Can the U.S. capitalize on the promise of open banking?

The Consumer Financial Protection Bureau’s Open Banking rule implementing Section 1033 of the 2010 Consumer Financial Protection Act marked an important opportunity for America’s  financial consumers as well as a moment of uncertainty. By standardizing how banks must protect personal information while granting clients greater control over their financial data, the rule cleared the way for a slew of new fintech companies to expand financial inclusion, streamline services and empower consumer choices.

At its core, open banking empowers consumers by granting them ownership over their financial data, allowing secure sharing with third-party providers to unlock better services, increase competition and expand financial inclusion. Yet, the regulation could be a solution in search of a problem and, despite the promise of open banking, the U.S. faces significant challenges to ensure it delivers on its transformative potential.

For a start, banks worry that implementing new portal technology will risk dangerously large data breaches. Even if they are able to overcome this problem, the upside may be limited. While India and Singapore have taken positive and effective steps to make open banking scalable to large populations (including payments and digital identifiers), with no obvious “killer app,” global open banking initiatives have only seen de minimis usage.

Though banks are understandably reluctant to put in work that may not benefit them, the real question is whether open banking can help consumers. Widespread adoption is key to conducting a proper cost-benefit analysis to determine whether the impacts of regulation are justified by the benefits it brings to consumers. Without improving consumer trust, standardizing API technologies and demonstrating compelling use cases, open banking risks becoming a regulatory checkbox rather than a revolutionary shift.

Regaining consumer trust is crucial. As we point out in our recent paper for the Psaros Center for Financial Markets and Policy at Georgetown University’s McDonough School of Business, this financial transformation depends upon innovation driven by demand. Consumer trust is the bedrock of any system reliant on data sharing, yet it is alarmingly scarce in the financial sector. According to a Pew Research survey, 81% of Americans harbor concerns about how companies use their data, and only 57% trust financial institutions to protect it. This distrust is not unfounded, as recent years have seen worsening data breaches and misuse of personal information.

To make open banking a success, the CFPB and industry stakeholders must establish robust data privacy and security frameworks. Open banking presents further risks to data security, largely due to the challenges of regulating and maintaining safe data standards amidst the proliferation of fintechs, alongside banks’ obligation to make information available.

Addressing these challenges to securing privacy and security — especially on the part of fintechs and other third parties — requires more than regulatory mandates; it demands clear, consumer-friendly disclosures that explain how data will be used, stored and protected. Transparency alone, however, will not suffice. Companies must demonstrate a commitment to ethical data practices by adopting stringent safeguards and promptly addressing breaches. A proactive approach to building trust — one that involves educating consumers on their rights and the benefits of open banking — will be key to overcoming skepticism.

Once the sector has built trust, it must ensure that the API is standardized. One of the most glaring lessons from Europe’s implementation of open banking under the Payment Services Directive 2, or PSD2, is the chaos caused by the lack of API standardization. Despite the existence of multiple API standards, inconsistent implementation by banks led to fragmented systems that hindered interoperability and imposed significant costs on fintech developers. The result was a system riddled with inefficiencies and suboptimal consumer experiences.

It seems as though the U.S. has learned from this when, in January, the Financial Data Exchange was authorized to set standards which could lead to a unified API infrastructure. The CFPB is still evaluating other applications for standard-setting recognition which would deviate from having a single authorized body as is the case in the U.K. and Australia.

A unified infrastructure could also be achieved through collaboration between regulators, financial institutions, and fintechs to develop a baseline set of technical specifications that are easy to implement and maintain. Such standards would ensure integration across platforms, reducing costs and fostering innovation.

For open banking to gain traction, it must deliver clear and compelling value to consumers. Global examples highlight the consequences of neglecting this principle. In Australia, the Consumer Data Right initiative — the country’s version of open banking — has struggled with low adoption rates, with only 0.31% of bank customers maintaining active data-sharing arrangements. Meanwhile, Brazil’s integration of open banking with its instant payment system, Pix, has driven significant consumer uptake by embedding open banking into everyday transactions.

In the U.S., open banking must go beyond niche financial management tools and cater to broad consumer needs. Drastically expanding the scope of payment initiation services, for example, could simplify day-to-day expenses like paying for groceries, utility bills or rent, making the benefits of open banking tangible for all consumers. Additionally, alternative credit evaluation methods informed by transaction data can expand financial inclusion by providing underserved populations with access to loans and other services.

To achieve this level of uptake, financial institutions and fintechs must develop products that resonate with consumers’ daily lives and market them effectively. Partnering with community organizations and leveraging targeted outreach campaigns can help bridge the gap between innovation and adoption.

While the road ahead is challenging, the potential rewards are immense. Open banking can foster competition, democratize access to financial services and unlock innovations that improve lives. By learning from global successes and failures, the U.S. has an opportunity to set a new standard for how open banking can deliver on its promise. With regulatory commitment, community collaboration, and a consumer-first approach, open banking can become a cornerstone of a more inclusive and innovative financial future.