On July 9 2021, President Biden didn’t just throw a bone to US open banking, he underwrote the mortgage, laid the welcome mat, and set the table to officially welcome open banking to the neighbourhood. 

Yes, open banking is nothing new to the US. With numerous American unicorns storming out of the gates there is little doubt around the demand for open banking solutions across the pond. Yet, the glaring absence of a regulatory scaffold  to solidify these efforts has left many scratching their heads around where open banking would ultimately end up.

It appears that the journey has now been mapped out.

What was the purpose of Biden’s executive order?

Biden’s ‘Executive Order on Promoting Competition in the American Economy’ (the Order), is based on a very simple but important intuition that having competition is a fundamental ingredient of a healthy capitalist economy, explained Brian Deese, director of the National Economic Council under Biden.

“It’s what drives better outcomes, lower prices, higher wages, more innovation, more economic growth. The core goal of this Executive Order is to reset across the entire Executive Branch a focus on where and in what ways can we encourage healthy competition in service of achieving those outcomes.”

In conversation with Bloomberg, Deese flagged that the economy has seen a serious reduction in competition, and that in the US, a large number of industries are now more concentrated than they were 20 or 30 years ago. 

With the rate of new business formation falling by almost 50% since the 1970s, Deese continued that consumer choices have been constrained and the predicted “follow through benefit” that has historically been used to justify consolidation has not come to fruition in the form of lower prices for consumers.  

“In fact, if you aggregate up the impact of consolidation to an American household, in terms of prices, wages and other attendant costs, the best estimates are that its costing about $5,000 a year for a typical household. The goal of this Executive Order is to say ‘how can we get at that?’”

So, what does all of this have to do with open banking? 

We turned to Plaid’s head of policy, John Pitts, for a breakdown.

Pitts explains that the Order holds two key takeaways for open banking in the States. First, that it very clearly moves open finance into the mainstream of the US financial services conversation, positioning it as one of the Administration's top priorities. Second, that this Order symbolises the first time that open finance has been framed as a ‘competition’ issue in the US. 

Open banking as a top priority

In the Order itself, the President frames the data element around the policy obligation of enforcing antitrust laws, in order to meet challenges posed by new industries and technologies including the rise of dominant Internet platforms, especially as they stem from the aggregation of data.

The Order states that “The Director of the Consumer Financial Protection Bureau (CFPB), consistent with the pro-competition objectives stated in section 2021 of the Dodd-Frank Act, is encouraged to consider:

• Commencing or continuing a rulemaking under section 1033 of the Dodd-Frank Act to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products.”

While noting that it is essential to look at the language of the Order and acknowledge that this section reads as more of an “executive endorsement” rather than an Order per say, Pitts explains that it demonstrates that the administration is encouraging the CFPB, an independent agency, to move quickly on this point.

“When I say it [the Order] puts it at the centre of US financial services, it's a recognition that the rest of the world has embraced open banking, and, while the US has a lot of open finance, we don't yet have regulation around it. It's a confirmation that open finance is going to emerge as a matter of law in the US and every company that's involved in it should now set its expectations for that happening.”

Competition by mandate

Section 1033 was created way back in 2008 with the Dodd Frank Act, so as the WSJ puts it – the data proposal within Biden’s Order has been kicking around for some time. 

Despite this decade-long introduction, Pitts’ personal hypothesis around the CFPB’s timing is that we can expect to see the next step in substantive rulemaking by Q1 2022. He adds that the “CFPB staff have already started moving quite aggressively on drafting a rule. They’ve done their advanced notice of proposed rulemaking at the beginning of 2021, they have a full rulemaking team ready, and they are only waiting for a confirmed director to lead the agency and the director is supposed to be confirmed in the next few weeks.”

Given that the CFPB director will be nominated by the President, he adds that it would be deeply surprising if the nominee wasn’t abreast of the Order and the expectations around delivery ahead of time.

While the US has seen open banking develop in a free-market environment, implementation of s1033 will provide certainty in the form of a regulatory framework for the sector, more akin to the regulated structures in the UK and Europe. 

Pitts draws a connection between phrasing in the Order with that included in the UK Competition and Markets Authority’s 2016 report on the retail banking sector – which was the precursor to mandated open banking in the UK. It read: “Despite these welcome developments, we have found that many problems remain. Essentially, the older and larger banks, which still account for the large majority of the retail banking market, do not have to work hard enough to win and retain customers and it is difficult for new and smaller providers to attract customers.”

Not only would acting on section 1033 assist in bringing US open banking up to a regulatory equivalent as in other jurisdictions, but Pitts argues that this Order presents an opportunity for the US to leapfrog efforts abroad. 

By definition, he explains that with open banking in the UK, nine of the largest incumbents (known as the CMA9) are obligated to be data sources under the open banking order. The UK’s open banking (and the EU’s PSD2) is a one-way data flow and was created to solve one very specific problem around boosting competition, but this one-way data flow has resulted in a fairly low rate of account switching in the UK as consumers tend to just add new accounts rather than switch. 

The tone in the recent US Order goes a step further, spelling out that the intention is to allow consumers to ‘more easily switch institutions.’ In fact, argues Pitts, the Order foreshadows a multi-directional data flow, engendered by a third-party consent network with the consumer at the centre, and effectively results in what we now refer to as ‘Open Finance.’

He furthers that “now we know that 1033 is going to happen, and that data flow is going to be happening as sort of a persistent element of financial services, banks don’t want to be restricted to being data-out only. I think what we’re going to start seeing is much heavier investment from the financial institutions on expanding their single direction API connections, to look more like a multi-directional data flow with APIs on both sides.”

A welcome reception?

As expected, the content tied to s1033 in the Order has been well received by the more digital factions of the financial services community. Pitts adds that it is an acknowledgement of our progression into an era where consumers should be in control of their data and which service providers they wish to use.

“On the traditional financial institution side, the real impact has been that this has given them the certainty that 1033 is happening. There was a long period of uncertainty because of the amount of time it took about whether this was something they needed to do or not. Now it’s no longer a question of if, but a question of when.”

Conversely, President and CEO of the Bank Policy Institute Greg Baer was less welcoming of the news, commenting in a statement: “By any analysis, banking is among the most competitive, least concentrated industries in America, as anyone who has shopped for a credit card, mortgage or deposit account knows. Moreover, banks continue to lose business to unregulated fintechs or government-sponsored enterprises, whose presence in the market current DoJ guidelines inexplicably ignore in assessing market competition. Those guidelines should be amended to reflect the underlying law.”

On LinkedIn, FDATA CEO Richard Prior added: “This is potentially huge news […] There are certainly many subsequent critical pieces of the puzzle that will need to follow for a healthy and successful open banking/open finance ecosystem, but a defined consumer data right is at the heart of what is needed to drive this. Examples abound in markets around the world, at different stages of maturity and implementation. It will be truly an historic moment in the journey for the US to see this step taken."