A Guide to Open Banking Regulations and Compliance

Open banking enables consumers to securely share their financial data with authorized third parties, and is aimed at promoting competition and innovation in the financial services industry. This results in a number of benefits, including increased control over personal financial data, improved access to customized financial products, and faster transactions. By increasing access to customer data, open banking levels the playing field for both large and small service providers, encouraging a greater focus on service and new ideas.

In October 2023, the Consumer Financial Protection Bureau (CFPB) recommended a new regulation to boost open banking adoption in the US. This suggestion, based on Section 10933 of the Dodd-Frank Act, is currently known as the “Proposed Rule” and would require financial institutions to make data available to consumers and authorized third parties upon request.

This change has the potential to be highly disruptive to the banking industry, creating new compliance challenges and sparking a drive for innovation. In such an environment, choosing the right technological solutions will be essential and organizations looking for a competitive advantage will need to turn to advanced systems for compliance management. Socure’s Account Intelligence (SAI) platform enables you to accelerate compliance with capabilities such as real-time account validation, ownership verification, and fraud prevention.

Read on to discover more about the proposed open banking regulations and learn the best ways to keep yourself agile and compliant.

What Are the CFPB’s Proposed Open Banking Regulations?

The CFPB Proposed Rule is a set of regulatory requirements impacting how financial institutions share data. Specifically, the law covers data providers. These include banks, credit unions, card issuers, and any other organization that controls or has data connected with financial products and services, such as checking accounts, credit cards, or digital wallets. Data providers that own or manage these types of products will be legally required to share consumer data upon request from an authorized third party.

These parties include the consumer who owns the data, as well as any organization or service provider that has been granted permission to make a request. The rule requires the businesses receiving the data to adhere to privacy and security standards to guarantee it’s protected.

As it stands, the proposed regulation would be implemented in phases, with larger financial institutions being required to be compliant sooner than smaller firms. The timetable currently allows:

• 6 months for large institutions with assets ≥ $500B or revenue ≥ $10B
• 1 year for medium-sized institutions with assets ≥ $50B or revenue < $10B
• 2.5 years for smaller institutions with assets ≥ $850M
• 4 years for smallest institutions with assets < $850M

The CFPB’s new open banking regulations will require that financial service providers get explicit consent from consumers before data can be shared. In addition, third parties are limited to collecting, using, and retaining data only so far as it is necessary to provide the requested services. However, more data being shared typically means increased security risks, so it will be crucial for all parties involved to implement rigorous data security measures to prevent breaches and unauthorized access.

What Are the Implications for Financial Institutions and Fintechs?

Let’s take a closer look at the potential effects the new open banking regulations will have on financial institutions and fintechs.

More Competition, More Innovation

Easier authorized access to consumer data will mean a lower barrier for entry to new players. This will place increased pressure on incumbents to lower prices and provide better services, accelerating their digital transformation, and triggering the adoption of new technologies.

Challenges For Banks

Banks, as the primary financial institutions, face a number of specific hurdles. First, they will need to invest in developing and maintaining secure APIs to enable data sharing with third parties. Additionally, there will be an expanded obligation to ensure compliance with data privacy and security regulations. Another consideration will be how to upgrade legacy systems that were not designed to support open banking. Finally, banks will have to confront the potential for loss of revenue due to the increased competition.

A Level Playing Field

With the new regime providing improved access to consumer data, less-established firms will be able to expand the range of services and financial products they can offer. This will mean increased opportunities to innovate and opens the door for partnerships and collaborations with larger institutions.

Data Access Fees Debate

While the regulation requires information to be shared, it does not prevent banks and larger institutions from charging access fees in exchange for the data. Whether data providers should be able to charge these fees is a subject of much controversy. While banks argue that fees are necessary to cover the costs of acquiring, managing, and maintaining the data, fintechs and consumer advocates claim they hinder competition and innovation. The question will no doubt continue to be fiercely debated until the proposed rule comes into effect.

