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Regulation in America: Checks and Balances

The following article is an adapted transcript based on the audio recording of Season 5, Episode 2 of the Mr. Open Banking podcast, which Ozone API are proud to be sponsoring. The audio version is available here.

Since the nineties, America has taken a staunchly market-driven approach to open banking. Players like Plaid and MX, Stripe and Square, have grown into multi-billion dollar companies. The Financial Data Exchange, stewards of the dominant open banking standard in the U.S., is a private non-profit, run by its members. 

But all that is about to change. The U.S. has now begun their own journey towards regulated open banking. The latest guest of the Mr. Open Banking podcast, hosted by Ozone’s General Manager of North America Eyal Sivan, has a front-row seat to the action.

A Conversation with John Pitts, Global Head of Policy at Plaid

John Pitts is the global head of policy at Plaid. Perhaps the most well known financial data aggregator in the entire world, Plaid’s technology enables more than 100 million consumers to link their financial accounts with over 8,000 apps across 17 countries, helping them better manage their financial lives. In his role as global head of policy, John passionately advocates for the consumer’s right to access, share and control their financial data while championing data practices based on transparency, consent and privacy. He has consulted on financial data and consumer protection laws in the United States, Canada, the U.K., the European Union and Australia. 

Before joining Plaid, John served as the deputy assistant director for intergovernmental affairs at the Consumer Financial Protection Bureau (CFPB). John worked with the state attorneys general to promote cooperation and coordination between the states in enforcing the Consumer Financial Protection Act, also known as Dodd-Frank. He is a regular speaker on topics including student lending, payday loans, and the regulatory landscape, as well as emerging technologies such as cryptocurrency, regtech and open banking. 

A New Era of Open Banking

When John speaks about open banking in the U.S., he often refers to what’s happening today as “a new era of open banking.” Eyal asked him to share his perspective on what he considers to be the “old era” versus the new one, and how these changes are impacting the market.

“The old era was a consumer-driven era of open finance. That is, consumers really demanded access to products and services that the incumbent financial institutions either wouldn’t or couldn’t provide for them…What’s happening now is that the Consumer Financial Protection Bureau (CFPB) is bringing in regulation to solidify and expand that market…The U.S. has been consumer first, and now that market, which is a thriving and robust consumer market, is about to become a regulated market. And that has some huge implications for everyone.” 

Although some may classify the U.S. as “laggards” when it comes to open banking regulations, John strongly disagrees with this perspective. He believes that imposing regulations on open banking from the get go isn’t always the right approach. 

“The core promise of open banking is more choice and better choices for consumers. You don’t need to get there through regulation. And in fact, some markets that have started with regulation have gotten it wrong in ways that have limited the value for consumers.” 

Therefore, John says that by viewing consumer value as the central meaning and purpose of open banking, you’re in a better position to understand what needs to be done to protect consumers and their choices. In that sense, the new regulations have come at the perfect time in the U.S. because business interests were beginning to interfere with freedom of choice for the consumer.

“That’s why open banking from a regulatory perspective is now happening in the U.S. There was a pretty clear understanding from the regulator, the CFPB, that the market had gotten things about as far as it could on its own, and had gotten to the point where conflicting interests between the incumbents in the market and the challengers in the market had become irreconcilable in some instances.”

This brings to mind a question that often arises in open banking circles, which is whether it is better to be market-driven or regulatory-led. However, this question is a red herring: the answer is that for open banking to be successful, you need both.

As John explains, a strictly regulatory approach often misses the mark on consumer benefit. On the other hand, an approach driven only by the market, eventually leads to conflicts of interest. 

Now that the U.S. has learned that lesson, they have begun to move quickly. On October 19th, 2023, the CFPB released their proposed rulemaking for Personal Financial Data Rights by leveraging the storied section 1033 of Dodd-Frank. 

Next, John gave us an overview of what the proposed rulemaking actually says and its relationship to Section 1033.

Taking Open Banking to the Next Level in the U.S.

John believes that the CFPB’s proposal is incredibly strong and will provide the foundation to take open banking to the next level in the U.S., but he cautions it’s important to understand that the proposal will change over time. The entire data access market will transition from screen scraping to APIs, a change that Plaid has been championing for years. 

According to John, one of the key positives of the proposal is that it guarantees consumers access to their own data, while providing third parties access to that data with the consumer’s permission, rather than allowing the data provider to become the decision maker which would leave room for conflicts of interest. 

