Could Open Banking Be Good for Small Institutions?

Although many small institutions fear that open banking will siphon customers away to fintech companies and other competitors, John Pitts, the global head of policy at Plaid, has a different view. 

The Consumer Financial Protection Bureau is expected to finalize rulemaking around Section 1033 of the Dodd-Frank Act this fall, Pitts says. Section 1033 will establish a regulatory framework and standards for open banking in the United States. Open banking is an approach that allows consumers to have much more flexibility when it comes to sharing their financial data with providers of their choice, says Pitts, whose company works to create those connections for customers. 

Pitts joins Reinventing Banking to discuss the proposed rule, the work that financial institutions will need to do to comply with it and the competitive challenges and opportunities that open banking creates. 

Section 1033 will require financial institutions to provide their customers with standardized connections via secure application programming interfaces, or APIs, so they can share their data. Comment letters submitted to the CFPB after the rule’s proposal highlighted how important standardizing APIs will be in facilitating an open banking regime, according to a recent article on FinXTech. The proposed rule gave financial institutions up to four years to comply with the standard, based on their size. 

“The difficulty is that API: The bank has to build it,” he says. “… It costs money to build something that you might say, ‘Why am I building this thing that lets my customers share their data with a competitor of mine?’”

While many institutions already offer these connections in some capacity, building a high-performing API may be challenging from a technology, data aggregation and privacy perspective for others, he says. The potential work to comply with a new rule might be a hard sell for banks and credit unions that see open banking as relinquishing control of their customers’ data. 

But Pitts doesn’t believe that small banks and credit unions necessarily will lose customers or deposits in an open banking world, given the pervasiveness of market-driven open banking capabilities in today’s environment. Instead, he believes that open banking could level the playing field between big and small institutions.