Lessons Learned from the EU’s Open Banking Regulations

The Payment Services Directive 2 (PSD2) is a key EU regulation first introduced in 2015. Like the CFPB’s proposed rule, PSD2 was designed to promote open banking and competition and obliges banks to share consumer data with authorized third parties. It covers payment accounts and payment initiation services.

Banks and financial institutions learned some valuable lessons from their implementation of PSD2:

1. Clear guidelines and agreements on standards are essential to ensure interoperability.
2. Compatible methods for data sharing among different parties is necessary to ensure data security.
3. Strong customer authentication mechanisms are needed for organizations to ensure genuine consent has been provided.

Beyond that, EU financial firms ran into challenges reconciling innovation with consumer protection. Balancing compliance with both data sharing and data protection requirements created a pressing need for ongoing dialogue and collaboration among all stakeholders.

What Are the Key Differences Between US and EU Approaches to Open Banking Regulations?

Although the PSD2 is similar to the CFPB’s proposed rule, there are key differences to note.

The main differences are :

• The proposed US open banking regulations cover a broader range of financial products and services
• The US regulations place greater emphasis on consumer control and data privacy
• The EU regulations include payment initiation services in addition to account information services

The Role of Socure’s Account Intelligence in Open Banking Compliance

Socure’s Account Intelligence (SAI) can play a pivotal role in ensuring compliance with open banking regulations by offering advanced fraud prevention measures and real-time account validation.

SAI integrates with the Socure ID+ platform to enable single API access to identity verification and fraud prevention tools for increased verification and end-to-end coverage. This includes device and behavioral intelligence; Email, Phone, and Address RiskScores; Sigma First-Party, Third-Party, and Synthetic Fraud; CIP/KYC; Global Watchlist Screening with Monitoring; ID document verification and biometric facial matching; and more.

Through this integration, SAI draws upon Socure’s expertise in developing innovative and accurate identity verification and fraud detection solutions. Socure’s patented machine-learning platform offers seamless KYC and compliance, identity fraud detection, and bank account ownership validation.

SAI can specifically address different types of fraud, including:

• Identity Fraud: SAI verifies account ownership, ensuring the applicant or user is the rightful owner of the account. This helps prevent identity fraud where bad actors attempt to use stolen credentials to take over accounts.
• Synthetic Fraud: SAI’s integration with Socure ID+ allows customers to leverage Sigma Synthetic Fraud, which specifically detects complex synthetic identities.
• ACH Fraud: SAI can act as a risk signal to alert for potential authorized push payment (APP) scams on outbound ACH transactions by identifying when a consumer attempts to send funds to an account they do not own.

The integrated Socure ID+ platform taps into a vast consortium of feedback data from more than 2,400 customers mixed with 400+ curated data sources, using advanced machine learning to connect behavioral signals across the network. This enables a 360° view of a user’s identity for industry-leading accuracy in assessing fraud risk.

SAI even provides supplemental data coverage so that institutions can reach accounts of consumers banking and transacting outside traditional financial institutions. This more comprehensive service is especially critical for companies with diversity and inclusivity objectives aiming to include marginalized populations.

How SAI Helps with Nacha’s WEB Debit Rule Compliance

One of the key regulations impacting digital transactions is Nacha’s WEB Debit Rule — which states that “ACH Originators of WEB debit entries are required to use a ‘commercially reasonable fraudulent transaction detection system’ to screen WEB debits for fraud.” SAI helps ensure compliance with new regulation by enabling institutions to verify account existence and consumer authorization before processing ACH transactions, reducing the risk of unauthorized transactions and payment returns.

Managing Payment Return Risk with SAI

By providing insights into account status and ownership, SAI enables data-driven decisions on transaction processing and risk management. This puts organizations in a position to mitigate payment return risk, making it easier to distinguish good accounts from risky ones.

The End of Friction-Filled Permissions and Microdeposits

Standard verification processes, such as microdeposits, are slow and provide a poor-quality user experience. By contrast, SAI provides instant verification results that enable swifter customer onboarding. It delivers a frictionless experience that doesn’t compromise security by requesting logins or access to accounts. SAI also offers lower operational costs compared to legacy solutions.

