Open Banking in the US – Eyal Sivan interview

What is the status of Open Banking in the US? Who oversees the initiative (banks, regulators, or private entities)?

Since Open Banking kicked off in Europe, the US has been painted as somewhat of a laggard because there didn't seem to be much activity coming out over the last three or four years. The first significant thing that happened was the formation of the Financial Data Exchange (FDX) organisation, a non-profit consortium that started to sign on members from the fintech and banking communities in late 2018. 

They thought of creating a common standard to enable secure, consumer-permissioned data sharing for financial data, effectively sounding the first signal that the US was going to pursue something like Open Banking. It's worth noting that regions like the US and Canada, for whatever reason, didn’t initially like the term Open Banking. They tried to come up with their names – ‘consumer-permissioned data sharing’ for the US and ‘consumer-directed finance’ for Canada. Nevertheless, their goals were generally aligned with those of Open Banking efforts in other parts of the world. Both regions were trying to provide a common standard for the secure exchange of financial data, which is what Open Banking is all about.

If you spoke with North American incumbents, they would often say that there's something about the word ‘open’ that they don't like, likely the implication that they must give their data away. The concept of the level playing field was not necessarily part of the equation. They also tried to divorce the idea of data ownership and rights surrounding data from the idea of secure data sharing, using a common standard. It's an interesting nuance which I’ll expand on later. 

So, FDX aims to establish a common, shared standard for Open Banking through a market-driven approach, the idea being to engage with the different market players and use a consortium approach similar to Bluetooth. That proceeded quite well and they picked up the DDA standard and went to sign up lots of members, recently passing 60 million customer records. If you look at their growth over that period, it has been linear to the order of roughly doubling year-over-year, showing continuously strong growth from FDX and a market-driven effort. 

Then, in October 2020, the Consumer Financial Protection Bureau submitted a proposal for a rule-making effort related to section 1033 of the Dodd-Frank Act, the first firm signal from the US government that they were considering supporting this effort -  ’supporting’ might be strong, as they didn't specifically call out FDX, but the idea was to provide some sort of government backing for the notion of Open Banking.

It is that section of Dodd Frank that speaks to data portability and the right for users to switch providers and move their data from one organisation to another; this is at the heart of Open Banking and addresses the question of rights and ownership that organisations like FDX tend to stay away from. For a good long while after that, there was radio silence.; everybody got a little excited, but it was more like a proposal for a proposal than anything concrete. 

Now, here we are in the summer of 2021 and there still hasn't been much of a response. However, in July, as part of the White House’s recent executive order regarding competitiveness and anti-monopoly behaviour, there was a firm section on financial services, and a specific bullet within financial services clearly stating that people should have a right to move their financial data from one organisation to another, a right to their transactions and that enabling those rights should not be a complicated process.

General data access should be considered, and they even encouraged the Consumer Financial Protection Bureau to take a second look at section 1033 and arrive at a meaningful rule-making effort. That was the strongest signal yet we've seen from the US government that they were considering some sort of a regulatory approach to pairing up with FDX.

What are the main challenges regarding Open Banking adoption in the US?

I think that one of the challenges is the perspective that US banks are taking on Open Banking. And you're starting to see this change. I'm Head of Open Banking at Axway. I talked to a lot of banks around the world, including US banks, and I'm quite encouraged by seeing the perspective on open data sharing. As stated earlier, at first, banks didn't even want to use the words ‘Open Banking’; they were like dirty words that involve regulations, and it would be best not to talk about them. What you've seen happening recently is that they have to understand that Open Banking is not a threat to their business. If you look at regions where Open Banking is more mature, the banks there have not only seen their businesses remain ‘uncannibalised’, no customers ran for the door. No, they saw more banking activity overall.

That is because, when users open fintech apps that are powered by Open Banking, they are usually complementary to their main account. So they don't close their old account. They open the fintech account additionally, and the reason is that fintechs usually offer specialised services or special discounts. For example, customers can deposit small amounts of money into fintech apps for travel or pay at restaurants, and still maintain their core bank account. So there is no massive threat from Open Banking in terms of revenue category.

