Should Banks & Fintechs Work Things Out?
Happy Friday, Fintech Takers!
I hope you’ve had a good week!
I’ll be back from vacation on Monday, which is fortunate because there has been A LOT of interesting fintech and banking news this week.
Plus, some pretty big things are happening here at Fintech Takes, which is going to result in some OUTSTANDING content coming your way. Stay tuned!
And today, I have something special — a guest essay from Dan Murphy, Founder of Sunset Park Advisors and a former CFPB staffer who was a member of the 1033 rulemaking team.
I can’t wait for you to read it, so let’s get to it!
- Alex
Should Banks & Fintechs Work Things Out?Copy anchor linkCopied
Sometimes I joke that I’m in a toxic relationship with open banking.
Having spent the better part of a decade focused on the issue – most recently as a member of the Consumer Financial Protection Bureau’s 1033 rulemaking team – I’ve been making that joke more frequently lately.
I don’t think I’m the only one, though. In fact, regulating open banking often felt a bit like counseling a couple going through growing pains in their relationship. Each side had its foibles and excesses, to be sure, but overall, they both seemed like they wanted to make it work. With the right regulatory structure in place to answer questions the market couldn’t solve on its own – something both sides advocated for – making it work seemed just possible.
For the last nine months or so, I’ve been less certain. Certain stakeholders’ behavior raises an obvious question for the ecosystem – where do we go from here? Can banks and fintechs go back to productively working on their relationship, even if they’ll always have differences? Or has the trust built up over years of collaboration been permanently eroded?
Misadventures in VegasCopy anchor linkCopied
To pick up where Alex left off with his Vegas bachelor party analogy last week, fintechs and banks have been in a long and, at times, strained courtship with each other for more than two decades. It hasn’t always been easy, and like all relationships, nobody has been perfect. But hey, they were working things out! The partnership was growing, and future prospects looked bright for marriage, family, and a house with a white picket fence.
But then just as wedding festivities started, the groom ran off to Vegas and put the couple’s entire relationship on the line. And although he briefly remembered his distressed fiancée waiting at the altar, flew home, and got married – he then ran off to Vegas again. The second time, it felt like he was never coming home. One morning, though, to his bleary-eyed surprise, his mother showed up at his Vegas hotel and marched him off to the airport. Now he finds himself flying home with an ill-fated misadventure behind and an awkward homecoming ahead.
This saga leaves the bride on uncertain footing, to say the least. As much as she might appreciate her mother-in-law reeling in her wayward son, it would have been a lot better if he had come home on his own. A lot of trust has been lost, and she may doubt any new promises for reform.
Every relationship is different, so maybe there is no universal “right thing to do” at this juncture. Sometimes you can work things out, and sometimes it’s better to just part ways. In the open banking context, though, the problem is that everyone has to keep living in the same house no matter what they decide. The only question is whether to be toxic roommates or stay married.
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In a stunning reversal last week, the CFPB asked the US District Court for the Eastern District of Kentucky to stay litigation in the Bank Policy Institute’s lawsuit.
In doing so, the CFPB abandoned its motion to vacate the 1033 rule finalized last year and is instead planning to amend the rule through the notice and comment process. An advance notice of proposed rulemaking (ANPR) to kick off that process is expected within weeks. For banks and fintechs, that means that the final (and already effective) 1033 rule seems like it is going to stand until any amendments are finalized. If anyone has been taking a break from compliance planning for the last nine months, that break is now over.
In that context, estrangement between banks and fintechs is extremely unhelpful. While the final 1033 rule doesn’t obligate any parties in the open banking ecosystem to use industry standards, it does recognize that fair, open, and inclusive standard setting bodies can play a useful role in the market by facilitating cross-industry collaboration.
To that end, the CFPB recognized the Financial Data Exchange (FDX), whose bank and fintech members undertook great effort in recent years to remake its governance processes to be more representative of a whole-of-industry effort toward standard setting for open banking. While FDX is still recognized, mistrust between its bank and fintech members would likely make it much harder to execute on existing priorities and align on new ones to make the ecosystem work better and simplify compliance. In short, mistrust means fewer, less useful standards that save banks and fintechs money.
An even worse outcome for cross-industry collaboration would be if FDX started to lose fintech members en masse and, per the CFPB’s terms, lost its status as a recognized standard setter. That would leave industry with nowhere to go to develop common open banking standards – leading to higher costs for everyone.
