US community banks face mounting pressure as fintech critics and regulatory uncertainty collide over open banking rules.
A consortium of US banks and fintechs have taken aim at the CFBP’s proposed open banking rules, warning of costly compliance and restricted data access.
While the Consumer Financial Protection Bureau (CFPB) has stated it plans to revise its proposed its open banking framework, a recent lawsuit filed in Kentucky by Forcht Bank, the Kentucky Bankers Association, and the Bank Policy Institute claims the CFPB’s rule exceeds the agency’s statutory authority.
“Plaintiffs respectfully request an order staying the rule’s compliance deadlines and enjoining the rule’s enforcement until one year following the conclusion of this litigation,” the motion reads. “Only at that point will all parties have certainty about all relevant regulatory obligations.”
The group has called for mandatory data sharing with third-party commercial providers rather than limiting access to account holders themselves. Banks have also challenged the rule’s ban on fees for third-party data access and argue the framework inadequately protects consumers.
CFPB plans regulatory re-evaluation
At the centre of the dispute are the CFPB’s proposed open banking rules, which the agency has said it plans to overhaul. The bureau cited new leadership priorities and legal concerns as reasons for a comprehensive rulemaking process.
Earlier this year, the regulator asked a federal court to pause the ongoing litigation, arguing that continuing the case could waste judicial resources if a new rule eventually replaces the current one.
“To conserve judicial resources,” the motion reads, “the Bureau respectfully requests a stay of proceedings to allow the Bureau to conduct an accelerated rulemaking process that may obviate the need for the Court to rule on the current Rule under review.”
The existing rule requires banks to provide consumers and authorised third parties with access to transaction-level data in a standardised, machine-readable format, enabling consumers and authorised third parties to move and manage financial data easily across apps and services.
The upcoming revision could significantly change both the technical and legal requirements.
However, until a decision is made, community banks are required to continue to prepare for the new rules in their current format. They must invest in technology, staff and infrastructure to comply, but with the CFPB planning a rule revision, these expenditures could go unrecovered.
In their filing, the banks asked the court to pause compliance deadlines until one year after the litigation ends, citing imminent financial harm.
Fintech criticism adds pressure
Adam Turmakhan, CEO of Florida startup TurmaFinTech, which helps community banks and credit unions, said fintech companies hold too much control over bank customer data.
“They’ve held community banks to ransom, controlling their customer data, embedding themselves in their systems, and building platforms that lock other providers, and the banks themselves, out,” said Turmakhan.
“They have made it near-impossible for community banks to take control of their digitalisation and at a time when these smaller institutions are struggling to compete, they have seriously threatened their success.”
He added that empowering small banks to leverage technology independently is essential to closing the digital gap.
“Don’t get me wrong, fintech providers have the potential to bring genuine value to smaller banks when they work with them hand in hand. But firms that call all the shots and strip away community banks’ data autonomy are doing far more harm than good,” he added.
“Empowering small banks to embrace technology on their own terms is the only way we can close the sector’s tech gap. If fintech firms aren’t checked, their malpractice could bring a halt to community banks’ digitalisation once and for all.”
