The process for creating a new rule obligating financial institutions to share a consumer’s data upon a consumer’s request will begin this week, which the director of the federal consumer financial protection agency indicated in a speech Tuesday is a first step toward an open banking or finance rule.
In remarks to the Money 20/20 conference in Las Vegas, Nev., Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra said that a rule will result in “empowering people to break up with banks that provide bad service, and unleashing more market competition.”
This week, Chopra said, the bureau will release a discussion guide about developing the rule that small firms can weigh in on. He said through that process, “we’ll hear from small banks and financial companies who will be providers of data, as well as the small banks and financial companies who will ingest the data. We will also gather input from the ‘fourth parties,’ the intermediary data brokers that facilitate data transfers.”
He said that in the first quarter of next year, the agency will publish a report about the feedback it receives, which “will inform a proposed rule that we are planning to issue later in 2023.” He said the bureau hopes to make the rule final in 2024.
Chopra’s remarks focused entirely on the planned rulemaking for sharing with consumers their financial data. He did not address the recent appeals court ruling that found the agency’s financing through the Federal Reserve is unconstitutional. Some have said that ruling imperils past CFPB rulemaking – and could, potentially, scuttle future rules, such as the one he outlined Tuesday.
Nevertheless, Chopra signaled he intends to proceed with the customer data rulemaking process. He said the rule as envisioned would propose requiring financial institutions offering deposit accounts, credit cards, digital wallets, prepaid cards, and other transaction accounts to set up secure methods, such as application program interfaces (APIs), for data sharing.
“While we expect to cover more products over time, we are starting with these ones,” Chopra said. “Through these transaction accounts, the rule will be able to facilitate new approaches to underwriting, payment services, personal financial management, income verification, account switching, and comparison shopping.”
He said the rule would also consider ways to stop financial institutions, and others, from improperly restricting access when consumers seek to control and share their data. “We will be developing requirements to limit misuse and abuse of personal financial data, as well as frauds and scams,” he said. “A common point of concern across jurisdictions around the world is how unscrupulous actors will look to harvest and hoard consumer financial data as it increases in scale.”
He said the agency is exploring safeguards to “prevent excessive control or monopolization by one, or even a handful of, firms.” He asserted that a decentralized, open ecosystem will yield the most benefits for creators and consumers alike.”
At the same time, he said, there will be strong incentives for “gatekeepers and intermediaries” to emerge, extract rents, and self-preference. “In consumer financial services, we have a number of highly concentrated submarkets: the credit reporting conglomerates, the card networks, the core processors, and more,” he said. “It’s critical that no one ‘owns’ critical infrastructure.”
The bureau director claimed four outcomes would result for consumers from a final rule:
- individuals and nascent firms would have more bargaining leverage;
- better security of personal financial data;
- more “switching” between financial providers, and incentives for better service;
- … and more switching would lead to greater efforts by firms to maintain or win customer loyalty.
He said these outcomes could, among other things, could cause large banks to find their customers “less sticky” (reluctant to switch providers) and easier to poach by other financial institutions. “They’ll also find it harder to impose junk fees and harvest personal financial data for their exclusive use,” he asserted.
He also indicated the rule could facilitate new ways for financial institutions to underwrite loans and “score with less bias.” He suggested the rule would help firms create processes for assessing ability to repay without attempting to use outside information to model a consumer’s presumed ability to repay.
“Transaction data will be especially useful for these purposes, and help bring an end to the current reliance on the three-digit social credit scores derived from credit reports that are cloaked in secrecy and rife with inaccuracies,” he charged. “Rather than rely on black-box models that people can’t make sense of, lending can move back to real-world data about someone’s ability to pay back a loan. This will eliminate bias and reliance on credit scores and other proxies.”