Opinion

Open Banking and the Wealth Gap

By Jason Gross & Steve Boms
June 28, 2019 at 5:00 am ET

President Donald Trump just traveled to London to talk trade, but it is Rep. Gregory Meeks (D-N.Y.) who has imported Britain’s best idea. Meeks, who heads the House Financial Services Subcommittee on Consumer Protection and Financial Institutions, is expected to introduce legislation before the July 4 recess to study how Open Banking can be brought to the United States.

Open Banking is revolutionizing the United Kingdom’s banking system, unlocking troves of financial data previously trapped within the walled gardens of the largest financial institutions. This data is catalyzing a new wave of innovation benefiting consumers and small businesses. 

The UK regime provides a roadmap for the U.S., where Open Banking could bring more Americans into the financial system and help address growing wealth inequality.

As noted in a recent Financial Data and Technology Association paper, Open Banking provides a safe system by which consumers gain access to their electronic financial records to take advantage of products and services that rely on that information, such as fintech and mobile banking applications. These applications, which range from automated savings plans, to low-cost loans, to personal financial management tools, offer consumers better prices for financial products and new, innovative options for managing their financial lives.

UK Open Banking has already helped millions of British citizens. An estimated 7,500-plus people are signing up for Open Banking services every day.

The UK’s system functions in a safe, secure and reliable manner thanks to a legal and regulatory regime that protects the consumer’s right to their own data, and standardizes how banks and financial applications transfer that data in accordance with the consumer’s wishes. Consumers, for example, receive clear disclosure about how Open Banking works and how to opt out. This is supported by modern data security standards and a common-sense liability regime that, in the case of a data breach, holds to account the party responsible for the breach. 

American policymakers must replicate this model.

The Consumer Financial Protection Bureau estimates 45 million Americans cannot access the modern credit system because of a lack of information in their credit report. Nevertheless, credit reports remain the prevailing source of data in U.S. loan decisions, in part due to the fact that other data is difficult to access.

The Federal Reserve estimates that 4 in 10 American adults don’t have savings necessary to cover a $400 emergency.

And American consumers face up to $34 billion in overdraft fees annually. 

Americans clearly are in need of new and improved financial options and the market is ready to provide solutions.

But the solutions require Open Banking.

Today, access to the data necessary for these financial applications to function is severely constrained. U.S. banks make data available to their customers using inconsistent, unreliable methods, and sometimes not all. A service like Mint.com, for example, may show your current bank account balance one day, but be unable to update it the next. Apps offering overdraft protection may time out at a critical moment because they do not receive the data that makes the service work. Small businesses may fail to qualify for needed financing because they cannot provide their own financial records and prove their creditworthiness.

A U.S. Open Banking framework should affirm the U.S. consumer’s right to their own data, and clarify the right to safely transfer this data electronically to providers of their choosing. Second, it should update outdated pre-digital regulation on the topic of data breaches and liability so responsibility rests with the parties responsible for bad acts. It should also help define standards of connectivity, technical reliability and data portability and provide minimum certification requirements for financial applications using consumer financial data. Finally, it should provide clear, conspicuous consumer disclosures and robust rights to opt out and limit sharing authorizations.

There will be opposition to this shift. Community banks and credit unions worry they lack the tech expertise and infrastructure to maintain Open Banking APIs. But that’s why alternatives such as screen-scraping and sanctioned, open-source API solutions are essential. Larger banks argue financial applications put consumer data at risk. This is precisely why regulatory oversight, with certification and data security standards, must be put in place. Some banks argue the industry can come to a private solution, but it’s unlikely the kind of modern, open, affordable and reliable data-sharing system necessary to support these applications will be designed by the very banks that will face increased competition as a result.

Legislators and regulators need to recognize these anti-competitive arguments for what they are and work with Meeks to create a U.S. Open Banking framework. The financial lives of millions of Americans hang in the balance.

Jason Gross is CEO and Co-Founder of Petal, a new kind of credit card company using electronic financial record data to lower costs and expand access to credit. Steve Boms is executive director of the Financial Data and Technology Association of North America.

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