposal as a win for consumers, but it could also come with a loss for traditional financial institutions.
“What makes banks special is the information they collect,” said Peter J. Nigro, Sarkisian chair of financial services at Bryant University. “If the data is owned by the customer, banks lose that information advantage.”
Although customers can try to link their personal financial information from their bank to a third-party platform, it fails at least 40% of the time, according to research by the Financial Data and Technology Association North America. Making it easier to transfer data also means it’s easier for customers to switch from one bank to another, or, as many expect, from a bank to a financial technology firm.
“Fintechs are better at building out that customer-facing technology, so that’s where customer acquisition is going,” said Frank Schiraldi, managing director of equity research for financial services firm Piper Sandler Cos. “Anything to grease the wheels to make it easier to switch accounts would accelerate that competition from fintechs.”
The push to a federal open banking policy is not unexpected. Some might say it’s overdue, given that the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB authority to create such rules. But the agency’s recent proposal, which aims to issue a final rule by early 2024, may have caught financial institutions off guard, Schiraldi says.
That might explain why more than half a dozen national, regional and community-based banks contacted by PBN declined to comment for this story. But just because they’re not speaking publicly doesn’t mean they’re not strategizing behind the scenes, Nigro says.
“They’re going to try to slow down the process as long as they can,” he said, adding that a final rule in early 2024 seemed unlikely.
Brooke Ybarra, senior vice president of innovation and strategy at the American Bankers Association, said in an emailed statement that the association and its members supported the proposal, but also said it was important that the third-party platforms through which customers share their data “must be held to the same high standards and supervision related to data security, privacy and consumer protection that banks must meet today.”
Nigro didn’t put much weight in such security concerns. When it comes to the risk of a data breach, “the cat’s out of the bag,” he said. “Now it’s time to put some rules around it.”
When a bank grants permission for a third-party aggregator to pull a customer’s financial data now, there aren’t many rules around how it’s done, which means a company’s software can “scrape” a lot more than banks might know about or want to give out, Nigro says.
Another potential plus to open banking could be helping banks and credit unions persuade customers to bring all their banking needs under one roof.
That is the hope of Brian Azar, CEO and president of Coastal1 Credit Union. The Pawtucket-based credit union’s strong mortgage business brought in a slew of new members during the recent real estate boom, but it’s been logistically tough to get those mortgage borrowers to switch their checking and savings accounts to Coastal1, Azar says. He also suggests that being able to access customers’ financial history with other banks might boost the number of loan applications Coastal1 approves, particularly for applicants without a traditional credit history and report.
“We see this as an opportunity to gain access to others’ data as well,” Azar said, adding that Coastal1 could compete just as well as fintechs for new customers.
And if you can’t beat them, why not join them.
Leaders at Navigant Credit Union are eyeing partnerships with fintech firms as a way to bring the perks of their tech-savvy competitors to Navigant members, according to Jonathan Roberts, senior vice president and chief information officer.
“There might be a niche market or a tool we want to make available, and there’s a lot of opportunity in the fintech space to do that,” Roberts said.
Another option Schiraldi recommends for banks looking to grow deposits is through “underbanked” industries such as cannabis and cryptocurrency businesses.
Azar says it is still too early for Coastal1 to make any big moves, but adds he is “open” to partnering with a fintech firm to help comply with regulations around data sharing.
“At this point, we’re just curious to see how it progresses,” Azar said. “It may be a net positive. I am cautiously optimistic.”
