Can Open Banking Win Trust to Drive Real-Time Payments?

The concept of open banking has gained global traction as part of the digital disruption of finance that has transpired over the past decade. In many ways, it represents a resolution of the bank-FinTech battle that began when the first digital challengers arose on the financial scene, looking to compete on a level with large incumbent banks. The premise of open banking is to encourage this competition as well as greater transparency and innovation by allowing consumers to share their banking data securely with third-party financial service providers. This sharing is enabled by the use of software connections known as application programming interfaces (APIs), which allow third parties to build new products and services around consumers’ primary financial institutions (FIs).

As open banking has made inroads around the world, the United States has been slower to get on board. A recent regulatory move from the U.S. Consumer Financial Protection Bureau (CFPB), however, could lead to a definitive verdict. The wider adoption of open banking has important ramifications for real-time payments, as it could make it easier to fulfill the escalating consumer demand for these payments, especially for smaller banks and financial service providers. However, notable roadblocks — in the form of data security concerns — must be resolved before open banking is likely to get the all-clear from the U.S. financial industry.

U.S. Regulators Move the Needle Toward Open Banking

Consumer and Business Concerns Persist Around Open Banking Safety

Open Banking Could Supercharge Real-Time Payments Adoption

How Open Banking Regulation Can Succeed to Advance Real-Time Payments

U.S. Regulators Move the Needle Toward Open Banking

Adoption of open banking in the U.S. could shift into high gear with a recent rule proposal from the Consumer Financial Protection Bureau requiring FIs to share data with both consumers and third parties. However, industry support for the proposed rule as written is far from unanimous.

The U.S. is taking its first steps into mandated open banking with a new rule proposal.

The CFPB recently proposed a rule to implement Section 1033 of the Dodd-Frank Act, which would require banks and other FIs to make financial data more easily available to consumers — and to third-party service providers authorized by those consumers. Moreover, it would impose new privacy and security obligations on both the data providers and the third parties around the sharing and use of this data. Among other things, the proposed rule would require banks, as data providers, to create and maintain developer interfaces, in the form of APIs, permitting authorized third parties to access consumer data.

Open banking expansion

The Consumer Financial Protection Bureau is floating a rule to expand open banking in the U.S., but some groups say it doesn’t go far enough to protect consumer data.

According to CFPB Director Rohit Chopra, the rule’s intention is to encourage the decentralization of banking and consumer finance while preventing misuse of personal financial data. By establishing a regulatory framework for secure and competitive consumer data access, the proposal marks the most significant step to date toward the adoption of open banking in the U.S.

Industry groups say the CFPB’s proposed rule does not go far enough.

The proposed rule has far from unanimous support, however. Multiple groups submitted comments to the CFPB in December 2023 in response to the proposal, with The Clearing House Association and the Bank Policy Institute saying it falls short in safeguarding consumer financial data security and privacy.

In particular, these groups would like to see a ban on third parties’ use of credential-based access and screen scraping once a data provider offers a developer interface. In credential-based access, consumers grant third parties access to their online banking portals by providing them with their login credentials — making it difficult for banks to distinguish between actual customers, legitimate third parties and potential fraudsters, the groups say. In screen scraping, third parties can take this practice a step further by downloading all visible data on customers’ online banking websites — including details they may not wish to share.

Rodney Abele, TCH vice president and director of legislative and regulatory affairs, explained the institution’s view that while FIs are held to stringent cybersecurity measures to protect sensitive customer data, “Currently, most third parties are not held to any supervisory or examination standards on cybersecurity protections once the customer shares it with them.”

Consumer and Business Concerns Persist Around Open Banking Safety

Industry groups are not alone in their concerns. Both consumers and businesses could benefit from having better access to bank data, but their perceptions of open banking’s cybersecurity risks are also posing barriers to adoption.

60%

of Americans say open banking could be a positive development for the financial industry, but only 57% trust banks and financial services to safeguard their personal information.

U.K. consumers and businesses remain skeptical of open banking.

Open banking faces skepticism from consumers as well. Much of this is coming from the United Kingdom, where 84% of consumers say they do not trust open banking’s safety, despite its implementation in that country since 2018. Moreover, nearly three-quarters — 72% — of U.K. consumers believe that open banking does not benefit the consumer most, with 50% instead believing that third-party financial providers are the primary beneficiaries of open banking.

