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Is America Ready for Open Banking?

  • Open Banking is already popular worldwide
  • The United States is late to adopt Open Banking
  • Regulation is priority on to ensure consumer and bank safety

After a late start, it looks like the United States is finally ready to adopt Open Banking.

Open banking, a system that allows consumers to share their financial data with third-party providers, enables access to a wider range of financial services. It's popular all over the world.

As reported at MicroSoft Start, banks in the U.S. are working to prepare for it, but it's slow going.

Three-quarters of banks say they aren’t ready for open banking, according to recent data published by Sopra. The changes within the banking sector are spurring banks to develop their innovations and partner with data aggregators and potential competitors in the fintech sector to improve their offerings.


Regulations for Open Banking

Step one, of course, is industry regulation.

"I think that as long as there is a tangible benefit that comes from an organization where all the players are jointly working together, I'm confident," Cambounet said, adding that consumers' trust and confidence will ultimately be won through regulation.

Last October, the Consumer Financial Protection Bureau (CFPB) issued the Personal Financial Data Rights Rule (1033), which requires banks and other payment firms to share transaction and account data with customers and authorized third parties. The rule also requires that third parties establish obligations for accessing a consumer's data, including privacy protections for that data, and provide basic standards for data access.

The CFPB said the rule will give customers the ability to "break up" with banks that provide bad service and would forbid companies from misusing or wrongfully monetizing sensitive personal financial data.

"The ambition really is to protect consumer privacy and also to put practices in place that increase the safety of the open banking," said Ulrike Guigui, a managing director at Deloitte Consulting

Time to Embrace Open Banking

Open Banking enables a plethora of opportunities across the industry, not just consumers. While consumers are able to access their financial data and share it across different platforms to enhance their financial experience, open banking can help financial institutions and fintechs to collaborate as well.

Under open banking, banks allow access and control of customers personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then use the customer's shared data (and data about the customer's financial counterparties). Uses might include comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer's behalf.

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The ability to share the customer transactional data, along with aggregating data from multiple participating FIs, can provide key data for fraud detection. This will enable banks to share and pool transactional data that can assist with spotting deposit fraud -- similar in concept to -- if not enhancing -- consortiums.

As noted earlier, we are in the beginning stages of adopting the concept of open banking. There will inevitably be delays and obstacles along the way. However, with benefits outweighing negatives, it's only a matter of time before the industry moves into the future.

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