Leapfrog Financial Powerhouses with Open Banking and CFPB Compliance: Sensedia Talks

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Lisa Arthur, the US Director and Global CMO for Sensedia, hosted this episode of Sensedia Talks, in which panelists Don Cardinal, managing director with Financial Data Exchange (FDX), Elaine Jesus, open finance product manager at Sicredi and DW Ferrell, CEO of Localight, shared how smaller financial institutions can leapfrog financial powerhouses with CFPB compliance and open banking adoption. 

Open banking in the US was sparked in 2017, and it's been growing in breadth and depth ever since. Last fall, the Consumer Financial Protection Bureau, the CFPB, published its draft section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and sought public feedback. The CFPB rule directs consumer financial service providers to give consumers secure and controlled access to their financial data. This access is referred to globally as open banking or open finance. 

Other countries have successfully implemented open finance strategies, gaining opportunities, even while balancing strict regulations. US financial institutions and fintechs can learn from these examples and explore what opportunities could exist for the financial sector and its consumers. 

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Thoughts on the CFPB's Proposed Ruling

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Don Cardinal explains how FDX offers data standards for open finance in North America and supports 76 million consumers sharing data securely and with permission. He offered his thoughts on CFPB Section 1033. 

At the FDX Global Open Banking Summit this past March, CFPB's director, Rohit Chopra, indicated a fall 2024 delivery of a final rulemaking, and he's also hinted at this timeline in public blogs. If the rule is finalized and put in place as it is proposed today, it will kick off a timeline of requirements for compliance based on institution size. The first, for the largest financial institutions, will be six months past the rule finalization, the second for large institutions is roughly a year after, then two and a half years for mid-sized institutions, and finally, four years for the smallest institutions.

When considering if election results could change or overturn the ruling, Cardinal shares, "The reason why I don't think it will be overturned, should there be a change in administration or anything else, is for several reasons. One, this rule has much bipartisan support. There are a lot of folks on both sides of the aisle with the privacy and security implications. Two, there's a lot of real interest and scrutiny from regulators in third-party risk management, and the idea of sharing IDs and passwords and allowing screen scraping is no longer tenable. And this ruling provides a solution for it." He adds, "And, of course, the FDX standard is free of charge. And we already have maybe 150 million bankable adults in North America who are already using one standard. So for those reasons, we believe it will be very durable through whatever changes happen in Washington."

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Open Banking Integration Opportunities

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With the ruling looming, many financial institutions are concerned about integrating opening banking into their platforms and systems. Ferrell shares that Localight offers products and services that are symbiotic with banking. The company seeks to forge mutually beneficial partnerships that increase membership and retention and enhance the member experience, keeping the institution top of the wallet and mobile. He acknowledges how some fintechs and digital banks are challenging brick-and-mortar financial institutions and the fear that open banking would give them a lever to get user IDs and scrape screens.  

He shares, "These data-sharing methods have been a vulnerability for over a decade, and there's no end in sight unless there's something that's a better system to replace it. And so right now, banks and credit unions are getting a lot of traffic and don't know where it's from." 

Ferrell explains that with current technology, financial institutions don't have any signals, such as knowing when a customer is considering leaving their establishment. Shifting to permission-based standards such as OAuth balance increases the need for consumer access with security concerns and data compliance. Open finance offers the bank or credit union more insight into member behavior. Knowing that a customer or member wanted to connect data from another institution or fintech is an incredible opportunity.

He adds that most consumer financial accounts will benefit from open banking within six months to two and a half years after the rule is finalized. The largest institutions must comply quickly, and their consumers will soon expect the ability to access and control their data. Smaller institutions that adopt early will benefit and be able to meet consumer demand. 

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A Real-Life Success Story

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Sicredi, a Brazilian cooperative financial institution with more than 120 years of existence, supports five regional cooperative centers with more than 100 affiliated local and autonomous credit unions. It was one of the first financial institutions in Brazil to adopt the open financial system.

