The state of Open Banking and Open Finance in the US and Canada – Interview with FDX (Part 1)

Tom Carpenter, Director of Public Affairs and Marketing for the Financial Data Exchange, shares his latest thinking on what’s driving the evolution of Open Banking the US and Canada, challenges, and the progress made so far

Could you please tell us more about FDX and its members? How does FDX sit within the Open Banking ecosystem?

FDX, which stands for the Financial Data Exchange, is a non-profit financial industry standards body. FDX is developing and promoting adoption of a common, interoperable, market-led, and royalty-free API standard for Open Banking and Open Finance data sharing -aptly named the FDX API.  

A good analogy to understand what FDX is doing is the Bluetooth standard. Bluetooth brought together many different consumer electronics manufacturers to create a standard specification so consumers could use differently branded products in an interoperable manner. In the same way, FDX brings together diverse financial industry players around a common API standard so consumers can share and use their own financial data between financial institutions, fintechs, and intermediaries in a secure and transparent manner regardless of where a consumer banks or which fintech app they might choose to use. And most importantly, adoption of the FDX API is replacing the need for data sharing that relies on shared consumer login credentials.FDX has more than 200 members across the financial sector globally including fintechs, banks and credit unions, data aggregators, consumer groups, payment networks, financial industry groups and other stakeholders. In addition, the FDX API itself is being implemented broadly across the financial services industry and is currently used by 22 million consumer accounts.

How are FDX standards paving the way for Open Banking in the US and Canada? Can you describe the FDX API standard for interoperable Open Banking? 

As Open Banking and Open Finance (typically understood to be a wider range of financial data sharing beyond just banking data) emerges with different systems and regulations around the world, the common denominator is an interoperable API standard that allows consumers to share their financial data seamlessly and securely with different financial services providers. And while many jurisdictions have developed an API standard via regulation, the financial industry in the US and Canada has come together under FDX to develop a market-led standard that we believe is better able to meet market needs and will be better able to predict and adapt quickly to changing market innovations and consumer demand. In addition, market-led standards can easily be tailored to accommodate any regulatory or legal requirements in each jurisdiction.

As for the FDX API specifically, we are currently at version 5.0, and it is the foundation of FDX’s data sharing standardisation along with FDX’s User Experience Guidelines, Taxonomy, Registry, and future Certification framework. The FDX API offers consumers the ability to access over 600 different financial data elements, including banking, tax, insurance, and investment data, making it one of the most comprehensive Open Finance standards in the world. The FDX API is designed to enhance interoperability and performance for the full range of current and future data sharing, and utilises foundational and globally interoperable standards for security, authentication, data transfer, authorisation, API architecture, and identity.

How would you describe the state of the US and Canadian Open Banking? In what inning are we? Where is the Open Banking sector heading in the US and Canada?

I always love a baseball question! I would say we are in the 2nd or 3rd inning in the US and Canada but let me explain.

First off, at FDX, we generally define Open Banking and Open Finance as the ability for users to access, share and leverage their own financial data to benefit and improve their financial lives. Under this simple definition, I would argue that the US and Canada, while quite different, are rather advanced. Consumers in both markets have been using fintech apps and sharing their own financial data for years. We may not have all the rules of the road in place and consumers may not know the term “open banking,” but we would not have the explosion of fintech firms and innovation if the consumer demand for such services was not firmly in place. If I stop my answer there, then I guess I could argue that we are in the 5th or 6th inning of Open Banking.

However, I still think we are in the first third of the game because it is still such early days for financial data sharing innovations. The market players and roles are constantly evolving, and I also think we have only scratched the surface of all the ways consumers are going to be able to share and use their own financial data in the future.

Finally, I usually describe Open Banking and Open Finance as having two halves – a “What” and a “How.” The “what” is often determined by legal agreements between financial services entities or defined in legislation or regulation. The “what” encompasses many of the decisions and guidance about financial data rights, determinations about what constitutes derived data and the way different entities and roles within data sharing are regulated. 

