The Consumer Financial Protection Bureau (CFPB) finalized its Dodd-Frank Section 1033 rulemaking on October 22, 2024, fundamentally impacting how financial data is accessed, controlled, and shared.

The rule aims to promote open banking by requiring financial institutions and other data providers to make financial data available to consumers and authorized third parties through standardized formats. This shift presents unique opportunities for financial institutions of all sizes to position themselves to build competitive advantage through compliance and by staying on the leading edge of innovation in the open banking landscape. 

These opportunities include:

Enhanced customer trust and loyalty. Compliance with Section 1033, which emphasizes transparency and consumer rights regarding financial data, can significantly boost customer trust. By prioritizing customer data protection, privacy, and providing basic standards for data access to their financial information, institutions can foster stronger relationships and enhance customer loyalty.

Competitive edge through innovation. Being proactive in adopting open banking allows institutions to innovate their product offerings and services. By leveraging third-party applications and APIs, they can create personalized financial solutions, improve user experiences, and offer tailored financial advice, setting themselves apart from competitors who may lag in these areas.

Improved data utilization and insights. Institutions that embrace open banking can gain valuable insights from aggregated customer data. This enables them to analyze consumer behavior, preferences, and trends, allowing for better-targeted marketing strategies, risk assessment, and product development, ultimately leading to increased profitability, improved consumer sentiment, and, consequently, market share.

By aligning with regulatory expectations and leveraging open banking opportunities, financial institutions can position themselves as leaders in the evolving financial landscape. The CFPB has highlighted its goal of ensuring fair market competition in the shift to open banking.¹ However, industry experts have expressed concern that the challenges for community banks and credit unions to comply with the data access requirements, timeline for compliance, and security standards, may challenge parts of the financial services sector from achieving the stated goal.²

Large financial institutions, especially those with operations in Europe, may have advantages in the shift to open banking due to their established customer bases and broader resources, as well as their experience in complying with the Third Payment Services Directive (PSD3). The wealth of customer data and brand recognition these large financial institutions possess can facilitate trust and adoption of new services, while their existing infrastructure allows for smoother integration with open banking technologies. 

The Community Bank Opportunity

If this may enable larger established institutions to quickly adapt to regulatory changes and innovate within the market, one advantage smaller institutions such as community banks and credit unions may have during the industry-wide adoption of these consumer-focused regulations is the reputation they hold for fostering consumer trust and loyalty. 

Being proactive on Section 1033 compliance will help community banks and credit unions maintain their competitive edge, thereby enhancing customer confidence and retention. These institutions should focus on mitigating technical and operational challenges and should consider the impacts of reliance on core processors, customer service roles, data access portals, and the long timeframes for historical data retrieval.

We have identified 10 potential pain points for financial institutions which would be key areas of focus when creating a tactical checklist for strategic compliance:

1. Data security and privacy – Financial institutions will need to implement enhanced security measures to protect consumer data from breaches and unauthorized access, and data-sharing practices must be in compliance with existing privacy regulations, such as the Gramm-Leach-Bliley Act (GLBA) and the General Data Protection Regulation (GDPR), where applicable.
   
2. Technological upgrades – Institutions must adopt standardized, machine-readable data formats (which may require significant upgrades to existing IT systems), as well as ensure seamless and secure integration with third-party service providers, necessitating robust API development and management.
   
3. Consumer consent management – Developing systems to manage and record explicit consumer consent for data sharing will be essential, and institutions will need to have processes in place to handle revocation of consent.
   
4. Operational and compliance costs – There will likely be significant implementation costs to upgrade systems, train staff, and develop new policies and procedures, as well as ongoing costs associated with monitoring and auditing processes.
   
5. Data quality and accuracy – Financial institutions must ensure data integrity, both confirming data provided is accurate, complete, and up-to-date and establishing procedures for quickly handling discrepancies, addressing and correcting any disagreements in the data provided.
   
6. Consumer education and support – Institutions will need to educate consumers about their rights under Section 1033, and create support infrastructure, such as, channels to assist consumers.
   
7. Third-party risk management – Financial institutions must conduct thorough due diligence of third-party providers to ensure they adhere to security and compliance standards. It will be necessary to establish clear contractual agreements that outline data usage, security obligations, and compliance requirements.
   
8. Regulatory uncertainty and adaptation – Institutions will need to stay informed about the final details of the rule, interpreting regulatory requirements and how they apply to specific operations can be challenging. Financial institutions must be agile and adaptable to future changes or updates to Section 1033.
   
9. Cross-border data transfers – For institutions operating internationally, ensuring global compliance with Section 1033 while also adhering to data protection regulations in other jurisdictions will be challenging, including addressing issues related to data localization requirements in various countries. 
10. Internal training and awareness – Comprehensive staff training programs will be needed to ensure that all relevant staff understand the new requirements and can effectively implement them, within a culture of compliance that prioritizes data privacy and consumer rights within the institution.

Summary

As the financial industry prepares for the impact of CFPB's Dodd-Frank Section 1033 rulemaking, the landscape of open banking is set for significant transformation. By proactively addressing key risk areas in compliance, security, technology, and consumer-centered solutions, institutions can position themselves competitively in the evolving market. 
Embracing the opportunities presented by open banking not only fosters innovation but also reinforces consumer trust and loyalty, aligning with what has always been a foremost goal for community banks and credit unions. As the industry moves forward, the institutions that prioritize compliance and adaptability will be best equipped to thrive in this new regulatory environment, ensuring they can meet both current and future consumer needs.

References
¹ Prepared Remarks of CFPB Director Rohit Chopra at the Financial Data Exchange Global Summit | Consumer Financial Protection Bureau
² What banks need to know about the CFPB's open banking rule | American Banker