banking – Dickinson Law's Inside Entrepreneurship Law Blog

By: Anthony Francioso

Open banking technologies allow customers to share their financial data with third parties. Software, known as application programming interface (API), enables apps to access and utilize the requested data. Customers have difficulty switching banks or accessing third-party financial products without open banking capabilities because banks control their customers’ data. When consumers first attempt to link their bank accounts to third-party financial applications, they fail at a 40% rate because major banks often intentionally frustrate the process. Open banking gives customers greater control over their financial information and promotes competition and inclusion in the financial industry. This YouTube video further explains how open banking works.

In the United States, an open banking framework stems from Section 1033 of the Dodd-Frank Act. Section 1033, which became law in 2010, requires financial institutions to provide their customers with their financial data upon request. The law instructs the Consumer Financial Protection Bureau (CFPB) to implement rules and regulations to realize this objective. Until recently, the government has done little to address open banking. However, that has changed recently. In July 2021, President Joe Biden encouraged the CFPB to issue rules related to open banking. The CFPB is expected to issue rules on open banking in the near future.

open banking benefits

Open banking offers several potential benefits to entrepreneurs and small businesses. Open banking can help with lending. Major banks denied 72% of small business loan applications in 2019. Open banking allows entrepreneurs and small business owners easily apply and potentially receive loans. Open banking allows applicants to submit electronic financial information, such as proof of income and payroll data for underwriting purposes. This process is much easier than the traditional loan application, where proof of financial information is difficult to access. Therefore, competition for loans increases while costs are low. Open banking would particularly help entrepreneurs and small businesses with little to no history of credit. Such assistance can promote financial inclusion to traditionally unrepresented entrepreneurs and business owners.

Open banking can also help entrepreneurs and small businesses manage their finances. Small businesses often fail due to a lack of capital. Through open banking, entrepreneurs and small business owners can use cloud accounting to accurately track their finances. Cloud-based accounting lets the user link accounting software with their business bank accounts. Transactions automatically link between sources which save time and prevents manual entry. Open banking similarly helps with forecasting. Poor cash flow is the main reason why small businesses fail. Open banking allows apps to use financial data to make predictions and build scenarios based on the user’s financial data. These open banking abilities help busy entrepreneurs and small business owners save time and focus on things like employees, marketing, and innovation.

open banking risks

When considering open banking technologies, entrepreneurs and small business owners should consider the potential risks. One main concern is data privacy and security. When users share their financial data with a third party, cyberattacks can cause data breaches. Third-party providers also may sell or share customer data with other third parties without the customer’s consent or knowledge. Data breaches and information sharing may lead to undesired third parties having access to the user’s information. Similarly, open banking may cause overexposure to marketing. As more third parties gain access to the user’s financial data, more financial services will want to sell to them. This issue may be particularly relevant to entrepreneurs and small business owners who do not have much of a business background. While open banking helps users find personalized financial products, it could backfire.

Entrepreneurs and small business owners, and their lawyers, should keep in mind the regulations may have growing pains. As the industry evolves and the technology advances, the government, and financial institutions will likely have to refine and update their policies. Since no strict rules are in place yet, only time will tell if the CFPB and other relevant government agencies have accurately assessed the industry.

takeaways

Open banking allows entrepreneurs and small businesses to use their financial data to more efficiently access loans while also optimizing the way they manage their finances. Entrepreneurs and small businesses can reduce the high costs associated with traditional banking services by embracing open banking. Despite the benefits, open banking may pose cybersecurity and privacy risks as strict rules and regulations are still being developed.

Entrepreneurs and small business owners should consider open banking technologies, particularly those more focused on a specific product or innovation and with minor business background. It is important for those who wish to utilize open banking technologies to ensure they are doing business with reputable financial companies to minimize potential security concerns. Therefore, entrepreneurs and small business owners should consult with an attorney who is well-versed in this field. An attorney can help entrepreneurs and small business owners stay informed of the developing laws.

This post has been reproduced with the author’s permission. It was originally authored on January 22nd, 2022, and can be found here.

Anthony Francioso, at the time of this post, is a rising third-year student at Penn State Dickinson Law. Anthony is from Hamilton, New Jersey, and a graduate of Dickinson College, where he was a member of the baseball team. He is also an Articles Editor for the Dickinson Law Review.