By COO Chris Cox
This article originally appeared in Finopotamus.
It’s a new year, so it’s time to start preparing for the adoption of the Consumer Financial Protection Bureau’s Dodd-Frank Rule 1033. The new regulation gives consumers the right to access and share their data, including information about their accounts, transactions, and other financial data. Consumers can authorize financial institutions and other third parties to access this data for services like budgeting, lending, or payment processing — and financial institutions providing access must ensure data security and compliance with data privacy regulations.
What does this mean for community financial institutions? And how can you prepare for this new world of open banking?
Here, we outline the implications for community financial institutions and discuss how this regulation will result in both challenges and opportunities for credit unions and banks of all sizes.
The State of Open Banking and Why It’s Good for Community Institutions
The largest financial institutions — those who control about 80% of the market — must comply with the regulation by April 2027. Those with assets between $850 million and $250 billion will participate in a phased rollout over several years, with the smallest in this group required to comply by 2030. Institutions with less than $850 million in assets are exempt from the regulation. If this applies to your institution, you may be unsure of the implications.
Initially, the 1033 rule was perceived as regulatory overhead, but it has the potential to drive efficiency, innovation, and growth for financial institutions of all sizes. Among the benefits to community credit unions and banks are the following:
- Simplifies switching: Though the largest U.S. banks have a stronghold on the market today, Section 1033 makes it easier for consumers to switch. Today, 80% of Gen Z and millennials have chosen a large bank as their primary financial institution, but roughly half of these consumers are willing to switch to a community bank or credit union, according to a survey from The Harris Poll and Apiture. If smaller institutions can differentiate from the big banks by offering a more tailored experience, they have an opportunity to attract these consumers while simplifying the process of changing institutions.
- Enables cost-effective innovation: Instead of building APIs and data sharing platforms in-house from scratch, financial institutions can lean on third-party providers to help implement this technology. By partnering with fintechs, community institutions can provide innovative services like budgeting apps, automated savings tools, or tailored lending platforms to account holders. And, once industry-standard APIs and frameworks are in place, institutions can also manage compliance costs more effectively.
- Builds trust: Community institutions can show they are committed to secure, ethical data-sharing practices by complying with open banking regulations. This commitment positions them as trusted partners, deepening relationships with existing account holders and appealing to consumers who are wary of larger institutions.
- Drives customer engagement and loyalty: Access to detailed financial data allows financial institutions to offer personalized recommendations, pertinent financial advice, and products tailored to individual needs. Giving account holders relevant information when they need it will deepen loyalty and attract new consumers.
- Aligns with global best practices: With open access to financial data, smaller institutions will be perceived as more tech savvy and better able to meet modern consumer expectations. As consumers become aware of their data rights, they will expect compliance — even if an institution is exempt from the regulation due to size. For example, if account holders cannot access certain technology such as a personal financial management (PFM) tool from your digital banking platform, they may get frustrated. Financial institutions will need to meet consumers’ demands for seamless digital services or risk losing them to competitors with better digital experiences.
- Reduces data disparity with larger banks: Traditionally, bigger banks experienced a competitive advantage due to their larger customer base. They could access significant amounts of customer data for insights and to inform new product development. Dodd-Frank 1033 ensures smaller institutions have equal opportunity to access and analyze customer data, allowing these institutions to offer data-driven services equivalent to larger banks.
Preparing for Open Banking
Complying with Section 1033 means having systems and processes in place to manage user consent, validate data availability, and respect consumers’ right to be forgotten. These include:
- Data Sharing Requirements: Section 1033 requires institutions to provide financial data in a standardized, user-friendly format, enabling consumers to switch providers or easily use third-party services. Organizations like the Financial Data Exchange (FDX) are currently leading efforts to establish industry-wide standards.
- Operational Challenges: Having secure, scalable APIs and platforms that ensure compliance is essential. Institutions should also consider potential pricing pressure since the regulation prevents third parties from charging for data access.
- Consumer Education: Financial institutions should clearly communicate data access rights and benefits to consumers as well as the benefits of data sharing.
- Innovation Opportunities: Partnering with fintechs to offer innovative solutions that take advantage of shared data provides you with an opportunity to differentiate your institution. Using data insights to create a more personalized banking experience can enhance consumer loyalty and elevate the user experience.
Lean on Trusted Technology Partners to Navigate Section 1033
The right technology partners can help you navigate the ongoing requirements associated with this new regulation and use it to your advantage. With expertise in technology integration and regulatory compliance, your digital banking provider should play a critical role in helping you overcome compliance hurdles. Several ways a strong digital banking partner can help include:
- Simplifying Technology Integration: Ensure your digital banking providers offers an API-driven platform with pre-built integrations to reduce development needs and the ability to innovate quickly. Such a platform forms the basis of secure, standardized data-sharing.
- Ensuring Security and Compliance: By incorporating multi-factor authentication and encryption into API technology, your provider can ensure robust consumer data protection.
- Enhancing the Consumer Experience: You can tap your digital banking provider for innovative, modern features such as PFM tools and real-time data access to help your institution deliver a modern, personalized experience.
- Building Scalability and Efficiency: Your provider can help you build scalable, tailored solutions on par with those of much larger financial institutions, enabling you to reduce your infrastructure investments and optimize resources.
- Promoting Innovation: An innovative digital banking provider can help your institution account for future consumer demands, making you more nimble in the process.
Ensure Success with Early Compliance
Although navigating new open banking compliance issues can be daunting, being an early adopter offers significant opportunities for your institution. Giving consumers greater transparency and control over their data helps promote a more secure and innovative financial future. And by enlisting the help of trusted technology partners to get the tools you need, you can provide the innovative services that ensure you remain competitive in an evolving marketplace. To learn more about the implications of Dodd-Frank 1033 for your institution, contact Apiture.
