The CFPB’s rule on Personal Financial Data rights, implementing section 1033 of the Consumer Financial Protection Act of 2010 (CFPA) is meant to supercharge the drive to open banking. Once finalized and passed, it is the hope that consumers will have more control over their data and competition within the financial services sector.
On completion, fintechs and “third party entities” will have permissioned access to banks’ walled gardens of data, a wealth of information that could enrich services and streamline processes. One sector that is expected to be significantly impacted by the influx of additional data is embedded finance.
“It’s basically saying that banks can’t hold consumer data as their own proprietary asset,” said Phillip Rosen, Global CTO of Moneylion. “It’s the consumer’s asset. The consumers are entitled to use it and have access to it to achieve their own financial goals. So, you know, the principle of it is very much an accelerant for open banking and embedded finance. It’s very consumer-friendly and I think it’s also very friendly to the new wave of fintech companies as they reach maturity and scale.”
However, the law remains as a proposal. How the related requirements roll out could make or break its effectiveness.
Favouring the Challengers
The central premise of the Financial Data Rights rules is that part of the power will be taken away from large incumbent banks, with their swathes of propriety customer data. Built on years of roadblocks for consumers to switch financial service providers, the CFPB was concerned that the institutions had settled into complacency, relying on this friction to retain customers instead of the appeal of their financial products.
“The Personal Financial Data Rights rule would help address many of the root causes of sticky banking – by giving people more power to walk away from bad service and enabling small community banks and nascent competitors to peel away customers through better products and services with more favorable rates,” said CFPB Director, Rohit Chopra, at the announcement of the proposal.
The proposed rules aim to favor innovation and disruption, an area fintech has been set for some time. Embedded finance, born at the point of need, could be well placed to take advantage of the change.
“So many of these ecosystem and platform companies have come to market to make things easier and more consumable,” said Rosen. “There are tonnes of companies who are little bits and pieces of the overall consumer experience you see in any fintech. And we have seen the emergence of a really mature, well-developed ecosystem of those solutions. And I think that that will continue to be the trend.”
However, some remained concerned about the “unintended consequences” the rules could have on smaller fintechs.
“The devil is in the details, we’ll see what that actually translates to in terms of how we are required to implement things,” continued Rosen. “When combined with a lot of the things that must be done around protecting consumer information from misuse or usage that is not in line with the intent of the consumer, it also creates a lot of obligations and additional requirements for fintechs. That implies some reasonably heavy investment in order to enable all the things that fintechs would like to do for the consumer.”
In response to the proposal, a number of trade institutions have submitted a request for an extension to the 90-day commentary period suggested by the CFPB. There are concerns that if not given enough time to consider its implications and provide their comments, smaller entities may be further competitively disadvantaged by the rules – the opposite of what was meant to be achieved.
“One of the big challenges that smaller fintechs will have as they get more data is that they’re going to see a lot of places where they want to leverage it. But they also have to do the work to know what they can do with it,” said Rosen. “It’s not as simple as consent. You might have data coming from different places from different consumers with different intent. And you have to understand that, which is actually a really hard thing for smaller companies to do.”
Will Banks Partner or Innovate
In light of the proposed rule changes, large banks may also mobilize to adapt, bringing their own products to the market, enriched by their extensive resources, bypassing and competing with fintechs.
“(Large Incumbants) have the ability and the resources to go do these things at scale, obviously, much faster than some challenger bank emerging, or some challenger fintech trying to replicate that functionality,” said Rosen.
However, he explained, their legacy framework may make this more difficult than for smaller, digitally native fintechs.
“It’s actually much easier for them to do those ecosystem partnerships and use third-party solutions when building than it is for potentially a Bank of America who has all sorts of legacy elements to their product suite are 30 years old at this point, and from a technical perspective may not even be able to be integrated into these new modern solutions,” he said. “So you do have a real advantage when you’re starting out small, and you can adopt new technology much faster and at a lower cost than larger entities.”
He said that how banks adapt to the heightened competitivity posed by the Data Rights proposal may rely on their size. Some community and regional banks have already leaned into embedded finance partnerships to meet the needs of consumers, and the rules feed into this trend.
“If you look at the biggest banks, I think that even there, there’s a conflict,” he continued, explaining that their large structure could allow for competing opinions on how to approach the change. “You’re going to have some people in the bank saying that they should have complete ownership over the consumer and meet their needs across everything…And then you’re going to have other people who are going to be more realistic and say that they have to, if they want to be able to engage with a number of consumers, who are naturally going to have multiple providers for financial services at any given moment.”
He said that the decisions on strategy in the larger institutions may also come down to product, where embedded financing and ecosystem partnerships are more attractive.