In the US, it's quite the opposite. Rather than seeing Open Banking as the threat, US-based banks should see it as more of a moat. That’s because the US is home to the world's largest technology companies – the largest companies, period - and they are itching to go after the banking sector – essentially, what Alibaba and Tencent did in China. 

Right now, there is only a thin regulatory line stopping them from doing that. And if they start to go there in earnest, because they are close, then US banks are going to have a very hard time competing. Unless there will be ground rules and standards upfront to make sure the playing field stays level so that they can continue to compete with the likes of Google, Facebook, and Amazon.

So, a first blocker is understanding what Open Banking is; it's not a threat, it's an opportunity and it's a moat against the technology giants. The second big blocker is that, and this is my personal feeling, if you look at other regions using a regulatory foundation to drive Open Banking, it works. There's this perception by some people that it's a black and white choice; you have to pick between regulation or market and the reasons for picking regulation would be that everything was done by the government bodies. That's just not the case. If you look at Europe and the UK, the government put a stake in the ground in terms of deadlines and general goals, but they did not write the standards. The standards were written by industry in response to these laws.

You saw cooperation between regulators and the industry to ultimately come up with an Open Banking framework that works. I think the US should learn from that and take a light-touch approach to their regulation. Nevertheless, they should put a stake in the ground, say ‘these are our general goals within this timeframe, now market do your thing’. 

I do think there needs to be some regulatory certainty. That's the second blocker. Banks have to understand that we're moving into a new world. They can't be all things to all people. Notions like ‘wallet share’ and keeping your customer close to you as a bank, as a brand, and making sure they buy as many products from you as possible are outdated. 

The fact is people want to use these cool new fintech apps. They want these new financial tools. They want lower-cost transactions, better savings, capabilities, better investment. And they want to share their data to do it. So the genie's out of the bottle. This is the new world. And you now have to figure out how to play in that world. So, tear down the silos, figure out what data you have, free it, open it securely, so that it can be shared, remixed, and reused, and understand that in this world APIs are your products and developers are your customers.

Does Open Banking have a clear path of adoption in the US? If so, what are the timelines and where should we keep a close watch?

That comes back to the story I told you at the beginning about US adoption, culminating with this executive order that happened in mid-July 2021. What are the times? I don't want to overplay it because, at the end of the day, it's an executive order. Whether this leads to some action or whether it gets mired in politics, is very uncertain. I want to be crystal clear that all that happened was just an executive order from the White House. It's not necessarily an actual law or even a proposal for a law. The next step that has to happen is the Consumer Financial Protection Bureau.

If this gets mired in politics and goes nowhere, that would be terrible. But if we take the optimistic view and everything goes right, what does the timeline look like? The next step is for the Consumer Financial Protection Bureau to prioritise this executive order and look at section 1033 of the Dodd-Frank Act and come up with a rulemaking effort to build a rule section that could be turned into a law. Even on the optimistic front, if the CFPB does that, you're looking at a rule-making effort kicking off presumably in the Fall of 2021. At the earliest, an actual set of rules that could turn into something would likely be around in the spring 2022 timeframe.

And then, even if everything goes smoothly and it becomes bi-partisan and they end up with a law or at least a mandate, you're still looking at 12 to 24 months of development of the standard, the ratification of the standard, implementation of sandboxes, liability frameworks, supportive frameworks around legal and privacy concerns. With an optimistic timeline, we’re looking at the second half of 2023.

Who is at the forefront of driving the US market towards Open Banking? Could you name some interesting companies and use cases?

I mentioned FDX earlier, but I can't mention them enough. Don Cardinal, chairman of FDX, and his team have been tireless and trying to bring the US towards a common standard and we've been in close touch. I commend him for continuing to push the issue in a challenging market. 

