The MoneyPot
Welcome to The Moneypot, the podcast from Money20/20.
Money Changed. Know more!
The MoneyPot
AFC Series: Open Finance Showdown: Suits, Countersuits, and the Future of Financial Data
Open Banking has become one of the most significant regulatory challenges of the last decade, with global implications for both financial services and consumers. As financial institutions and consumers navigate the evolving landscape of data sharing, the U.S. has recently introduced new regulations that may reshape the future of financial innovation. In this episode, we explore the launch of the Consumer Financial Protection Bureau's Final Rule for Open Banking, its mixed reception, and the lawsuits that followed its finalization.
Hosts: Rachel Morrissey, Money20/20 US
Phil Goldfeder, CEO, American Fintech Council
Guest: Alexandra Barrage, Partner, Troutman Pepper Locke
Follow us on LinkedIn
Welcome to the Money Pot. My name is Rachel Morrissey, I am here on the podcast from Money 2020, and we are doing a special series with the American FinTech Council around all of the very quick changes and difficulties around issues or opportunities, around issues happening in the fintech policy world, and joining me as my co-host for these is Phil Goldfeder. He is the CEO of the American Fintech Council. So, hi, phil, how are you doing?
Phil Goldfeder:Great, so great to be here with you again, rachel.
Rachel Morrissey:It's good to be with you and here. Our guest today is Alexandra Steinberg-Barrage, and I want to make sure I got Steinberg right and I didn't say the wrong. Give it the wrong pronunciation, so and she is a partner at Troutman Pepperlock and we are here to talk about open finance, the suits, the counter suits and the future of financial data. So let's throw it to you, Phil, why don't you go ahead with the first question?
Phil Goldfeder:Yeah, I'm really excited to be here with you, rachel, but Alex is really the leading expert on the subject. I've been following her for months and really just excited to have this conversation and really put it out for the world to see some of the expertise that have been leading from the front line. So, alex, we're going to jump right in. You know, open finance, open banking, has been a hot topic for quite some time. Specifically, as we all know, the CFPB worked on this issue for a long, long time, many, many, many more years than just, I think, the one year that people were focusing on it. Meanwhile, if you look overseas in the UK and the EU, many other jurisdictions are way ahead and have moved forward with formal open finance regulation frameworks. What do you think took the CFPB so long? And, once they put it out, tell me about how you thought in terms of the way you wanted to flavor the response and where the law needed to end up in the US.
Alexandra Barrage:So thanks very much, phil, and thank you, rachel, for inviting me on the pod. I love these questions, especially around consumer regulation. I'm a bank former bank regulator and core bank regulatory attorney, but I do see so many crossover issues on 1033 and other consumer reg issues that have significant impacts on my practice. So I think that your question, phil, is interesting and I, as a lawyer, will want to take just a moment to step back and think about the terms you used the term open finance and the term open banking. For a lot of people, this is interchangeable, these two ideas. For some, it's actually very different. So I want to talk about it in the general sense of open banking and I don't want to get overly technical about this, but I would say if you understand the differences in these terms, it helps you then understand more broadly the context within which these frameworks have grown up across the world. So when we think about open finance, that is really a broader concept to me than open banking. Open finance is focused on data sharing between banks and literally any other third party right that could be data aggregators, could be insurance companies, could be non-bank lenders just a much wider universe. To me, open banking is something more specific. It's really about improving consumer choice, convenience, making it easier for consumers to share their financial data with financial institutions in our construct, primarily banks and so when you kind of understand those differences and you look at, okay, what's special about open banking?
Alexandra Barrage:If we were to step back and look at open banking frameworks across the world, we would see basically three things. The first thing is how are we going to standardize the data? We want the data in the same format. We want protocols for easy sharing. We want to create rules to resolve conflicts between participants. That's definitely one theme. Another theme is around consumer safety and consent and disclosure. So a lot of open banking frameworks focus on protecting consumers from bad actors and ensuring consumers have a say around who can access their data. And then the third element that's common to open banking frameworks is data access. So we want to set limitations on who has access to data and how third parties use and save that data after they have permission.
Alexandra Barrage:So then you step back and you're like, okay, what has the US done and what has the rest of the world done? You're like, okay, what has the US done? What has the rest of the world done? And certainly the US, you could say credibly has been at the tail end of this open finance, open banking kind of chronology. But at the same time, we can't be making apples to apples comparisons on these frameworks, right? So you know, one way to think about the evolution of these frameworks is to start with what Europe has done.
