Breaking Down Silos

The European Union is working on the third iteration of its regulatory framework governing open banking. Meanwhile, across the Atlantic, open banking rules remain in legislative limbo and have faced pushback from many financial institutions, raising doubts about whether the model will gain traction in the U.S.

At its core, open banking aims to unlock consumer financial data—originally a domain reserved for banks—for third-party service providers. Using application programming interfaces (APIs) as intermediaries, these fintech companies can provide an array of financial services, including mobile banking and peer-to-peer payments.

The growing demand for such services indicates that the open banking model is advancing regardless of whether nations adopt a regulatory-first or market-driven approach—and this trend is likely to continue for years.

Considering Challenges

One significant challenge facing the future of Section 1033 in the U.S. is substantial pushback from leading financial institutions, chiefly due to concerns about increased compliance burdens and risks associated with opening customer banking data to third parties.

Banks fear that free access to consumer data by fintech companies could lead to oversight issues similar to those seen post-failure of Synapse, which failed to properly document its financial flows, resulting in approximately $85 million in frozen customer funds. Regulators have since called for stricter oversight of banks’ partnerships with third parties.

James Wester from Javelin Strategy & Research highlighted that fintechs and neobanks are essentially pass-throughs that add layers of technology without adequate compliance, emphasizing the need to maintain fundamental banking principles such as risk mitigation and ledger management.

JPMorgan’s Proposal

In response to these concerns, JPMorgan Chase has proposed a plan that could significantly impact the open banking model. The bank is considering charging fintech companies for accessing customer banking data—a move that could cost the industry hundreds of millions and threaten many business models.

This proposal, if implemented, would likely limit third-party access to consumer financial data, contradicting one of the key principles of open banking: free access to consumer data to deliver better solutions and drive innovation. Such a step could face significant opposition from fintech groups, as it has in previous instances.

The dynamic of financial institutions needing third-party support to meet modern consumer expectations is likely to keep open banking moving forward, regardless of regulatory blessing or lack thereof.

Advancing Despite Challenges

The digitalization and modernization of banking have raised consumer expectations so high that most financial institutions can no longer meet them without third-party support. This reality alone is likely to keep open banking moving forward, with or without regulatory backing.