#313—How the CFPB’s open banking rule kills community banks
Also, members of Congress take on banking regulators
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This week:
How the new open banking rule kills community banks
The House Financial Services Committee takes on banking regulators
1. How the new open banking rule kills community banks
The goals for open banking as a concept are pretty straightforward. It’s about giving consumers control over financial data. It’s about creating a dynamic environment that fosters financial services innovation. And it’s about increasing competition between the many financial institutions, fintechs, and banks across the country.
But as Hard Yaka partner Chris Lewis points out in a new op-ed for American Banker, the Consumer Financial Protection Bureau’s final implementation for open banking requirements risks sidelining over 3,000 banks from a new era of banking.
Here’s Chris Lewis:
By exempting over 3,300 banks — almost 75% of FDIC-insured depositories — with assets of $850 million or less from compliance, the agency has killed them with kindness.
Yes, the technology costs of implementation may be challenging and even insurmountable for some banks. But by saying, essentially,"OK, you can sit this one out,"the CFPB has relegated community banks to the sidelines of innovation, where some may die a slow death. Instead of breathing a sigh of relief, these banks need to work together to help themselves and remain in the game.
…
The CFPB's rule assumes, rightly, that different financial institutions will face different challenges in compliantly adapting their technology, infrastructure and internal processes to the new reality of open banking. Opening up their systems will require extensive planning, time and resources. That's all true. But instead of setting up a framework under which community banks could be successful, the final rule exempts them altogether. This isn't kindness — it's murder. Open banking is the future, and one thing we do know is that if you don't meet the needs of your future customers, you're not likely to be around in the future.
Community banks have a tremendous opportunity, because they actually don't have some of the constraints that big banks do. In many respects, they can be more nimble and innovate more quickly. But when it comes to open banking, the cost of technology is their Achilles heel.
…
It seems unreasonable to expect community and regional banks, already pushed to the brink, to undertake expensive technology projects voluntarily — but that's exactly what needs to happen if they are to survive.
2. The House Financial Services Committee takes banking regulators
On the topic of financial services innovation, House Financial Services Committee Chairman Patrick McHenry, along with over two dozen other members of Congress, has published an open letter to the Fed, the FDIC, and the OCC, taking them to task over banking system access for fintechs:
We write regarding the above referenced Request for Information (RFI) issued on July 31, 2024, focusing on the emerging trends in the financial technology (fintech) space. Innovation, including technological advances, in the financial system have and will continue to play an important role in the form of new products and services. Given fintech’s evolving nature and promising potential to enhance our financial system, it is essential that these newer products and services are not treated with undue regulatory scrutiny, which will only lead to stifling innovation.
Of note, the letter points out potential discriminatory practices against “novel” businesses:
Some business models can be novel, but novelty does not in and of itself justify discouraging banks from pursuing partnerships. This includes communicating with banks during the examination process to better understand the roles and responsibilities. In regulation and supervision of bank-fintech partnerships, regulators should seek to provide clarity to ensure firms can innovate without fear. Regulators should also be cautious not to overstep statutory authority. Instead, regulators should collaborate to identify any existing gaps in authority and work with Congress.
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Via Chris Lewis—Introducing Kinexys (Formerly Onyx) | J.P. Morgan
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