United States confronts open banking

United States confronts open banking

We analyze the Treasury Department's report on the financial system's openness to the fintech ecosystem and innovation.

01 Oct. 2019

Open banking is gaining strength and there can be no delays in regulating it. After the PSD2 came into operation in the European Union,  CMA Open Banking in the UK,  HKMA in Hong Kong and other initiatives in Australia, Japan and Brazil, it is now the United States' turn. But how does the country say it wants to move forward?

Last August, the American Treasury Department published a report aimed to promote innovation in the areas of loans, payments and wealth management, which also sets the limits for managing open banking. 

The United States currently lacks a law on open banking but the market has pushed the accelerator and the Treasury has been obliged to outline initial recommendations, in the form of broad guidelines, to define general aspects of this model, such as the responsible use of consumers' financial data, the generation of a regulatory environment that encourages innovation and prevents fragmentation, updates legislation for a large number of products and activities and creates test beds (sandboxes) to innovate. The Treasury also wants to update the regulation in terms of loans, payments and financial planning to make it easier for fintechs to enter the scene.

And here is where the example of Europe fits in. In addition to the European model's success, the British experience has also shown the benefits of working together to achieve a system that protects consumers and small businesses while promoting their financial well-being, promoting innovation and benefiting financial institutions.

In particular, the US Administration recommends that the market should move away from screen scraping to, instead, use more secure APIs. However, the United States has neither established nor agreed standards on these interfaces. Hence the important work of NACHA, the electronic payment association, and its cooperation with the industry to develop standards and best practices.

A good first step is to create APIs, developer platforms and smart ecosystems for income distribution. The report predicts banks will have a competitive advantage as promoters and innovators in this area, which is an important role in this new era. Those banks that take the initiative will be better positioned to compete against the technological giants that will be incorporated into the financial services segment.

In addition, and although the Treasury Department does not require banks to open up through APIs, it does recommend that regulators remove the legal and regulatory uncertainties that are "preventing financial services companies and data aggregators from entering into agreements to migrate from screen scraping to more secure and efficient API-based data-sharing methodologies."

To date, US entities have been reluctant to open up to fintechs for security and regulatory issues, but the need to compete can compel them to adopt a secure model through APIs. Because despite its many benefits, it is true that open banking per se extends the perimeter of financial risks. In return, the Treasury recommends that banking regulators eliminate the ambiguity that discourages banks from adopting more secure data access methods, such as APIs.

BBVA is a pioneering example in the United States. Its subsidiary there launched the BBVA Open Platform project last October, through which it makes its APIs available to companies that, without being purely banking corporations, wish to enter the financial market. Therefore, the platform grants third parties access to services once they have passed strict security controls.

The most important challenge in the United States relates to security. The Government is working to coordinate state and federal regulators and sponsor them under a security firewall that guarantees inviolability. The Treasury is betting on its report because the solution comes from private companies, with the participation of federal and state regulators. And to find a way to lower costs. The report points to Cloud Computing, Artificial Intelligence and machine learning as keys that should accompany this process.

With 50 states, the country is concerned about aligning all its laws in order to not get caught up in regulatory failings In fact one of the Treasury report's most controversial recommendations is the call to the Consumer Financial Protection Bureau (CFPB), in which it expresses its concern about the need to oversee the federal regulation of each of the States, on the one hand, and, on the other, the possible restrictions on consumers' access to credit.

The bulk of loan proposals are concentrated in mortgage loans on mortgages, with a focus on improving customer experience as well as operations, thanks to advances such as automated appraisals. It urges working in line with the measures described by Ginni Mae (Government National Mortgage Association) in its Roadmap for 2020. In addition, the Treasury recommends developing uniform and practical rules for closing loans and mitigating losses.

Regarding data protection, the Treasury makes a number of suggestions on how to harmonize it throughout the country, which would allow the United States to catch up on the international level. Specifically, it is asking Congress to pass a law to require financial institutions to protect consumer data, an aspect in which it gives New York State as an example. In this respect, it proposes that organizations provide consumers with the means to revoke permission to share their data whenever they wish.

The text again asks the public and private sectors to work together, this time to create a trustworthy digital legal identity system, based on multiple authentication factors, for example biometrics and temporary PINs.

It also demands that specific regulations be updated for the wide range of activities and services provided by non-bank financial institutions many of which, it says, have become obsolete in light of new technology.

Well-founded open banking because there is no way to avoid open banking in the United States.

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