Business perceptions about open banking security are also preventing its embrace in the U.K., despite the technology’s full regulation for bank-level security there. While U.K. businesses are aware of open banking’s benefits — with 39% saying it would improve the customer experience and 37% saying it would improve payment efficiencies — 48% of British business leaders say they have cybersecurity concerns that are holding back their adoption of the technology.

Americans are receptive to open banking but are also concerned about data security.

Perceptions of open banking in the U.S. appear to be more favorable, but doubts nevertheless persist. A recent study found that while 60% of Americans believe open banking could be a positive development for the financial industry, 56% said they do not know where their data would be stored, and 87% wish they knew exactly what data companies actually collect about them.

Just 57% of Americans said they trusted banks and financial services to take care of their personal information, and the same proportion said they would stop doing business with companies that suffered a breach or cyberattack that endangered their data. Financial service providers looking to implement open banking in the U.S. will need to reassure customers that this technology will not place their sensitive financial details at risk.

Open Banking Could Supercharge Real-Time Payments Adoption

Despite the hurdles, open banking’s potential to revolutionize the payments industry is clear. Financial service providers could have unparalleled access to banking data, allowing them to make real-time payments implementations more readily than ever before.

Open banking in the U.S. could accelerate real-time payments adoption.

While open banking is often viewed as benefiting FinTechs, banks have significant opportunities to gain from it as well. One of these is the accelerated adoption of account-to-account (A2A) payments, or those made directly from a consumer’s bank to a merchant’s bank, typically using real-time rails. This payment method has been slow to catch on in the U.S. due to competition from credit cards. However, industry experts predict that open banking regulation could allow U.S. banks to stake a larger claim in the payments marketplace by leveraging A2A rather than offloading payments to card companies.

Faster payments

With help from open banking, A2A could reach $200 billion in consumer-to-business transactions in North America by 2026.

A2A payments benefit merchants by eliminating interchange fees, thus lowering costs. They can also substantially reduce fraud and chargebacks due to the use of real-time rails and because each transaction is authenticated by a consumer’s online banking credentials. The data that open banking provides could also offer banks more detailed insights into consumers’ payment habits, allowing them to develop more personalized products for their customers. A recent report estimates that with the aid of open banking regulation, A2A could represent $200 billion in consumer-to-business transactions in North America by 2026.

The U.K. government is calling on the payment sector to leverage open banking for real-time payments.

Although the U.K. is already equipped with a real-time payments system known as the Faster Payment Service, a new government report calls the system “clunky” and is urging the payment sector to tap open banking technology to develop new routes between customers’ bank accounts and retailers to challenge the dominance of credit card giants. By allowing financial service providers to bypass the standard means of moving money, which requires customers to enter sort codes and account numbers, open banking could reduce payment times in the current U.K. system from their typical 70-80 seconds to the 30 seconds seen in Brazil, Sweden and India.

How Open Banking Regulation Can Succeed to Advance Real-Time Payments

Through seamless integration between different FIs and payment service providers, open banking has the potential to revolutionize the landscape of real-time payments. This interoperability eliminates the traditional barriers associated with transferring funds between accounts held at different entities, enabling instant payments to be executed across a variety of platforms and networks.

Despite consumers’ and businesses’ trepidations about open banking security, the use of APIs allows for secure data sharing between authorized parties, reducing the risk of data breaches and unauthorized access to sensitive financial information. Open banking also fosters financial inclusion by expanding access to real-time payment services for underserved communities. Through the use of mobile devices and digital wallets, individuals who may not have access to traditional banking services can participate in the digital economy and enjoy the benefits of instant fund transfers and convenient payment options. However, the current proposal from the CFPB must put to rest industry concerns about data security and privacy surrounding screen scraping and credential-based login. Private-public consensus gained through a review of the details in collaboration with industry bodies could help ensure a final rule’s broad acceptance — and success.

Effective and informed consumer consent and control has to be at the heart of [the open banking] regulation, and we think that screen scraping and credential-based access should end so that consumers are able to effectively control who has access to their data and who has access to moving money in and out of their accounts.”

Rodney Abele
Vice president and director of legislative and regulatory affairs