Alexandra Barrage:You know, the first real regulatory development we saw in Europe was back in 2015, so literally 10 years ago, when the European Parliament adopted a payment services directive that was known as PSD2. That was not a regulation. That was basically a directive that required member countries in the EU to develop their own rules, which they have, and essentially this was kind of like the first effort at open banking. There were definitions in the PSD2 directive obligations for market participants and so on. The PSD2 directive, obligations for market participants and so on. Some of the friction, I think, across the world has just been banks in general being slow to agree to the technical specs for how they share customer data. That's a theme that we see even today, with the 1033 final rule Following the EU over the next six to seven years, other countries enacted laws and regulations, such as Australia and also the UK, than the US have.
Alexandra Barrage:So we should just like give ourselves a little bit of credit that we even got a final rule done, because, you know, we have something like upwards of 5000 banks and the UK and the EU have a significant fraction of that. But the UK, you know the UK has a similar framework that is called that's under the financial conduct authority and competition markets regulator, and so these things have been happening in parallel. What has taken us so long here, right apart from the fact that we have a significant number of banks in our jurisdiction, we have thousands of banks and hundreds of fintechs based in the us of banks and hundreds of fintechs based in the US I think part of the reason is just our framework is different. Some people look to Dodd-Frank Section 1033, as the basis for open banking.
Alexandra Barrage:I think a lot of banks would take issue with that. They would say, well, 1033 really wasn't just about open banking. It was really more about how you share data with consumers. So where do we land on? This Terminology is different. Concepts and principles might be the same. We are where we are in the United States and then query how far are we? Because, of course, 1033, the day that it was announced, the day that former director Roetropa gave a speech at Philly FinTech that same afternoon. There was a lawsuit, so I'll pause there.
Rachel Morrissey:And I've said a lot, but I'm glad that you differentiated that, because open finance is about a much different picture than open banking is, and the other part about the vastness of the American market. As far as banks go. You said 5,000, and there were 5,000 banks, but there's over 10,000 depository institutions in the United States. There's like 180 plus in the UK and across Europe. It's far less than the system in the US, and then the differentiation between those institutions is even greater. The array of the types of institutions there are that would need to be participants or could be participants in open banking is really different. One thing we've always talked about is that the US took a very market-driven approach, so it wasn't as if Rule 1033 made it, so open banking was suddenly a thrust upon everybody. There's plenty of American organizations that have implemented APIs in the infrastructure for open banking, but it's just now we have this framework that is being challenged and I'm really I appreciate that you've set that up.
Rachel Morrissey:So, if we focus in on what the CFPB has decided, you know when they closed Rule 1033, they came to our show immediately after the Philly FinTech one. I think the Philly FinTech was Tuesday, and then they were on our stages on Sunday put in and, you know, filed, and there was already discussion about the nature of what was going to happen there, and so it all happened very fast. So if we look back at the CFPB's process, I think we can look a little bit about the proposed rule and that process towards the end where the finalized rule, and when they closed their proposed rule, before they reviewed them, they had 11,000 submissions representing all the different aspects of the financial services industry. Many other stakeholder groups had also submitted and I'm sure you reviewed your fair share of the comments. So where did you find to be the general themes? What were the general themes of the comments, and were there any surprises on the perspectives that you didn't expect to see?
Alexandra Barrage:Yeah. So look, I love really reading comment letters. I'm a big nerd, but I also think comment letters are a really unique window into the industry and a voice that you don't hear unless you read them. I mean, you can read speeches from regulators, but it's really not the same. Comment letters in general go into a lot more depth because the best ones are reacting specifically to questions raised by any regulator. So there's some rigor to the process around comment letters, I think, if you're doing it correctly. Anyway, so I didn't read all 11,000 letters, to be fair, but I'll tell you I think I have a unique. No, I hope hopefully the one person didn't have to do that. Clearly, there's a lot of repetition and we'll talk about how they look thematically and I'll tell you, as a banking lawyer, a few of the things that really stood out for me that are still real. Issue that I actually think whoever takes over at the at the CFPB and I assume that will be Jonathan McKernan over at the CFPB, and I assume that will be Jonathan McKernan this will be an area of focus. So I think a lot of the issues that I remember reading were ones that I had anticipated just after reading the proposal. I'll focus on two issues.