In addition, John points out that the CFPB’s proposal outlines that digital wallets are also a data source for the purpose of the regulation, which means that banks will have just as much right to access data from fintechs as fintechs will have to access data from banks. This will lead to a balanced market that ensures consumers are able to access their financial data and share it with a third party if they so choose. 

However, John also sees some negative and more nuanced aspects of the proposal. 

One concern of his is that the CFPB might have gone a little too narrow, leaving out 

mortgages, auto loans and student loans. He also disagrees with placing restrictions on how data can be used to help consumers—for example, under the regulations, companies that use consumer data won’t be able to use that data to improve the products or services they’re offering the consumer. 

“Using data to improve products is something that is standard business practice that the CFPB looks like they are limiting in this role. There was a lot of industry feedback on that point. I do hope they take that seriously, because it might limit some of the consumer value that gets delivered.”

Finally, John notes that these compliance obligations are new for everyone and unfamiliar to many parties in the ecosystem. When it comes to handling consumers’ financial data—what they consider to be their most important and confidential information—companies need to do that with the utmost responsibility, trust and care. To ensure all companies remain compliant with the regulations, all players in the ecosystem must take a networked approach to keep each other accountable. 

“Adapting to a world of compliance is a real adjustment for a lot of companies. With reciprocity, with everyone being both a data provider and a data recipient, which is where I think this market is going, we really need to balance both sides of the market and serve both sides.”

What’s Next for U.S. Open Banking?

Make no mistake, U.S. open banking regulation is on its way. Not because the market needs to be more competitive and innovative, but because consumers need protection in a market that is already competitive and innovative.

The proposed Personal Financial Data Rights rule aims to make sharing your financial data easy, safe and, most importantly, as valuable as possible, to you, its owner. American consumers will finally have not only more choice, but also more protection.

Once the legislation is in place, and the standard is established, things are going to change for everyone involved, whether fintechs, banks, or consumers themselves. Eyal asked John what he thinks is going to happen next. First, he says the distinction between a data provider and a data recipient is going to effectively be erased, and the same will happen with banks and fintechs—to an extent. From there, he says the mass digitization process will continue to unfold.

“From a products-for-consumers perspective, consumers have voted with their thumbs, and they have voted in the direction of their financial services being at their control, with them at the center of it, using multiple services for different needs, and being able to do it on their phone…That’s the type of digitization that’s going to happen, and it’s going to happen everywhere.”

John believes that with the changes happening in open banking, there will be a lot of winners, some of which might be unexpected. For example, smaller community banks and credit unions will be able to connect their customers with fintech apps, meaning they won’t need the money and resources to build them in-house, and they won’t have to lose business to the larger Wall Street banks because they can’t compete.

Companies that truly embrace this digital future will also be winners in John’s view, because they will become the hub of their customers’ financial life. He explains that many consumers have multiple bank and fintech accounts, but over time, they tend to choose one platform to link all their accounts to, which means it effectively becomes a one-stop-shop platform for their entire digital financial life. 

“It’s a really different mindset to think about in terms of how you engage with your customer. It’s not one where you are giving them every service, but you are giving them access to every service.” 

Many people describe open banking as a stepping stone towards open data, but John has suggested that people in this camp are missing how big the open banking movement really is. John explained that the financial services business is ultimately a data business. Throughout history, that information has been exclusively controlled by the financial institution, but open banking fundamentally changes that dynamic by putting the power back into the consumers’ hands and making them the true owner of their data. 

“I think fundamentally reshaping the core structure of how data works in financial services is a change that we are not going to see again in our lifetimes, and is one that is going to impact the lives of billions of consumers for the better in those lifetimes…Open banking gives you more control than anyone has ever had over their money and their data. Ever.”

Conclusion

In the digital age, our personal data is the currency of power – a treasure trove coveted by giants and wielded by a select few. Without control over this data, we are but pawns in a game of profit and manipulation. 

The U.S. Consumer Financial Protection Bureau is working on forging a new path ahead—one that starts by giving Americans the right to control their financial data, to decide for themselves how it is used, by whom and for what purpose. In John’s words, “giving them more control than anyone has ever had over their money. Ever.” 

But this is not just a quest for control; it is a quest for that most American of ideals: freedom, for in the realm of data, personal control is the key that unlocks the door to a brighter, more equitable world, in the U.S. and beyond.

Learn more about John and his work on LinkedIn and X.

To listen to the full podcast episode and & subscribe via your favourite player, click here.

Visit Mr. Open Banking @ http://mropenbanking.com

If you missed the first season of the podcast, click here: https://www.mropenbanking.com/podcast

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