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Consumers tend not to care how banks actually work. So it is unlikely many of them noticed a new rule on Tuesday making it easier to move personal data from one financial company to another — an innovation known as “open banking”. Banks and their lobbyists, though, care deeply.
The idea, which Britain introduced seven years ago, is that lenders must share data with rivals when a customer requests it. This initiative from the US Consumer Financial Protection Bureau is broadly helpful. Switching banks would become easier. Those with sparse credit records could invoke their transaction history to help get a loan.
Yet open banking is already turning into open warfare. The Consumer Bankers Association, a trade group, says the CFPB has overstepped its authority. JPMorgan Chase, the biggest US lender, describes the CFPB’s approach as “unconscionable”. The Bank Policy Institute filed a lawsuit challenging the rule within hours of its publication.
It does not help that CFPB head Rohit Chopra is pitching the initiative as a way for dissatisfied consumers to “fire” their banks. But opponents are right that there are wrinkles to be ironed out, such as exactly how the technology will work, and how millions of data transfers will be policed effectively. Lenders are also bristling at the CFPB’s refusal to let them charge fees to offset the cost of complying.
In Britain, open banking, marketed as a boost to competition, brought less teeth-gnashing. But then the US is a different beast. It has more than 4,000 banks, but four — JPMorgan, Bank of America, Wells Fargo and Citigroup — tower over the rest. JPMorgan’s assets are 3,500 times bigger than the median lender’s, according to Federal Reserve data.
Introduce more market forces, and odd things could happen. Customers might switch from big banks to smaller ones with better rates. They might defect from smaller banks to bigger ones with slicker services. Or they might do nothing. The average customer has been with their bank for 17 years, one survey found.
Banks have much to lose if customers get friskier. For example, US institutions collectively have about $4tn in non-interest bearing deposits. Imagine those earned just 1 per cent in interest — a quarter of what banks earn lending to each other overnight — and it would cost lenders $40bn, about a tenth of the industry’s total pre-tax profit, based on data collected by the Federal Deposit Insurance Corp.
The furious reaction of banks belies the more likely outcome, resembling what happened in Britain: some service improvements, but no drastic changes in market share. Resorting to the courts suggests banks are not taking any chances. If they get their way, the door to open banking may get unceremoniously slammed shut.