Alexandra Barrage:One really interesting issue that comes out in a few of the letters and some of the regulatory statements is this idea of consumer choice, right. So one of the themes of this whole effort around open banking is for consumers to be able to pre-permission the data sharing and, to quote, be able to break up with their bank the data sharing and, to quote, be able to break up with their bank, right. And that's, from a consumer choice perspective, a really compelling idea. But there's another side to that idea of consumer choice if you're a bank, right. And so just remember back to SVB and those failures. Just remember back to SVB and those failures. And when we think about how sticky deposits really are, we have these rules. One of them is called LCR. We have other liquidity-based rules that basically try to help banks manage their liquidity risk in all these different scenarios, and they have certain outflow assumptions they need to make. And you know, post SVB, these assumptions around who's going to leave the bank and how quickly can they leave were really turned on their heads, right, because we saw massive deposit flight on a single day, something upwards of like I forget, I think it was like 40 billion, it was maybe 45, 60. I can't remember the number. I think it was like 40 billion. It was maybe 45, 60. I can't remember the number.
Alexandra Barrage:If you have a framework that not only envisions that but encourages, you know, customers going to the bank that makes the most sense for their relationship, easily Right Pre-permission what does that mean for deposit stickiness? What does that mean for banks who are going to have to navigate the liquidity risks in that world? That's not really a comment on 1033. That's a broader comment on how are banks going to adapt to this. You can imagine an AI agent basically being programmed by a customer who say look, if the bank within a 50 mile radius of my house has a yield of X plus in certain number of basis points that I pre-permission the sharing of my customer data and the movement of my account the bank doesn't know anything about that, but that's the world we're headed into, this world of driverless money, and so I think one of the interesting takeaways from 1033 is how are banks going to manage that? There's a lot of stuff in the letters around increased account portability and making it easier for customers to move to different relationships, including involving fintechs, and so I think that's just a really interesting issue to think about In terms of the real substantive issue that you saw across many of these comma letters.
Alexandra Barrage:It comes down to liability and concerns that the proposal and frankly, also the final rule, which didn't really differ too much in this regard that it doesn't appropriately address allocation of liability among the different participants in the event there's fraud or breach or stolen credentials and banks are on record about being very concerned about this right In each of these you know cases of bad actors.
Alexandra Barrage:Whether you're a data provider or you're a third party or you're a data aggregator, you still would be required to comply with whatever respective legal obligations you have under state and federal law If you're a data provider. If you're a data provider, that would likely include regulation E and Z. But it's less clear for banks exactly where the liability begins and ends, and that lack of clarity is, I think, one of the key reasons so many banks were against this proposal and, of course, ultimately they wound up litigating it within hours of its issuance. So if I were to pick one thing that I expected and that is common, it is this liability the lack of granular detail on how the liability gets apportioned across this broad ecosystem.
Phil Goldfeder:So I love that you said that when you started to answer to this question.
Phil Goldfeder:In terms of open banking, CFPB's proposal per the director at the time was really about consumer choice and portability and making sure you're building a lot of competition into the market.
Phil Goldfeder:I think you know, obviously there was a lot of differing opinions on sort of the best way to do it and there's a bit of uncertainty, but I think what was fascinating was the pace at which the response came and, as Rachel mentioned earlier, I happened to have been at the Philly Fed when it all went down, I think, as many of us were, but that Sunday Director Chopra was actually at Money 2020.
Phil Goldfeder:And again, same day as CFPB issued the rule, BPI and the Kentucky Bankers Association filed suit, the director was asked on the stage was what do you think about the lawsuit? And I think his direct quote was I haven't read their lawsuit and they clearly haven't read my rule, and so obviously there's a lot of gamesmanship where, you know, the American FinTech Council is a trade association as well, and so we look at various rules and how it impacts our members and you know, obviously you know legal option is always an option in terms of how do you combat to best protect your members and, most importantly, protect their consumers? How do you think and I know we're going to get into the politics how do you think the litigation potentially impacts sort of what the ultimate result is with 1033 and open banking?
Alexandra Barrage:I think the litigation is a very clear marker for where a huge swath of this industry is right the banks, especially the largest banks and I think it's an important marker. I think, personally, there've been a number of instances in the prior administration where the CFPB acted outside of its jurisdiction. That said, I think 1033, in the spirit of 1033, is correct. I'm not, don't misunderstand. I think it's a really important development and so to me, the lawsuit was like the line in the sand. We wrote about it, we sent you comment letters about it, we really, really mean it and frankly, I'm sympathetic to the bank's arguments and I think that where this should land and where I hope it lands under, I assume, future director McKernan is that you know we take a step back. We ask ourselves what, within this rule, was in that CFPB statutory authority, and that's going to be done across the board, not just with 1033.
