Is 2025 going to be the year open banking accelerates in the US?

The US approach to open banking uptake in the US is shifting, thanks to a new regulation anticipated later this year that will require financial institutions to share customer data upon request.

The Consumer Financial Protection Bureau (CFPB)’s Personal Financial Data Rights Rule represents the long-awaited implementation of section 1033 of the Dodd-Frank Act and comes in response to growing public appetite for mobile banking and payments apps.

Heralding a switch from industry-led open banking adoption to a regulation-driven model, the aim of the rule, according to the CFPB’s Director, Rohit Chopra, is to “supercharge competition, improve financial products and services, and discourage junk fees”.

In theory, it should empower individual consumers and lead to increased data sharing after its implementation in the autumn.

In other parts of the world, legislation-driven open banking is nothing new. For example, the EU’s PSD2 regulation set the framework for both the bloc’s 27 members and the UK eight years ago. This is due to be strengthened by the forthcoming PSD3 rule.

But despite Europe’s regulatory head start, accurately gauging who is winning the global open banking race is no mean feat. Statistics on regional penetration vary by source. Yet one thing’s for sure: the trend for data sharing between large financial institutions and fintechs is one of growth.

And this leads us to a question. Following a challenging few years in the fintech sector, could the CFPB’s open banking rule spur a wave of innovation and growth as third-party providers, or TPPs, race to build out products and services?

At Iliad, we believe the answer is yes. That’s because the move is another milestone in the digital transformation of financial services. Not to mention the fact that it’s the world’s biggest economy signalling that open banking matters and is here to stay.

Challenge and opportunity: what the changes mean for US financial institutions and fintechs

However, as far as banks are concerned, this represents both a challenge and an opportunity.

On one hand, large financial institutions will be required to connect to many more fintech APIs over time, increasing complexity in a payments ecosystem composed of legacy and modern platforms.

It will also create further imperatives for banks around reducing fraud prevention and improving financial literacy among customers. Additionally, there will be a need to develop new customer retention strategies as it becomes easier for people to switch providers.

Yet on the other hand, the rule should create a fertile environment in which banks and fintechs can deepen partnerships to deliver more customer-centric user experiences through the use of digital technology.

In order to make the most of these opportunities and overcome the challenges presented by the new rule, it’s sensible for banks to review and optimise their ability to integrate with modern systems.

By becoming ‘open banking ready’, US banks will be well placed to deliver innovation quickly and securely when the CFPB rule goes live.

Innovation ready: the tools innovators need to implement open banking

Knowing exactly what this will entail remains to be seen. But what we can say for sure is that with any new system, comes new standards.

And in recent weeks the CFPB has been engaging the financial sector on the criteria organisations need to meet to become a recognised standard-setting body. These institutions will play an important role in setting technical standards for banks and third-party providers to follow when the data sharing rule comes into force.

Based on Iliad’s experience in implementing new systems – from Faster Payments in the UK to FedNow in the US, as well as ISO20022 at global level – it will be essential for banks to test above and beyond industry-set standards.

Such an approach allows financial institutions to simulate extreme scenarios and test products and services to destruction, minimising the chances of a damaging outage post launch.

Another consideration with open banking innovation is the increasing number of API calls financial institutions are having to make between internal and external endpoints. For instance, in the UK last year, there were some 14bn API calls as one in seven consumers took advantage of open banking tech.

Therefore, it makes sense for financial institutions to work with a testing partner who has the technology and know-how needed to conduct seamless testing across a range of separate departments and third-party providers.

As we move towards implementation of the CFPB’s Personal Financial Data Rights Rule this autumn, details about standards will become clear. Thankfully, US innovators can feel reassured that Iliad’s software will be ready to enable effective testing right from the start of this new era in open banking.

To find out more about our approach to supporting payments innovation through world-class testing and certification, email info@iliad-solutions.com.

Anthony Walton, CEO, Iliad Solutions

 

 

Sources:

CFPB Proposes Rule to Jumpstart Competition and Accelerate Shift to Open Banking

OVERVIEW OF THE CFPB’S PROPOSED OPEN BANKING RULE AND FINAL INDUSTRY STANDARD SETTING RULE

Open Banking—far more than PSD2

Open Banking Goes to Washington: Lessons from the EU on Data-Sharing Regimes

Latest Impact Report shows strong growth and the power of payments

Open Banking in Europe vs the US: Regulatory vs Industry-Driven Approaches

Stop talking about  “Open Banking”