The institution voluntarily entered phase one of the open banking implementation in April 2021. Jesus shares, "Our main expectation regarding open finance was that the ecosystem would bring new opportunities for people to discover the benefits credit unions offer, providing an environment with more transparency and freedom." 

Sicredi aimed to learn from the process and generate new opportunities for connection and innovation. Through open finance, they expected to offer even better credit conditions to members with appropriate rates, tariffs and limits based on their profile and history. Keeping the member at the center of decisions open finance offers has helped them and their members experience tremendous benefits.

Sharing Sicredi's results, Jesus explains that consent grew from 349,000 associated members to 684,000 consenting. An additional $59 million was converted into deals through business opportunities managed by account managers. $423,000 in savings was invested via the app, and the organization experienced a $2.1 million increase in credit limits on cards, $4.5 million in credit contracted via the app and more than $1 million in incoming cash deposits. There were also non-measurable benefits, such as brand exposure and learning from exchanges with other institutions participating in the ecosystem. 

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Fear, Uncertainty, and Doubt

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Don Cardinal begins to dispel the uncertainty, sharing, "There's this fear out there that, oh my gosh, open finance will lead to a mass exodus of my consumers. Nowhere in the history of open finance or open banking in any jurisdiction have we seen a mass exodus of consumers, period. UK, Australia, Brazil, other jurisdictions, it just doesn't happen."

Sicredi did not experience the mass exodus many US institutions fear. Instead, they increased deposits, customers, volume, and value per customer through open finance and net income. The institution has evaluated and learned through the process and gained tremendous benefits and insight into future user behavior.

Cardinal explains that most financial institutions already offer excellent products, pricing and services. An extra channel doesn't impact whether or not consumers choose to stay with an institution. He cites the old fear that online and mobile banking would end brick-and-mortar banking. The physical branch is very much alive. The concerns that digital access would end banking as we know it were unfounded. These new access methods improved banking by offering more options for consumers. 

Ferrell adds, "Your data is already being shared today via screen scraping, but wouldn't it be great to have that visibility to understand?" 

He explains that if a consumer shares data with a credit card, mortgage or some other company, this insight could signal marketing to make a credit card offer, a mortgage offer or whatever the consumer seeks outside the institution. After a customer moves funds out of the institution, it's too late. He adds that insight gained earlier in the relationship is an opportunity to understand where assets are held and find better ways to salvage customer relationships, acquire new business, and prevent them from leaving. 

He continues, "With open finance, you know with certainty, and that allows you to very carefully, surgically allocate your marketing resources and tailor your messaging to real value-add for your consumers." He reminds financial institutions not to be afraid of open finance and to understand that waiting only allows the competition to jump ahead, take advantage of the opportunity and leave late adopters behind. "You should move early and take advantage of this stuff. It's only a net positive," he adds.

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Democratizing Financial Services

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Open finance can help level the playing field for consumers and increase their chances of obtaining needed services. Ferrell explains, "At its core, the ruling is going to recenter data around the consumer, around the individual. That's empowering." 

He shares that underwriting and credit ratings are already changing through companies like Square Capital that use an algorithm based on data rather than a credit rating system. He continues, "They're able to do that because they also have the transactional side. Now, if institutions could employ that kind of opportunity in that data and offer just-in-time opportunities to their members, that's going to guard member retention and serve them in a way that unlocks capital for people that I believe may be left out of the existing financial system in our current credit rating structure."

Open finance allows organizations to pull in valuable data and create an insightful and realistic picture of a consumer's credit, helping them retain consumers during the loan approval process. The right data allows financial institutions to look at assets using open data access and empower the customer, institutions and fintechs, fostering a more member-centric vs. institution-centric process.

Don Cardinal mentions that using cash flow underwriting is beneficial for institutions and consumers. He offers, "It gets you back to the old five C's of credit, right? Character, conditions, capacity, collateral, character and the idea that you can actually make decisions that are as good or better than other older methodologies. I think it's incredibly useful when you're dealing with thin-file and no-file consumers and small businesses that may be thin-file themselves."

