Federal regulators want to make switching banks less of a hassle — but first, it looks like they’ll have to win a court battle.
On Tuesday, the Consumer Financial Protection Bureau (CFPB) unveiled the final version of its long-awaited open banking rulewhich aims to create more competition between financial services companies by making it easier for users to transfer their personal data between them.
The move is designed in part to ease some of the common headaches familiar to anyone who’s ever tried to move their checking account or upgrade to a better credit card — a process that can require manually resetting numerous automatic bill payments and can mean losing years of transaction history.
These types of inconveniences are known to prevent many consumers from shopping around for better deals. One study found that the average American had same checking account for more than 17 years; about 10% of consumers say they didn’t switch mainly because of the hassle.
During a speech in Philadelphia, said CFPB Director Rohit Chopra the agency’s new regulation, officially known as Rule 1033, would help remove some of those “barriers.” Under the measure, banks, credit card issuers and payment apps will be required to provide customers with electronic access to their account information, including allowing third parties of their choosing to collect it – allowing fintech firms and other institutions to are connected without problems. and transmission of key information.
“It means you can more easily walk away from mediocre products or services,” Chopra said. He compared the changes to rules that allowed cell phone users to take their numbers with them when they changed service providers, making switching to a new plan much easier.
However, the rule has drawn fierce criticism from banks who argue that it will be unfairly expensive for them to implement and expose customers to serious fraud risks. On Wednesday, industry groups filed a federal lawsuit in Kentucky to stop the regulation, accusing the CFPB of “exceeding its statutory mandate.”
Read more: How to switch banks: a step-by-step guide.
What really changes
For many consumers, the new Open Banking rule may not change much at first glance. According to the CFPB, at least 100 million Americans have already allowed third parties access to their various financial accounts, using apps like Plaid to connect their banks and brokerages with personal budget software and services like TurboTax. That has led some to downplay the agency’s new regulation.
“In many ways, 1033 is just a formalization of the digital finance economy that already exists,” Plaid CEO Zach Perret told a crowd at a fintech conference on Wednesday.
But regulators and outside supporters argue that the Open Banking rule will make important behind-the-scenes changes that will benefit consumers. Today, they note, banks can choose which companies to let touch their clients’ data and under what conditions. Tech firms they refuse to work with often resort to workarounds like “screen scraping“, which are widely considered security risks.
The new rule will force banks to grant access to any third party customers want using a formal portal, as long as they meet certain standard requirements. It also creates privacy rules about how data can be handled after it is transmitted, so that information can only be used as intended by users.
“Essentially, the rule that the CFPB put out says it’s not up to the bank, it’s up to you,” said Steve Boms, executive director of the Financial Data and Technology Association of North America. “Your bank can’t stand in front of you and say, ‘no, we don’t think so’.”
So that consumers can benefit
In addition to making it easier to hop between banks, advocates say the new data rules open up new, consumer-friendly ways to make everyday purchases and apply for credit that could shake up large swaths of consumer finance.
One type of service that could potentially see growth: Pay-by-bank apps, which allow customers to buy things or cover bills directly from their checking account, rather than through a debit card or paper check. Merchants are already cheering for the possibility, as the services could save merchants the so-called commissions that banks and other card issuers collect on each transaction. Some may eventually offer discounts to customers who use a bank payment option instead of using a Visa or Mastercard.
“Open banking could cut out these middlemen and create competition that would benefit both small businesses and consumers,” the National Retail Federation’s general counsel Stephanie Martz said in a statement this week.
Experts also say the data rules make it easier for some Americans to get access to loans through cash flow insurance, where lenders assess creditworthiness by looking at an applicant’s history of paying rent and bills on time. This could be especially useful for immigrants and young people who tend to have thin credit files.
Read more: What to do if you sent money to the wrong person on Cash App, Zelle or Venmo
Why are banks marked?
Banks have lodged a number of complaints about the new data rules, starting with costs.
The regulations will prohibit financial institutions from charging fintech firms any fees for access to customer data, while requiring them to pay new compliance costs. They also argue that the new rules do not do enough to protect them from legal and financial liability if a third party is not careful with the information they collect or misuses it. That’s a particularly acute problem, the industry says, because allowing more third parties to view data increases the chances of a bad actor getting through.
“It’s just another vector and another chance for the fraud to really increase,” said Brian Fitzsche, associate general counsel at the Consumer Bankers Association.
In its lawsuit filed Wednesday, the Bank Policy Institute argued that regulators have gone far beyond the authority outlined in the 2010 Dodd-Frank Act, which required the data regulations. “This is a case of a federal agency overstepping its statutory mandate and injecting itself into a growing ecosystem that is well-functioning and thriving on private initiatives,” the complaint states.
Courts are being asked to strike down the rules entirely – or, failing that, to allow banks to charge fees to any fintech firms that will seek access to the data.
Jordan Weissmann is a senior reporter at Yahoo Finance.
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