Massive Untapped Market Awaits Open Banking Amid Regulatory Limbo

Open banking is proving to be a work in progress, certainly on the regulatory front in the United States, and in terms of technical issues too. 

As PYMNTS reported in May, the ultimate fate of the so-called “open banking rule,” also named Section 1033, is unknown. The rule helps govern the ways in which banking customers permission their data to be shares with third parties, including FinTechs. The Consumer Financial Protection Bureau (CFPB), which is itself is in flux, reportedly could rework the rule, or ask for additional input from banks in reference to data sharing and liabilities tied to that data.

According to PYMNTS Intelligence data in “Consumer Sentiment About Open Banking Payments,” 46% of consumers would be “highly willing” to use open banking options for bill payments and financial services. But just 11% of U.S. consumers have used open banking payment options, which leaves 89% of a so-far untapped market.

The opportunity may be vast, but so are some of the challenges faced by providers. Instant payments are part of the open banking landscape, helping underpin consumer facing and B2B use cases. 

Joint research from PYMNTS Intelligence and The Clearing House reveals that there’s a wide disparity between banks that have moved to instant payments and those that have not. Large financial institutions (FIs) are six times more likely than their smaller counterparts to deploy real-time payments. 

That skews the 7 in 10 banks that have connected to real-time payment rails. We found that 74% of FIs with regional or national footprints allow individual consumers to send instant payments, versus just 44% of credit unions or local banks.

Of the small FIs that don’t offer real-time payments, 35% of them say that integration complexities are an impediment, while 23% of these banks cite costs of implementation as a concern. 

In a new report titled “Key Considerations for Open Finance,” the Bank of International Settlements’ Financial Stability Institute contends that open finance is part of the evolution of open banking, broadening the scope of customer-permissioned data sharing to include a wider array of financial products like investments and insurance. 

“Digital innovation does not change the fundamental premise of trust in money underpinned by central banks. But it does open vast new potential for the functioning of the monetary and financial system. Technological innovations hold the promise of improving existing financial services and enabling entirely new contracting possibilities,” the BIS detailed in a separate report, its annual economic assessment.

But there’s also risk tied to data exchange and regulatory demands. 

A cornerstone of an effective open finance framework is its technical infrastructure, per the open finance-focused writings. Among the recommendations of the BIS are a standardized application programming interfaces (APIs) and a common architecture, which are critical for broad participation, interoperability, cost reduction and data security standards. 

Enabling broad participation demands an infrastructure facilitating access for diverse financial service providers, potentially via reciprocity or mandated participation of large data holders. 

A significant challenge is preventing big player dominance by ensuring the framework’s technical underpinnings do not hinder competition. 

“Centralized and decentralized architectures can be considered, depending on priorities and market conditions,” noted the report.

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