Open finance provides the ability to have that data in real-time. It gives greater confidence to lenders, who, in closed financial systems, are often forced to use older, audited financials. Real-time data increases insights into the customer's needs and helps the lender to know the need before the time window has passed.

Cardinal also discusses how open finance offers a window into catching potential fraud early. "Often, apps are the canary in the coal mine," he says. In addition to serving and protecting consumers better, he adds that open finance saves institutions time while improving accuracy by removing much of the manual process and the errors that come with it.

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Helping the Smaller Players Leapfrog

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India calls the massive increase in mobile phone usage, skipping landlines altogether, the "Leapfrog of the Century." Open finance and open banking can help smaller institutions do the same leapfrogging with financial services, skipping ahead of recent technology quickly. 

The FDX API standard and connectivity are the same for small institutions and trillion-dollar banks. Cardinal explains, "This is a common interface for everyone. This is a true level playing field. You can offer the same speed of service to the same big and small fintechs as the "bigs" can. When have you ever had that ability in your tech portfolio to compete for peer-to-peer capability-for-capability with these large organizations? Never."

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Parting Advice

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Elaine shares, "Listen to your associates and collaborators and after understanding their real needs, use open finance as a facilitator to meet these needs. Open finance only makes sense if it serves and improves the lives of financial systems users. And choose reliable partners. Sensedia was an important and wise choice to help us with the challenge of implementing open finance. This made us more confident to start and continue in this journey." The Sensedia/Secredi case study can be found here.

Ferrell tells the panel that passive transactions such as FedNow and real-time payments are already motivating a rethink of previously unavailable opportunities. "Open banking is going to open up new opportunities. And FDX represents a standard I'm really excited about. I think about it as an electrical outlet or a plug. It's a standard. At least across the US, we can use the same plug consistently, allowing innovation to focus on what you do with that energy and power. And so it's important that we support one standard and really galvanize around that, and that's FDX from our standpoint." 

He adds,  "And as open banking moves from an idea in the US to a requirement over the next couple of years, fintechs already are thinking about using the principles of open banking, taking advantage of what has worked in other countries."

Ferrell goes on to say that APIs are the language of partnership and work with consumer data directly in a privacy-centric way. Consumers benefit, and businesses can provide more value. Open banking is going to separate fintechs that are serious about privacy and access from ones that don't have the same priorities.

Cardinal concludes that open finance has to solve a consumer problem or meet a need. FDX has been very careful in determining what problems it solves. He requests, "Now we have 230 members, but we need all of you in the audience to also get a copy of the spec to join. We also want your voices to ensure this continues to meet your needs. This is an open standard. It's freely available, but we definitely need you." 

Discussing data in and data out, he shares that API is the next new channel. "Think about being able to prefill an account application with no errors, no delays, and accurate data; think about being able to get bank statements for another financial institution in real-time with no chain of custody issues and no errors. What would that do to delays? Well, there wouldn't be any," he says.

He continues, "You could actually decision them and provision them in real-time. Well, that means you can get more throughput through your existing process. More throughput means more revenue. This is a revenue play. This is not a check-the-box compliance play. If you missed that part of this assignment, then you've missed the point of this. This is a net new channel, and you need to think about what this will do with our digital play."

He adds, "We're here to help. There are a lot of free tools and resources by all means, but you cannot wait. You cannot wait for the last minute, slap it in and call it done, just like you couldn't wait till the last minute and slap in any old website. You had to be thoughtful and proactive about what you did. This is your brand. And so I would leave you with that. Be prepared to augment your digital offering with this new channel." 

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Click here to watch the webinar recording

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Resources

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Financial Data Exchange (FDX)

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FXD White Papers and Other Resources

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Remarks from CFPB Director Rohit Chopra at the FDX Global Summit
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Sensedia/Sicredi Case Study
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Localight
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Sicredi

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