Will open banking become another wedge putting distance between the nation’s largest banks and most community banks? We already have a bifurcated banking system in this country, with some banks deemed too-big-to-fail and others too-small-to-save. Think of the big three that failed in early 2023, compared to the Oct. 21 failure of First National Bank of Lindsay, Okla., where some depositors won’t get all of their money back.
Purportedly in the name of more competition, the Consumer Financial Protection Bureau has finalized its open banking rule, known as Section 1033 of the Dodd-Frank Act. It gives consumers free access to the data collected by their financial institution. It also requires banks and credit card companies to share such data with fintechs and other third parties. The rule, which was finalized on Oct. 22, includes a surprise exemption for banks with assets of less than $850 million. All others are required to comply with a phased implementation schedule, beginning with the largest banks, which face an April 2026 deadline.
I am a fan of the exemption for smaller banks, but I worry that it will exacerbate differences between small and large banks. Customers at smaller banks might want the kind of access to their data that 1033 promises. Accepting the deposit insurance limitations of a small bank in comparison to the safety of the BofA branch, a community bank customer might find technical limitations around info sharing to be the last straw and actually move their business.
This is not an argument for applying 1033 to all banks, but why mandate open banking at all? It is one thing to simply allow banks to adopt it if they choose, but it is quite another to require a group of banks to offer it. Smaller banks will inevitably find themselves in the disadvantaged group.
Something that is drawing all banks together is concern over fraud, which is rampant these days. Banks subject to 1033 have complained loudly about the security risks posed by data sharing with fintechs, most of which are less disciplined in handling such info than banks. Rohit Chopra, CFPB director, has downplayed the security issues, claiming they are worth accepting in light of the benefits of the competition he says open banking will create. I am skeptical of that claim; certainly within the banking industry 1033 tips the scales away from community banks to the detriment of consumers who prefer a bank offering the kind of personal service unique to community banks.