Disjointed Open-Banking System in U.S. Leaves Opening for Permissioned Data Providers

In the United States, the vast number of financial institutions and the absence of federal regulation around consumer access to bank data have resulted in a fragmented open-banking landscape. Permissioned data providers can play a crucial role in navigating this landscape, facilitating secure and efficient data sharing between consumers and businesses. They can help streamline processes such as verifying loan or insurance applications or screening potential tenants and employees. In a recent report, “Why Data Isn’t A Zero-Sum Game in Payments,” Matthew Gaughan, Payments Analyst at Javelin Strategy & Research, outlines the main players among permissioned data providers and how the inevitable regulation of the space will affect open banking.

Differences Between FIs in Europe and U.S.

Open banking promises to democratize and modernize the financial services industry. It fosters competition among financial institutions and fintech startups, leading to improved offerings, reduced operational costs, and enhanced customer experiences. Open banking’s structure will vary depending on the financial framework it is in. Just look at how different open banking looks whether you’re in Europe or in the United States. “The UK banking market is very concentrated, with the top five FIs responsible for an overwhelming majority of current accounts in the country,” Gaughan said. “This allows the UK government to play an outsized role in standardizing the APIs that FIs must adopt, making adoption easier. “The U.S. market has nearly 10,000 FIs across the country with varying levels of resources and technological capability. This has led to a disparate implementation of (application programming interfaces) at FIs across the country. Financial data providers emerged in the U.S. to help close this gap. The Tier 1 players in the U.S. include Mastercard Open Banking, MX, Plaid, and Trustly, and broadly speaking, they help create a two-sided marketplace of providers and consumers of financial data through a network of APIs.”

Standardization Will Open Up the Industry

Although there has been a lack of open-banking regulations in the United States, that could soon change. The Consumer Financial Protection Bureau is working on a standardized rules framework through Section 1033(a) of the Dodd-Frank Act. This will level the playing field by ensuring that consumers can access their data uniformly, regardless of the data provider. “The rules are expected to be finalized in 2024 and would potentially require financial data providers to provide consumers with certain financial data—transactions, products, account-level information—upon their request,” Gaughan said. “That could limit permissioned data providers’ ability to create proprietary standards and ultimately increase competition in the space.” With standardized access to financial data, fintech startups and other innovators can more readily enter the market and develop new services and applications, without having to navigate a complex web of proprietary data standards. Proprietary data access standards can also create data “lock-in” scenarios where consumers are reluctant to switch providers because it’s cumbersome to move their data. Standardized data access reduces this lock-in effect, making it easier for consumers to explore new financial services. This could benefit fintech startups and smaller players. “A lot hinges on the CFPB’s anticipated regulation,” Gaughan said. “Financial data providers are working with clients—FIs, fintechs, merchants—to establish data connections through APIs. The fragmented nature of the U.S. banking market makes reaching all 9,000-plus FIs difficult, but an API mandate would accelerate the adoption of such technology.” Learn more about how the fractured nature of U.S. financial services can affect open banking.