Open Banking Standardization Bringing More FIs and Fintechs Together

Heading into the new year, fintech trends focus on the rise of items like super apps, digital wallets, and Web 3.0, which combines concepts such as decentralization and token-based economics. All require access to real-time data. The steady movement toward open banking standards should help pave the way. 

In December 2022, The Financial Data Exchange (FDX) announced an update of its common open finance standards via the release of its FDX API version 5.2. The new version of the FDX API adds more functionality to the fintech and financial institution ecosystem, including new requirements for certification by data recipients (fintech apps that interact with financial Institutions), management of payment initiation for users, and updated data for tax returns. The update aligns with other global standards like the Open ID Foundation’s financial-grade API (FAPI) security standard and the insurance industry’s ACORD annuity standards.

FDX, an independent subsidiary of the Financial Services Information Sharing and Analysis Center (FS-ISAC), is a Reston, Va.-based nonprofit dedicated to uniting the financial industry around a shared, interoperable, royalty-free standard for data sharing through an industry consortium of financial institutions, data aggregators, fintechs and consumer groups. 

FDX API 5.2 Clarifies Language

With its update, FDX API 5.2 clarifies what FDX describes as “must” versus “should” language; including new requirements. Additionally, the FDX API 5.2 now includes a prescribed journey in the user experience (UX) guidelines for setting up and consenting to payment functionality. Further, the FDX user experience guidelines clarify to implementers what to display to the end user including in detail the consent journey and how to edit or revoke consent through dashboards implementers must provide.

These updates also provide more specifics about sharing data and standardizes the enumeration structure for developers. For tax filing, it enables the inclusion of data needed for filing information returns electronically (FIRE) with the IRS.

FDX recently reported that 42 million consumer accounts currently use its API for financial data sharing in the U.S. and Canada. FDX, which has global membership and predominantly operates in the US and Canada has more than 200 member organizations comprised of financial institutions, financial data aggregators, fintechs, payment networks, consumer groups, financial industry groups and utilities and other stakeholders. The FDX API updates originate from the work of FDX’s membership across more than 30 different technical working groups and task forces.

CFPB Signals Open Banking Rules

Open financial application programming interface (API) standards are continuing to enter the U.S. banking space. They will help propel fintech invention and partnership, advance user permissions and transparency, and help safeguard consumer information. 

The concept of open banking continues to evolve internationally as policymakers push for consumers to have better control over their banking information. To date, U.S. regulators have taken a mostly hands-off approach to open banking by delivering non-binding guidelines. 

However, in a speech at Money20/20, CFPB Director Rohit Chopra signaled a change in the wind. He said “Around the world and here at home, financial services are slowly moving toward open banking and open finance. A more decentralized and neutral consumer financial market structure has the potential to reshape how companies compete in the sphere.” 

Chopra explained the CFPB will launch the process to activate a dormant authority under Section 1033 of the Consumer Financial Protection Act that he said will accelerate this shift. “While not explicitly an open banking or open finance rule, the rule will move us closer to it, by obligating financial institutions to share consumer data upon consumer request, empowering people to break up with banks that provide bad service, and unleashing more market competition.” He added, “If successful, it will also reduce the ability for incumbents to build moats and for middlemen to serve as gatekeepers. It will provide big advantages to those who provide the best products, service quality, and rates.”

Chopra announced the agency expected to propose requiring financial institutions that offer transaction accounts to set up secure methods for data sharing, and develop requirements to limit the misuse and abuse of personal financial. Chopra outlined how in the first quarter of 2023, the CFPB will publish a report about input received about the proposed rule that they plan to issue later in 2023. “We then hope to finalize the rule in 2024 and move to implementation.” 

Market Volatility Pushes Fintech-Financial institution Partnerships

The current levels of market uncertainty and volatility show no signs of abating, so 2023 is also likely to see rapid change in everything from corporates’ priorities, to regulation, to supply chain disruption. Staying compliant and competitive will require financial institutions to implement new capabilities faster than ever, while minimizing disruption for customers. Financial institutions cannot achieve this level of agility on their own. Many more will embrace a collaborative, platform approach – which will be increasingly cloud-based – enabling them to tap into fintech ecosystems to find ready-made solutions that meet their needs, then implement them quickly via open APIs.

This movement will interconnect substantially with the growth of embedded finance. Partnerships between fintechs and financial institution are mutually beneficial. For credit unions and banks, an open-banking solution tapping into new technology can extend their market reach, connectivity to customers and provide new revenue opportunities. Meanwhile, partnering with financial institutions by gaining access through open banking application programming interfaces, such as the FDX API standard, allows fintechs to strengthen their offerings. An API marketplace — which includes an API manager, gateway, security, publisher and developer — helps bring the financial institutions and fintechs together. 

FDX members include Bank of America, Capital One, Charles Schwab, Citigroup, Experian, Fannie Mae, Fidelity Investments, JPMorgan Chase, Wells Fargo, Envestnet | Yodlee, Finicity, Plaid, three of the major banking cores FIS, Fiserv and Jack Henry; and secure data solutions software platform supplier NXTsoft. 

NXTsoft offers secure paths for financial institutions to free up and connect with fintechs. OmniData enables financial institutions to access its data quickly and securely; and OmniConnect, the vendor agnostic premier open banking marketplace for all API needs, provides API connectors for as many as 40 different core accounting systems including Fiserv, Jack Henry and FIS.