Alexandra Barrage:We engage with the banks on their liability issues, and that's just one issue. There are other issues, but to me that is like probably the biggest one that impacts the most number of. That is like probably the biggest one that impacts the most number of entities in this, in this ecosystem, and we we get smarter about how to apportion it and we have more engagement on it, and I'm hopeful that with that engagement and new leadership we will get there. Would we have gotten there in the absence of a lawsuit? I don't know, maybe, but you know, that's a really important process that lays out all the concerns and all the arguments in a different way and, um, at the same time, I think, is an opportunity to have a new conversation with a new administration about the concerns. So, um, that's as much as I can imagine, kind of where we're sitting today. I don't think 1033 is going away. There's too much in it. That's actually, I think, good, but some stuff that needs some calibration, I think.
Rachel Morrissey:So I'm curious about this a little bit, because I totally understand the sympathy with the banks and what the bank's position is. At the same time, I don't feel like the CFPB acted rashly or acted overly fast. They took quite a bit of time to consider this and they did pull in a lot. So I'm curious. Pull in a lot, so I'm curious. I haven't seen that be a big factor in the realities.
Rachel Morrissey:As these things were implemented in other countries, as they took on rules the UK, for example they made their rule. It only ended up applying to their nine biggest institutions you didn't see a lot of account movement between the banks because there was, frankly, not a lot of differentiation or market differentiation between the ones that it was implemented in, between the ones that it was implemented in, and so this idea that bank choice leads to this flurry of movement there's not a lot of examples of it in the reality. Theoretically, it definitely allows for it. I've never seen it happen in any of the markets where it's been implemented. So I'm curious about that as well. What do you think that? How much of this is the banks fighting against something theoretical or something that they just feel is loosey-goosey, for lack of a better legal term and how much of it is based in something else. And what do you think from 1033 should stand?
Alexandra Barrage:Sure, those are great. Let me take them in order. I think in general, there wasn't a whole lot of change between the proposed and the final, with a few exceptions that I think are worth changing. Definitely, the CFPB heard the industry on having longer implementation timeframes. That should absolutely be kept, especially for some of the smaller banks that frankly, don't have or haven't had the resources to implement what they will need to, and there's also a threshold that was put into the final rule. So it's not as if the CFPB didn't hear comments and react. I don't mean to suggest that.
Alexandra Barrage:I also agree with you that on the concept of bank choice, even though that was the tagline in the release, it hasn't borne out, at least historically. However, I think we also need to be thinking about money movement in a much more future state world where we have AI, where we have the technology that basically facilitates that movement a lot easier, like in SVB. It almost seems like prehistoric, but we had apps that allowed people to do this very easily. Those apps are going to look like ancient compared to what I think we're going to see just over the next three to five years, and it's going to be a world where you don't actually, as a human being, have to do it at the time. You just pre-program some other app or AI agent or whatever to do it for you upon certain conditions, and so maybe that's the reason we haven't really seen the money movement.
Alexandra Barrage:Or it could just be people have been happy with their banks and there's been so much competition that there would be no reason to leave one bank for another. That's that's an entirely plausible, you know, reason for why we haven't seen that money movement. So I think that I would say the jury is out on that. Let's see how tech develops over the next several years and revisit your question years. And revisit your question maybe on a future podcast, because I think that that will change and the pace of that change is really hard for me to predict, so I don't know how much time.
Phil Goldfeder:I think we have a few minutes left, but I think, we would be remiss if we didn't jump, maybe, into the.
Phil Goldfeder:Obviously there's been a huge political shift since the rule was finalized. So you talked for a bit about the court case. But what does this administration do? I mean there's been a huge political shift since the rule was finalized, so you talked for a bit about the court case. But what does this administration do? I mean there's a lot of talk about rules that are getting Congressional Review Act, cra, and sort of. There's a conversation in both houses of, in both sides of that of Congress and the House and the Senate, about sort of what to do with this one and how to manage it. What do you think happens and how do you think that plays out?
Alexandra Barrage:Yeah. So this is a hard one because you know we don't want to get ahead of leadership that hasn't been confirmed yet, so it's going to take a couple of assumptions, but but I'm going to assume, as I said earlier, jonathan McKernan will have the votes to be confirmed. I worked with Jonathan a little bit and I think he's going to be a terrific leader for the CFPB. He's very focused on making sure agencies act within their statutory authority. That certainly was the case when he was a member of the board at the FDIC. I don't know what his policy priorities are going to be or what the agenda will be once he steps in, but, knowing a little bit about him, I think he will first look at every rule, including 1033, and look at, you know, is there statutory authority for the CFPP to do this?
