Banks’ Suit on CFPB Rule 1033 Predicts Private-Public Sector Clash on Open Banking

The Consumer Financial Protection Bureau released its final rule on data-sharing Tuesday (Oct. 22).

But the issue is far from over.

The battle between banks and the CFPB over what is commonly called Section 1033 is shaping up to be a fight waged in court due to growing contention over liability and oversight of the relationships between banks sharing their data and the third parties with whom that data might be shared.

The Bank Policy Institute and the Kentucky Bankers Association filed a lawsuit Tuesday that claimed the CFPB is “overstepping its statutory mandate and injecting itself into a developing, well-functioning ecosystem that is thriving under private initiatives.”

And, said the lawsuit: “Worse yet, the framework the agency has adopted is fundamentally unsafe, so the primary result of its overreach will be to harm the very consumers it is charged with protecting.”

The suit asked the court to “bring a halt to the bureau’s unlawful efforts to force banks to engage in unsafe dissemination of their customers’ personal financial information and set aside the rule.”

A Chilling Effect?

The CFPB’s final rule could cause open banking in the United States to face headwinds because uncertainty breeds a chilling effect in financial services innovation.

Among the central issues is whether that innovation should be mandated from the top down or whether it should be a process (arguably organic) that comes from the bottom up, through private-sector efforts.

In the lawsuit itself, the banks alleged the rule “seeks to cut off that private development and replace it with a complicated, expensive, mandatory regulatory framework that Congress never authorized.”

“In the United States, the developing open banking system has achieved substantial progress through private-sector efforts,” the suit added. “Banks, including plaintiffs and their members, have embraced this opportunity for innovation because it allows them to develop secure and attractive products for their customers. In other words, open banking is already flourishing through a private, market-based ‘consumer data-sharing ecosystem’ in which industry members have been actively participating.”

The Risks of Data-Sharing

The lawsuit contended the final rule does not promote appropriate oversight of third parties that use banks’ customer data and that, at the same time, banks cannot stop sharing that data when risk management concerns arise.

The suit argued that “such risk-based denials must be carried out ‘in a consistent and non-discriminatory matter,’ a hazy and subjective standard that leaves banks with no assurance that a denial based on legitimate risk-management concerns — even those deemed necessary to meet expectations of its primary financial regulator — would not expose it to an enforcement action by the bureau.”

Who Pays?

There is a prohibition on banks from collecting any fees from third parties in exchange for the newly mandated service, and “Section 1033 does not authorize the bureau to adopt such a one-sided fee prohibition that effectively gives a windfall to commercial entities like FinTechs and data aggregators,” the suit said.

As for what might be likened to an unlevel playing field, in the Tuesday announcement of the suit, the plaintiffs said that by not allowing fees to be charged to third parties, the CFPB’s rule “allows third parties to profit, at no cost, from systems built and maintained by banks. Technology costs are a significant expenditure for every major company in America, and banks have invested billions of dollars in building systems to protect consumers’ data and information and have earned customers’ trust accordingly. Banks should be able to charge third parties who seek access to that sensitive data, just as companies charge one another for products and services routinely in the marketplace. These practices are consistent with developer access offered by Google, Apple, Facebook and other major U.S. companies.”

The PYMNTS Intelligence report “Consumer Sentiment About Open Banking Payments” found that nearly 46% of consumers said they are ready for open banking and would be willing to pay fees to have instant payments and other more direct fund flows available to them.

In the meantime, as banks, FinTechs and regulators hash it all out, open banking’s evolution may proceed more slowly than some would hope.