It has been a busy year in payments with the Reg II clarification enforcement and the launch of Fed Now, but there is no rest for the weary. The CFPB announced a new set of regulations for open banking and proposed a rulemaking in early October. Earlier this summer, Director Chopra wrote, “The CFPB is working to accelerate the shift to open banking through a new personal data rights rule intended to break down these obstacles, jumpstart competition, and protect financial privacy.” With this as a backdrop, the payments landscape will be set for more change as early as 2024. The proof will be in the implementation of these rules, but Director Chopra hopes this will be a good change in the financial services industry.
Open banking, as with most payments innovation, started in Europe. Open banking is generally defined as a system based on application programming interfaces (API) and intended for sharing financial information necessary for the development of financial products and services. In banking, these products will take down some of the barriers that financial institutions have built to keep their customers locked in. While it is not the sole purpose, one function of open banking is to allow customers’ data to be shared between banks and nonbanks. In the end, the goal of open banking is to increase competitiveness between financial institutions. As with all competition, proponents of open banking believe it will drive innovation and reduce costs.
As with faster payments, the main use case for open banking is not retail payments. It is different than faster payments, though, because open banking is flexible and will potentially be easier to adopt in the retail payments space. The Paypers published their sixth edition of the Open Banking Report, which uncovers the global potential of open banking, open finance, and open data. The report provides a comprehensive view of the landscape, including a detailed list of technology providers. Plaid was an early leader in this space by creating a suite of APIs to allow for access to many of the financial institutions in the U.S. Visa attempted to acquire Plaid in 2020, though the acquisition was challenged by regulators resulting in both parties abandoning the merger. Plaid continues to succeed as a stand-alone entity. Other companies like Klarna have been working in the open banking space for years in Europe and are attempting to bring their technology to the U.S. Trustly started in the U.S. and is leading the charge in the merchant community to drive adoption. The global card networks are also active in the open banking industry as Mastercard acquired Finicity in 2020 and Visa acquired Tink in early 2022. Open banking, like other innovations in the payments space, needs to be a partnership between the merchant, solution provider, and financial institutions. With a true partnership and collaboration, open banking is poised to drive significant change in the U.S. payments system.
The Merchant Advisory Group’s (MAG) Innovation Committee meets monthly to discuss innovations in the payments space, including open banking. Solution providers are offered an opportunity to present their innovative solutions to committee members to ask questions and offer feedback. Merchants wanting to join the committee or sponsors wanting to present solutions should reach out to Bryan Penny directly. MAG’s Advocacy and Communications Committee also meets monthly, and committee members discuss the latest developments on issues like open banking as they pertain to governmental engagement. Please contact Beth Provenzano if you are interested in joining the Advocacy and Communications Committee.
There is no silver bullet here, the merchant community will need to educate themselves and work to make sure that the regulators keep the system in check. This new and evolving marketplace cannot and should not evolve into another power play by the large financial institutions to stimy competition and innovation. The sky is the limit, and we should continue to drive for change.