Alexandra Barrage:And second, is this rule really reflective of what we started out with? Is this really open banking or does this rule just fail to address some critical elements around liability and security? Does it? Does it fall short, maybe, of other models that have been successful in other jurisdictions? How about we think about that? So I I know a lot of folks think that the CFPB is going to do absolutely nothing that the CFPB and its new leadership will take a close look at, kind of where we are current state on this rule and whether there is a path to get large swaths of the industry, primarily banks, on board. If that's the direction the CFPB takes, kind of an openness to rethinking the rule, that will involve a lot of stakeholder dialogue and time and we might see a reproposal of the rule in that instance. But alternatively maybe it goes nowhere. I think I'm more hopeful than not that we'll have some new version of it. But again, don't hold me to that. That's just. Those are my own thoughts.
Rachel Morrissey:Fair enough. Okay, there was one thing that I was thinking about here. With the new administration in the future of the CFPB has been put into question a lot. They have the new leader coming in. You've already said you're pretty hopeful. Do you think that that center will hold? Is, I guess, what I'm asking.
Alexandra Barrage:I think the focus of the CFPB will be on looking at rules, either getting rid of them or fine-tuning them. I think whoever the rule writers are the CFPB historically that stuff they will be really important to whatever version of the CFPB will occur. Enforcement and supervision is not as important in this new CFPB. That's not to say they're unimportant. I just don't see the emphasis there, and we've already seen a number of instances where enforcement actions have either been withdrawn or dropped. Not even speaking about other regulators, just talking specifically to the CFPB. So those are the signs that I'm reading Regulators just talking specifically to the CFPB. So those are the signs that I'm reading. If I'm right that rulemaking and rule revisiting will be a priority, then then we may see some movement here.
Rachel Morrissey:It's just there's so many questions and they range from all the way from quite I don't. I don't want to really characterize them as hopeful or not hopeful, because a lot of people have a lot of different hopes for a lot of different outcomes, but they're very wide in their perspective of what they hope happens and everything seems to be on the table.
Alexandra Barrage:Yeah, there's another element to your question. I'm sorry, I didn't mean to interrupt you. Your question just reminded me of something really important, which is that we can think about the CFPB just as its own thing, or we can step back and think about consumer regulation in the patchwork of states and the CFPB right and in a world where the CFPB does nothing and there's a void. We're already seeing states like going full steam ahead on earned wage access. I mean, phil's the expert on that. That principle, that dynamic, is not limited to ewa, nor is it limited to opting out of dinmica or all these other things the states have been, you know, doing so it's a whole nother podcast we, it's a whole podcast.
Alexandra Barrage:but the point is like, if the cfpb does absolutely nothing, which is not my view of the world or my hope for the CFPB we have much bigger problems.
Phil Goldfeder:I absolutely agree. In the absence or perceived absence of regulatory structure at the federal level, you're going to find banking regulators and state attorneys general who are going to step in to try and fill that void as aggressively as they determine they need to for their one specific state, which is going to put the industry in a whole different level of turmoil.
Rachel Morrissey:I guess that's actually what I was getting at is. I was like I was wondering, like, because there is so much question around the nature of the CFPB itself and the nature of federal versus state, the nature of federal versus state, I just I'm really curious as to where this is going to go and where the industry is going to actually prefer the, or will they actually prefer the clarity of one, whether they like all of the constraints or not, or will they prefer the other side, which has a lot less clarity but perhaps has a lot more leeway state to state? And so you just yeah, phil is shaking his head at me like going no, they want clarity. And I'm like, okay, fair enough.
Alexandra Barrage:I agree with Phil Fair enough. You want to build, you want to scale. You need to know what the rules of the road are. You need to know that they're of the road are. You need to know that they're the same well.
Rachel Morrissey:Thank you so much for joining us on the podcast today. That's all the time that we have. It's my pleasure, it's a lot of fun it looks like we're gonna have to have like three more uh to really dig into all of the different elements that we ended up and all the questions we ended up asking here. Um, so I really appreciate you joining us and, phil, we're so glad that you were able to co-host with me. I appreciate it.
Phil Goldfeder:Are you kidding? We're just forever grateful for our partnership with Money 2020 and you, rachel, so thank you.
Rachel Morrissey:We're so glad to have you guys. So that's it for this episode of the Money Pod. Please go ahead and find us wherever you listen to your podcasts. Please leave us a review. It helps other people find us, and we look forward to continuing these conversations in the next short while. Have a great one.
