Federal regulators want to ease the hassle of switching banks, but first they need to win a battle in court.
On Tuesday, the Consumer Financial Protection Bureau (CFPB) released the final version of its long-awaited open banking rules. The rules are intended to increase competition among financial services companies by making it easier for customers to transfer personal data between them.
This measure is intended to alleviate some of the headaches that are common to anyone who has ever tried to transfer a checking account or upgrade to a better credit card. This process requires you to manually reset the number of automatic bill payments, which could mean a loss. Several years’ worth of transaction history.
Such inconveniences are known to deter many consumers from shopping around for a better deal. One study found that the average American has had the same checking account for over 17 years. Approximately 10% of consumers say they haven’t made the switch primarily because of the hassle.
CFPB Director Rohit Chopra said in a speech in Philadelphia that the agency’s new regulations, officially known as Rule 1033, will help remove some of those “roadblocks.” The measure would require banks, credit card issuers, and payment apps to provide electronic access to customers’ account data, including by allowing customers to authorize third parties to collect their account data. , fintech companies and other institutions will have seamless access. Enter and transfer important information.
“That means it’s easier to move away from mediocre products and services,” Chopra says. He cited as an example a change in rules that allows mobile phone customers to bring their own number with them when they change service providers, making it much easier to move to a new plan.
But the rules have drawn fierce criticism from banks, who say they are unreasonably expensive to implement and expose customers to serious fraud risks. On Wednesday, industry groups filed a federal lawsuit in Kentucky seeking to halt the regulation, saying the CFPB has “deviated from its statutory obligations.”
Read more: How to switch banks: A step-by-step guide.
CFPB Director Rohit Chopra testifies at a June 12 Senate hearing (Bill Clark/CQ-Roll Call, Inc via Getty Images) · Bill Clark via Getty Images
For many consumers, the new Open Banking rules may not seem to have changed much at first glance. According to the CFPB, at least 100 million Americans already use apps like Plaid to connect their banks and brokerages to personal budgeting software and services like TurboTax, allowing third parties to manage their various financial accounts. It is said that access is allowed. This has led some to downplay the importance of the authorities’ new regulations.
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“In many ways, 1033 is just a formalization of the digital financial economy that already exists,” Plaid CEO Zach Perrette told the audience at a fintech conference on Wednesday.
But regulators and outside advocates argue that open banking rules bring about important behind-the-scenes changes that will benefit consumers. Banks now have the ability to choose which companies have access to their customers’ data and under what conditions, they point out. Tech companies that refuse to partner often resort to workarounds such as screen scraping, which is widely considered a security risk.
The new rules will force banks to grant customers access to any third party they desire through official portals, as long as they meet certain standard requirements. We also create privacy rules for how data is handled after porting to ensure that the information is used only as the customer intended.
“The core of the rules that the CFPB put out is that it’s not up to the bank, it’s up to you,” said Steve Boms, executive director of the Financial Data Technology Association of North America. “Your bank can’t stand in front of you and say, ‘No, we don’t think so.'”
Advocates say the new data rules will shake up big parts of consumer finance, not only making it more convenient to move between banks, but also creating new, consumer-friendly ways to make everyday purchases and apply for credit. claims that it is possible.
One type of service with potential for growth is banking payment apps. This allows customers to buy things and pay bills directly from their checking account rather than using a debit card or paper check. Retailers are already welcoming the potential of these services, which could save merchants so-called swipe fees that banks and other card issuers charge on every transaction. Eventually, some companies may offer discounts to customers who use bank payment options instead of having a Visa or Mastercard.
“Open banking has the potential to remove these middlemen and create competition that benefits both small businesses and consumers,” Stephanie Martz, general counsel for the National Retail Federation, said in a statement this week. .
Experts also say the data rules have made it easier for some Americans to obtain loans through cash flow underwriting. With cash flow underwriting, lenders evaluate creditworthiness by looking at an applicant’s history of paying rent and bills on time. This could be particularly helpful for immigrants and young people, who tend to have poor credit records.
Read more: What to do if you send money to the wrong person with Cash App, Zelle, or Venmo
Banks have raised a number of complaints about the new data rules, including costs.
The regulation would prohibit financial institutions from charging fintech companies fees for accessing customer data, while requiring them to pay new compliance fees. They also argue that the new rules do not go far enough to protect them from legal and financial liability if third parties fail to pay attention to the information they collect or misuse it. This is a particularly serious problem, the industry says, because allowing more third parties to view data increases the chance that bad actors can slip through the cracks.
“This is just another vector and another opportunity for fraud to really grow,” said Brian Fitche, associate general counsel at the Consumer Bankers Association.
In a lawsuit filed Wednesday, the Banking Policy Institute alleges that regulators far exceeded their authority under the 2010 Dodd-Frank Act, which called for data regulation. “This is a case in which a federal agency overstepped its legal obligations and inserted itself into a well-functioning developing ecosystem that was growing under private initiative,” the complaint states. is stated.
It wants the court to either overturn the rules entirely or, failing that, force banks to impose fees on any fintech companies seeking access to their data.
Jordan Weissmann is a senior reporter at Yahoo Finance.
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