It's also worth mentioning a couple of the large banks like Wells Fargo and US Bank who have leaned into their API programmes and have demonstrated an understanding of the mindset shift I described earlier where APIs are your products and that you can't be everything to everyone. They took great strides in moving in the direction of becoming banking platforms, working with fintechs, and creating strong developer portal offerings. 

Of note is Akoya, an organisation started by several large US-based banks and The Clearing House to create an Open Banking data hub that allows for secure data exchange. While I'm not a huge fan of the hub model, I commend their efforts to try and create some mechanism that's based on a standard and indeed Akoya uses FDX to move the data around in banks, securely using APIs instead of screen scraping. 

You can't talk about the US without talking about fintechs. Even in the absence of an Open Banking standard, fintech activity in the US is among the strongest in the world. Not just in terms of investments or adoption – those numbers are strong – but just the diverse number of use cases that are covered. 

You've got organisations like Finicity and Plaid who do aggregation recommendations and look at your data – classic Open Banking stuff. You've also got specialised organisations like Brex, which offers a small business-oriented credit card. You've got massive changes in payments in the war between Square and PayPal and companies like Robinhood who famously offers 0 dollar trades. 

In terms of fintech activity and consumer use cases, there is no shortage in the US. What they're missing is a standard underneath that will allow all these incredible fintechs to securely and efficiently work with all the banks, which would pour gasoline on the fire and lead to an absolute explosion of innovation and economic activity in the US. 

I'd also like to mention smaller banks, like Cross River, who, even in the absence of an Open Banking standard in the US, really positioned themselves as banks for fintechs, tailor-made to provide banking services to someone else who owns the consumer experience. This is very advanced thinking. It's the kind of stuff you see in more mature Open Banking environments, where you have PSPs or TPPs like True Layer. I commend that activity in the US as well. They have their eye on the future. All they're missing is that Open Banking standard.

What approach will be taken towards Open Data (personal data, data privacy, data sharing, data ownership)? What role will FDX play?

The question of data ownership is not one that FDX comments on. Their standard supports whatever mechanisms you would want to implement to enable data privacy, data ownership, tracking, etc.

At the end of the day, the decision as to whether people own their data, have a right to their data, or the right to move their data around is not something that the standards body is going to address. That is the kind of thing that regulators have to address. And it comes back to the point I made earlier.

Regulators do not have to be heavily involved in Open Banking. But they do have to set the rules and the guardrails participants are going to follow and the end goals that they are pursuing. One of the guardrails a regulator could put down is: consumers own their data – they have their data, they have rights to access their data.

It's too early to tell if the US is going to enshrine this right (Open Data/data sharing/data ownership) into law like other regions have done. It is certainly a big part of the Open Banking debate. 

However, in my view, data ownership is not a prerequisite for the establishment of an Open Banking standard. You can build a standard, like FDX is doing, have everybody adopt it, and support an ecosystem where everybody is sharing financial data securely, with permissions and consent. But at the end of the day, there is no legal backing for it. Consumers do not have special rights. That data is still owned by letting consumers share it securely.

That is possible. My prediction is, just because of the nature of what Open Banking is, all you are doing is delaying the inevitable. Even if you end up going that route and not establishing any consumer data rights, the more people get used to sharing their data, getting value from their data, understanding that their data has value, the more they will start to demand these rights. So, even if the US decides to go down this road in the absence of any regulation around data ownership, I still think they will inevitably get there. I will say that Biden’s executive order at least certainly does specifically point to the notion of data ownership and data rights.

About Eyal Sivan

Eyal Sivan is the Head of Open Banking at Axway, where he is responsible for positioning the firm as the number one thought leader and integration solution provider in the Open Banking space. As a member of the elite Catalyst team, he brings a high-degree of specialisation in APIs, microservices, and digital transformation within the FSI sector. Eyal is also known as Mr. Open Banking, based on his podcast of the same name, where he interviews the key leaders, innovators, and influencers who are driving and shaping the emergence of Open Banking around the world.