That might not be a big deal for a bank with an $18 billion technology budget, but for everyone else, it’s a real problem. For small banks and credit unions that want to participate in open banking, a lack of common standards would effectively lock them out of the market, ensuring they continue to lose customers to the likes of Chase. For fintechs, a lack of such standards will result in persistently higher costs that similarly ensure they remain under the thumb of the largest banks.
Counterintuitively, a hobbled FDX may be worse for the banks than the fintechs in the current environment. In an April memo laying out the CFPB’s supervision and enforcement priorities, CFPB leadership charted a clear path toward refocusing supervisory resources toward depositories and away from nonbanks generally, and specifically toward “inadequate controls to protect consumer information resulting in actual loss to consumers,” among other priorities. In other words, the CFPB’s new leaders may decide that they still care about banks’ obligations under Subpart B & C of the final 1033 rule. FDX is well-positioned to help banks manage those cost-effectively, so long as it doesn’t lose recognition or legitimacy.
Estrangement between banks and fintechs creates a significant headache for the CFPB as well. They’re never going to agree on everything, to be clear. But the CFPB’s life will be considerably harder if it not only has to make difficult policy decisions, but also has to mediate every dispute over the minutiae of complex technical specifications. Take my word for it, the policy decisions are hard enough.
Staying MarriedCopy anchor linkCopied
The CFPB’s reversal last week may open the door to a more productive path, if banks and fintechs are still interested.
Through the notice and comment process the CFPB is starting, banks and fintechs will have another opportunity to be heard out on their policy issues, only this time by Trump appointees. That may result in some meaningful policy changes from the existing rule, or it may result in more modest changes as new leadership begins to encounter the many difficult tradeoffs on the road ahead. Either way, while it’s doubtful that either side will get everything they want, the result may give both sides more of a sense of finality. Even now, the way things are heading appears to indicate that open banking rules are going to be a fact of life.
In that environment, banks and fintechs could decide to play by the existing rules and, to the extent everyone does that, air their remaining policy grievances through the rulemaking process (returning, briefly, to my earlier analogy, this would be the equivalent of marriage counseling). While that process chugs ahead at the CFPB, they could refocus their extracurricular efforts on cross-industry collaboration through venues like FDX. There are myriad issues that most stakeholders agree could be addressed through collaborative industry standards, many of which would make compliance a lighter lift for banks and fintechs when the time comes.
Where Do We Go From Here?Copy anchor linkCopied
As an ex-regulator who simply wants this all to work, staying married feels like the most logical path to me.
After everything that has happened, though, banks and fintechs may feel differently. At a minimum, it seems like what the open banking ecosystem needs is a sort of vow renewal that gives both sides a sense of starting fresh. In order to get there, banks in particular need to start acting like more reliable, well-intentioned partners than they have been recently. If their well-resourced friends invite them on another trip to Vegas, they should decline.
I honestly believe that most banks want to stay married. In my time at the CFPB, most of the leading bankers I got to know in this space tended to be thoughtful, mature executives who understand that open banking is the future, and trying to stave it off won’t work forever. Many of them dedicated considerable time, resources, and expertise to FDX’s efforts and to providing feedback to the CFPB. They cannot be pleased that recent developments have put years of their hard work and investment in cross-industry collaboration at risk.
What those well-intentioned bankers do next may determine whether banks and fintechs can work things out. I hope they do, but even if they don’t, they’re going to have to live together.
MORE QUESTIONS TO PONDER TOGETHER
Big news for the endlessly curious (yes, you): I’m collecting your fintech questions on a rolling basis.
What’s keeping you up at night? What great mysteries in financial services beg to be unraveled? Think of it this way, if a stranger is a friend you just haven't met yet, your question is a Fintech Takes conversation waiting to happen.
One that could headline a Friday newsletter or be answered in an upcoming Fintech Office Hours event.
Drop your question here, whenever inspiration strikes!
INPUT REQUESTED!
I’m working with Dilly Labs and the wise and powerful Tom Johnson on a little research project and I am looking for folks who work at a consumer lending company (bank, credit union, non-bank lenders, etc.) and who have experience buying/implementing/working with credit decision engines to fill out a quick survey.
Credit Decision Engine Vendor Survey
I promise it won’t take long! And it will be extremely helpful! So …
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Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
