As financial services companies prepare for the advent of open banking in the U.S., thanks to a pending Consumer Financial Protection Bureau rule proposal, the agency’s director, Rohit Chopra, warned of “dangers” in setting standards for the new realm.
In remarks before the Financial Data Exchange Global Summit on Wednesday, Chopra explained that standard-setting organizations will play a crucial role in setting up parameters for open banking, a new arena in which consumers can move their financial data easily, safely and privately from one financial institution to another.
“We know dangers exist when more powerful players weaponize industry standards,” Chopra said in the text of prepared remarks. “We have to be vigilant that standard-setting does not skew to benefit dominant firms and their prevailing market power.”
Chopra flagged that the agency expects to finalize the underlying Personal Financial Data Rights rule proposal “this fall.” As preparation, the agency also envisions “setting rules around formal recognition of standard-setting organizations” that will “prevent large incumbents from rigging standards in their favor,” the director added.
Late last year, the CFPB proposed new rules for creating an open banking environment, a year after introducing the plan at the Money20/20 conference in Las Vegas in 2022. Open banking has already taken root in Europe, and the concept is spreading as a swarm of fintechs simplify moving data between accounts, often via apps.
The proposed rules, relying on the CFPB’s authority under section 1033 of the Consumer Financial Protection Act, will turn on developing industry standards created for handling the data.
“The Proposed Rule does not set forth detailed technical standards for compliance,” attorneys at the law firm Mayer Brown wrote in a review of the proposal last December. “The CFPB acknowledged that such detailed standards would not be able to keep pace with changes in the market and technology. Instead, the Proposed Rule leans on compliance with qualified industry standards to satisfy certain requirements (e.g., the requirement to provide covered data in a standardized format), or to indicate that a requirement has been satisfied (e.g., whether performance is commercially reasonable).”
Fintech trade groups were largely supportive of the CFPB’s approach under the proposal as laid out this week by Chopra in the speech.
“We are pleased to see Director Chopra recognize the need for diverse voices in standard-setting organizations, particularly new market entrants like fintech companies,” Financial Technology Association spokesperson Miranda Margowsky said in an emailed statement.
“At the same time, the Bureau must continue to prioritize preventing anti-competitive behavior in the final open banking rule,” Margowsky added. “Doing so will ensure consumers can take advantage of the rule's intended benefits, like being able to switch to a different service provider or shop for the digital financial services they want.”
The fintech trade groups welcomed the agency’s efforts to protect their influence in developing open banking. “I agree with Director Chopra on the importance of ensuring that all entities, especially innovative or smaller market participants, are properly represented in any CFPB-recognized standard-setting body,” American Fintech Council CEO Phil Goldfeder said in a statement. “Given the significant role played by innovative community banks and responsible fintech companies to power the modern banking ecosystem, it is especially important to ensure that all stakeholders have a strong voice in the creation of an open banking standard-setting body.”
Chopra didn’t name any particular standard-setting bodies that the CFPB is counting on to support the new infrastructure. Indeed, he said the agency wanted to avoid “dictating prescriptive technical details.” Nonetheless, he has some clear ideas of what the agency doesn’t want to see happen.
“We continue to hear reports about incumbents potentially coordinating efforts to limit consumers’ exercise of their rights to access data by forcing data sharing through a bank-owned venture,” Chopra said in the speech, but he warned that “anti-competitive behavior by dominant firms” will not engender open banking. “Banks can choose their own service providers to enable open banking, but we will be watching out to make sure that such service providers are not used to an anticompetitive effect,” he said.
The event's Financial Data Exchange host seems a likely candidate for the new standard-setting purview. Its members include top U.S. banks as well as fintechs, credit bureaus and payments players.
"The Financial Data Exchange (FDX) specification, which currently connects 76 million accounts safely and securely, is developed by a diverse array of stakeholders and provides a strong foundation for compliance," American Bankers Association Vice President Ryan Miller said in an emailed statement in response to the speech. "American Bankers Association is an active member of FDX and represents the views of our entire membership, which includes community and regional banks. ABA and the entire consumer-permissioned data sharing ecosystem believe that recognition of FDX is essential to the success of the CFPB's personal financial data rights rulemaking."
On behalf of FDX, the organization’s managing director, Don Cardinal, offered a statement, after saying he was pleased Chopra addressed the group. “FDX’s mission is to set open data standards that allow for the secure sharing of consumer-permissioned data,” he said in the emailed statement. “From day one, FDX has been committed to fair, open and inclusive standards setting processes that reflect the voices of all corners of the Open Finance ecosystem.”
Chopra warned companies about engaging in such anticompetitive acts, reminding them that the CFPB is in regular communication with the Justice Department regarding “potential self-dealing schemes that may run afoul of civil and criminal laws.”
As for what will be more in tune with the CFPB’s vision, Chopra provided a road map for qualified standard-setting entities. He said the agency will codify rules detailing those attributes that must be demonstrated for standard-setting bodies to be recognized under the new rule.
The CFPB will examine the balance of decision-making authority in such organizations, such that no single actor or group is dominant; the make-up of the board or group that governs setting the standards; and the diversity of funding for the organization.
“I urge all interested standard setters in this space to look hard at their practices and procedures to ensure your organization is not simply a puppet for a powerful player,” Chopra said.
While such standards are geared toward creating interoperability for players in the new open banking arena, Chopra noted he’d prefer to have the agency recognize more than one protocol for setting standards in the market. New standard-setters may surface as the new open banking system evolves, he said.
