Open Banking: What's Next for the US & Canada

Open banking is one of my favorite topics, and it's really been heating up this month. On October 22, the US Consumer Financial Protection Bureau (CFPB) released its final open banking rule - the same day, a lawsuit was filed challenging the rule.

With the recent developments, where are we? Who is leading…or lagging?

Open banking regulations have been put into place in various countries and jurisdictions throughout the world: the UK, European Union, Australia, Brazil, Japan, Singapore, and others. Many of these global financial institutions and fintechs are benefiting from this rich data. In fact, 82% of banks in the UK were expected to be using open banking by the end of 2023.

Depending on the region, open banking is market or regulatory-driven.

Source: https://platformable.com/blog/open-banking-and-open-finance-regulations-as-at-q1-2024

As noted above, the Consumer Financial Protection Bureau (CFPB) has proposed the Personal Financial Data Rights Rule under Section 1033 of the Dodd-Frank Act.

In Canada, the Financial Consumer Agency is working on open banking, or what they are calling consumer-driven banking.

The US and Canada have nearly identical stated goals for the creation of this regulation:

1. Give consumers greater control and ownership of their financial data.
2. Ensure that security and consumer protection are a primary focus.
3. Foster innovation and competition in the financial sector.

Let's separate regulation from data access.

Arguably, the US is the most mature financial data aggregation environment (a common term for non-regulated access to other bank data) in the world. Most US banks are using "bank account linking" in their onboarding process for new accounts and/or in their account management to improve things like credit line management, verification of income, and other customer information, along with understanding small business cash management. I have 130+ financial service apps on my phone as I've been researching digital banking for decades. Of those apps, over 80% of them used bank account linking for one service or another.

Canada is well behind the US (and the countries that have open banking regulation) in the usage of this data. That's due to two primary factors:

1. Banks trying to limit the access mainly in a defensive effort to stem attrition, and
2. Security and privacy concerns, as it's technically a breach of most Canadian banks online banking agreement

The Top 5 Open Banking Opportunities

So why all the hullaballoo with open banking? Why should North American bankers care?

I see five big opportunities to improve bank decisioning strategies:

1. Significantly improved verification of key credit application data: income, rent, mortgage, and debts not reported to the credit bureau (just to name a few). The CRO in me loves this as these aren't predictions but observations, and I don't have to ask for documents to verify them. This also means less manual intervention, and as such, higher conversion rates.
2. We are at a point where this linking has become commonplace and when done well, it creates a seamless, low-friction experience for customers. The argument a decade ago was that people would not do this - that's changed, and regulation should improve that even further. Again, this will drive conversion rates and the bottom line.
3. Cash flow analysis and new predictive variables are now available. This improves the predictive models that we use for credit approvals, and it also creates more financial inclusion (because more people can be scored). This can help younger applicants and new immigrant populations who often have little (or no) credit bureau data but do have savings / checking accounts.
4. Small businesses have always had a challenge when working with FIs on credit applications and demonstrating both creditworthiness and a capacity to repay the loan. Open banking data will significantly enhance the ability for the banks to understand the financial nature of small businesses. This provides better predictability on credit performance and affordability, and it can also significantly shorten time-to-decisioning performance, because many FIs take weeks to access credit for this group.
5. For many consumer bankers (me included), there's a dream of an AI-driven personal financial consultant, and open banking data will be a great step forward to fueling that innovative dream.

The forecasted growth numbers are impressive: market growth CAGR of 23.3% and a forecasted market size of $203.8B for 2033.

Source: https://www.fintechfutures.com/techwire/open-banking-market-to-soar-to-usd-203-8-billion-by-2033-driven-by-digital-transformation-and-regulatory-initiatives/

Technology and the Future of Open Banking

I haven't spent any time talking about how bank technology can implement such regulations. Why? Because it's the easiest piece - well, maybe not that easy, but many API-driven decisioning platforms already have the ability (at least in the US) to communicate with Plaid, Finicity, Yodlee, and others. I would expect that when the regulations get finalized, the software industry will be there as fast as it can to provide tools and access to this mission-critical data.

So, while it does appear that regulation and implementation for both countries are still aways out, we expect continued innovation and adoption in the bank data sharing space. The question is, who will be ready to fully capitalize when the opportunity gates open?

Learn More About FICO and Open Banking

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Our industry-leading technology is enabled by FICO Platform's modern, decomposed, flexible, and API-first architecture - all supported by enterprise-grade core capabilities that have been proven in the most demanding and highly regulated environments. To learn more, check out The Forrester Wave™: AI Decisioning Platforms, Q2 2023 report, a comparison of top providers, including FICO and 12 others.

Reach out with a comment below if you'd like to continue the open banking conversation.

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