Addressing Privacy and Security Concerns

Without strong privacy and security measures, financial institutions will find it challenging to maintain consumer trust and confidence in the new open banking ecosystem.

Socure’s Account Intelligence can address these concerns thanks to its superior data protection features and advanced security measures, such as tokenization and data obfuscation techniques. It adheres to industry standards and best practices, including compliance with the Gramm-Leach-Bliley Act (GLBA), ensuring the highest level of data protection. Smooth integration with Socure ID+ brings multi-layered identity verification and authentication along with real-time fraud detection and prevention capabilities.

The use of AI and machine learning presents exciting opportunities for enhancing privacy and security in open banking. By harnessing Socure’s patented AI and ML platform, SAI can continuously improve its risk assessment and decision-making processes. The AI-driven approach ensures accurate customer data matching, verifying that the account belongs to the actual customer in question, and reduces false positives and manual reviews. As AI and ML models become increasingly sophisticated, continuous refinement allows smarter decisions, preventing fraud losses and enhancing efficiency while maintaining a hassle-free user experience.

By leveraging these advanced technologies, financial institutions can confidently take on the challenges of protecting sensitive data while embracing the opportunities presented by open banking.

Looking Ahead: The Future of Open Banking in the US

As open banking continues to gain traction in the United States, the Consumer Financial Protection Bureau (CFPB) will likely consider expanding its mandate to encompass a broader range of financial products and services. This potential expansion could include loans, mortgages, and investments, providing consumers with even greater control over their financial data. Additionally, the CFPB may extend data sharing requirements to non-banking financial institutions, further leveling the playing field and stimulating competition in the financial sector.

Such an open banking landscape opens tantalizing new possibilities for innovative financial products and services. With access to comprehensive financial data, providers could offer personalized financial advice and wealth management solutions tailored to individual needs and goals. Instant credit decisioning and loan origination could become a reality, streamlining the borrowing process and improving access to credit for consumers. On top of that, open banking is expected to enable seamless cross-border payments and remittances, making international transactions more efficient and cost-effective.

To fully realize the potential of open banking, ongoing collaboration among key stakeholders is key. Regulators, financial institutions, and fintechs must engage in dialogue to address challenges, share insights, and drive progress. Developing industry-wide standards and best practices will be essential to ensure a consistent and secure open banking environment. Moreover, promoting a culture of innovation and customer focus will be integral to developing financial products and services that truly meet the rapidly changing needs of consumers.

Solutions like Socure’s Account Intelligence will play a central role in the future of open banking in the US. By enabling secure and compliant data sharing, these tools will build the digital trust that’s required for the development and adoption of new open banking use cases. They will help financial institutions and fintechs stay ahead of the regulatory curve, ensuring compliance with emerging standards and requirements. Importantly, such solutions will boost inclusive access to financial services, particularly for young consumers and new-to-country individuals, by providing a 10-20% incremental lift in coverage.

As the open banking landscape continues to develop, embracing innovation, collaboration, and a customer-first approach will be key to harnessing its full potential. With the right regulatory framework, technological solutions, and industry collaboration, open banking has the power to reshape the financial services sector, ultimately benefiting consumers and businesses alike.

Stay Informed In The New Open Banking World

The CFPB’s proposed open banking regulations are set to shake up the US financial services industry, requiring institutions to share customer data upon request. As the ecosystem grows, staying informed and adopting a proactive approach to compliance, security, and innovation will be the building blocks of success.

Assess the impact of new regulations on your business and consider leveraging solutions like Socure’s Account Intelligence to ensure secure and compliant data sharing, prevent fraud, and manage payment return risk.

To discuss your organization’s specific needs and objectives, reach out to our account verification experts to run a live trial of SAI. By partnering with trusted solution providers, you can confidently embrace the opportunities presented by open banking while overcoming the challenges of compliance and security.