Open Banking Proposal Raises More Questions Than Answers For CUs

In 2021, Jaime Dimon famously proclaimed his $3.9 trillion financial institution should be “scared sh*tless” of the fintechs. The recent proposal by the CFPB to “jump-start” open banking demonstrates how right he was.

In proposing that all credit unions and banks develop interfaces to facilitate the frictionless transfer of consumer account information to third parties, the CFPB is not so much jumpstarting a new banking framework as it is jumping on a train in which non-depository competitors have gradually taken away more and more of what was once considered core banking activity.

Regardless of what happens with the CFPB proposal, this trend became inevitable the day Apple introduced the iPhone and made it easy for consumers to download financial apps. With competition in this space only intensifying, there are several questions raised by the trend toward open banking, the answers to which have profound implications for every financial institution. Incidentally, this is not one of those lamentations that the credit union industry is dying. The environment in which all businesses operate evolves over time, and these changes represent opportunities as well as challenges, so long as they are not ignored.

In case you missed it, a little less than two weeks ago, the CFPB proposed a regulation mandating that all financial institutions implement technologies that allow third parties to access account information. These are very generally referred to as APIs. It is also hoping to facilitate the development of baseline technological standards for these applications by calling for the collaboration of stakeholders whose work would be certified by the CFPB.

On one level, this proposal does nothing more than facilitate a trend that is already taking place. For instance, for more than 10 years now, Plaid has specialized in helping companies like PayPal and Venmo connect their apps to consumer accounts. According to the CFPB’s own estimate, at least 100 million consumers have already authorized a third party to access their account data.

Against this backdrop, the key strategic question is, how does your credit union avoid remaining just a credit union? In the old days, the place where the consumer placed her money or the start-up business had its account was the only logical place to go when you wanted to get a loan for the business, a car loan or even a mortgage. Not anymore.

According to a 2019 report by the FDIC, the percentage of loans made by banks reached its zenith in 1974 at 62% and declined to 37%. This not only reflects regulatory flexibility for the activities in which non-depository institutions can engage, but also the increased dominance of fintechs like Rocket Mortgage. Today, the majority of mortgages are done by non-banks.

How do you avoid being nothing more or less than the institution that holds your members’ funds while other companies are the ones your members look to for help growing their money? If technology is a key component of your answer, should credit unions join together so that they can cost-effectively provide such services?

This proposal also raises safety and soundness concerns that go well beyond the scope of the CFPB’s specific proposal. As the services traditionally provided by banking institutions become more and more diversified, how do policymakers mitigate this risk? If we learned anything from the mortgage meltdown, it is that as more and more lending is done by non-bank entities, the risk of economic contagion spreads more quickly to the larger economy. Is it time to mandate that non-depository institutions take a more active role in risk mitigation? At what point should Apple contribute to the Share Insurance Fund, for example? Unless policymakers start making fintechs share the burden of safety and soundness, credit unions and banks will be less and less competitive while being responsible for protecting against the growing risk posed by financial integration.

Finally, who is going to pay for all of this? The Bureau has graciously proposed that credit unions of all sizes be prohibited from charging fees for consumers to provide information to third parties. I know of no other business where a party must go through the expense of providing a product (in this case, a consumer account) and has to give away that information free of charge so that competitors can cherry-pick from their work. This is particularly troubling in the case of smaller credit unions that already find it difficult to pay for cost-effective but efficient core processing services.

Unfortunately, there are no easy answers to these questions, but the greatest danger is not grappling with them. The good news is that just as it is going to be easier for competitors to introduce themselves to your members, it is going to be much easier for credit unions to do the same thing.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.