With this in mind, FDX is working hard to accomplish the “how” but much of the “what” remains to be determined in the US and Canada. We still have a lot of innings to play!

How would you describe the current regulatory environment in the US and Canada when it comes to fintech?

I need to start by saying that as a technical standards body, FDX is currently barred from taking positions on most legislative and regulatory policy issues. FDX works to educate policymakers and regulators on its standards, and we do advocate for market-led technical standards, but we generally stick with the technical “How” work as I stated earlier.

With that said, my general view is that both countries, and frankly, most of the world, are stuck trying to fit old financial laws and regulations around new and innovative financial firms. These legacy regulatory structures can cover many of the activities of fintech firms, and bilateral agreements with regulated financial institutions can in fact extend the spirit of regulation to fintech firms, but it just doesn’t work very well.

All to say, I think you would be hard pressed to find anyone in the Open Banking and Open Finance ecosystem that doesn’t think that some regulatory clarity and modernisation would be beneficial. 

What are the challenges to overcome before US and Canada can implement Open Banking? When Open Banking is implemented, will it be driven by regulation, market innovation, or both? 

As I mentioned earlier, in a lot of ways the US and Canada both already have robust Open Banking or Open Finance in place. I can go to an app store today and start using my own financial data with many apps that help me budget, better my credit score, allow me to get a loan, give me the ability to make payments, show me all my accounts in one place, compare services and fees, etc. In addition, and thanks to FDX, both countries have a robust industry developed and common API standard in place that provides interoperability across the spectrum of financial institutions, fintechs, and intermediaries.

On the other hand, neither country has a fully defined regulatory structure called “open banking” yet. I think that will soon change in both countries as I expect to see proposed rules from the CFPB in the US and some implementation of the Canadian Advisory Committee on Open Banking’s final report in the next 12 months. The remaining challenge will be arriving at rules and regulations that properly balance the government and market roles so that the rules are clear and yet also allow the market, innovation, and competition to continue to thrive.

Ultimately, when we look back in 5 years or so, I think that both the US and Canada will end up with hybrid Open Finance systems. I also think those countries that have started with mostly regulatory Open Banking approaches will also end up with hybrid frameworks in the future.

What challenges does Open Banking present to banks in these markets?

I often get some form of this question and it usually seeks to define a “Banks vs Fintechs” type narrative. However, I truly believe Open Banking and Open Finance are a high tide that lifts all boats. Of course, banks and financial institutions are the legacy financial services providers in both Canada and the US, so adapting to a competitive landscape that increasingly includes a diversity of providers and where consumers demand choice in financial services can be challenging. However, banks have decades, if not centuries, of consumer trust built up that they can leverage in Open Banking. Further, there is not a rule that says a fintech app must be provided by a third party. In this, I think we will increasingly see banks providing fintech type services to customers and/or providing and easy app-store like interface for their customers to use with their data.

Read the second part of the interview for key insights on data sharing, consumer education, and the agenda for the future of Open Banking in the US and Canada.

About Tom Carpenter

Tom serves as the Director of Public Affairs and Marketing for the Financial Data Exchange (FDX) where he leads the organisation’s communications, thought leadership and brand development among financial industry stakeholders, policymakers, and the media. Prior to FDX, Carpenter spent almost two decades developing and advocating complex public policy in Washington – beginning as a legislative aide in Congress and then as federal lobbyist and senior government affairs executive managing legislative advocacy campaigns and policy brands for clients from Fortune 500s and trade associations to startups. 

About FDX

Financial Data Exchange, LLC is a non-profit organisation dedicated to unifying the financial industry around a common, interoperable, royalty-free standard for secure and convenient consumer and business access to financial data. FDX empowers users through its commitment to the development, growth, and industry-wide adoption of its API, according to the principles of control, access, transparency, traceability, and security. Membership is open to financial institutions, fintech companies, and other industry stakeholders.