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In a December 20th article titled, “Without Open Banking regulation, banks and fintechs clash in the US” (*), we get a taste of the first issues that are arising in the U.S. of trying to work in a somewhat open banking space without regulation. One of the issues mentioned in the article relates to aggregators in the U.S. being blocked by banks that are upgrading their security features from accessing account holder data. This is, in turn, preventing fintechs from delivering services that use these aggregators to obtain data from the banks of which the account holders have granted these fintechs permission to do so. Account holders are now upset with the banks for making these security changes. But the question that is coming to the forefront in the U.S. is who actually owns client data? The banks or the customers themselves? As there is no regulation in the U.S. yet to determine this, it is unclear. In the United Kingdom this is clearly stated under open banking regulation.
It has long been debated if regulation is truly needed with many out there that still believe that it is not needed. The U.S. is the one country that needs regulation more than any other. Why? Because the U.S. is more divided and geographically challenged than any other country in the world.
(*) Reference - https://econsultancy.com/without-open-banking-regulation-banks-and-fintechs-clash-in-the-us/
Geographical Challenges of the U.S.
Let’s go on a quick trip of the U.S.
To put this in numerical perspective:
In comparison to other “open banking” countries:
Distance is certainly relevant when trying to bring the three key players together on such an important movement.
U.S. Regulators (*)
To add more complexity to the U.S., they have, as we know, 52 states which have independent laws and regulations. Having said this, the financial sector in the 52 states must follow federal and/or state regulations.
The federal regulations are divided into 5 regulators:
At state level, each state has an office(s) or agencies that are charged with supervising and regulating state-chartered banks and thrifts.
*Reference - https://www.frbsf.org/education/publications/doctor-econ/2006/november/commercial-banks-regulation/
What does the Above Tell Us?
Taking into consideration the geographical and regulatory challenges in the U.S., it is very unlikely that the entire U.S. will be able to adopt open banking without a single open banking regulation that clearly stipulates the core structures that were implemented in other open banking countries:
This is, unless, each state or a small number of states create an alliance in which they share the above bullet points and begin to influence other states. This, in turn, may create the use cases necessary to convince other jurisdictions and financial institutions to follow suit, but it will take time.
Risks
The risks that may exist in the U.S., as collaborative innovation continues and banks as well as fintechs realise and jump on the “open” movement, are:
(*) Reference - https://www.theverge.com/ad/16774328/american-checks-currency
Opportunities
The U.S. has a population of over 329.45 million, according to the 2019 census. This makes the U.S. a formidable market not only for fintechs but also for financial institutions if they can adopt open banking. With the U.S. having one of the most active retail markets in the world with e-commerce sales alone totalling USD 154,543 million per quarter in 2019 which is approximately 8.9% of overall retail sales valued at over USD 5 trillion, there are certainly opportunities for new products and services to leverage these numbers.
With a growing trend in e-commerce sales brought on by millennials and simply convenience (7,4% in 2015 versus 8.9% in 2018), this is where we may see fintechs realise the opportunity of open banking to facilitate payment products and services not to mention a mobile phone penetration of 103%.
Summary
The U.S. has always faced challenges in the adoption of global payment services in the financial sector as mentioned above. But will consumers finally push banks and regulators into open banking due to the unstoppable force of innovation? With global travel becoming more appealing to US residents and with some of the largest fintech firms based in the US jumping on the “open” movement, it seems that this may finally be the push needed. Like other countries with large populations, the US is certainly an appealing commercial venture, but its main hurdle is simply all of the red tape and geographical challenges surrounding it.
While some independent efforts are on the way within the US, it will be interesting to see what the actual trigger will be that will cause the US to adopt open banking.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Nikunj Gundaniya Product manager at Digipay.guru
11 October
Priyam Ganguly Data Analyst at Hanwha Q cells America Inc
Fang Yu Co-Founder and Chief Product Officer at DataVisor
09 October
Alexander Boehm Chief Executive Officer at PayRate42
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