Big banks are afraid of open banking. That's a good thing.

MukeshKumar - stock.adobe.com

In the digital era, it should be easy for consumers to switch bank accounts to take advantage of higher interest rates. By now, we should also have powerful artificial intelligence assistants to help us find the best credit cards and loans. 

Instead, over 90 million Americans have never switched bank accounts. And more than half of all homebuyers get only one mortgage quote. 

A big reason why is that big banks have worked to lock in consumers, including by making it harder to access and transfer our financial data. As a result, consumers pay tens of billions of dollars more each year. Fortunately, the Consumer Financial Protection Bureau is finally taking steps to move us toward a world of open banking. Banks are scared, but maybe that's not such a bad thing.

Small-business owners like my father, an electrician who has a few employees, can't lock in customers. They also don't get government bailouts if they fail. Competition keeps them up at night. That makes them improve their services and offer lower prices.

Big banks are different. Unlike in most other industries, it is especially hard to start up a bank because the federal government almost never approves new bank charters. And since everyone knows our government will step in if big banks mess up, they receive a subsidy that lowers their costs of doing business. As a result, many customers unfairly believe their money is safer in big banks. Big banks can sleep soundly knowing most of their customers are functionally locked in.

A decade ago, as digital technologies took off, big banks began to fear stiffer competition. Not only were some technology startups trying to offer similar services as banks, but others were seeking to leverage artificial intelligence to help consumers navigate a bewildering consumer financial marketplace. Many early tech entrepreneurs made it clear their goal was "breaking banks." At the time, Jamie Dimon, the CEO of the largest U.S. bank, warned shareholders: "Silicon Valley is coming."

Banks' early playbook was to block third-party digital helpers from access to user accounts, both by making it technologically more difficult and by threatening lawsuits. Without access to consumers' data, it would be hard for competing companies to figure out which credit card, mortgage or savings account fits best.

Those early moves slowed the challengers down, and because regulators failed to intervene banks had plenty of time to develop their own copycat innovations or purchase emerging competitors. Banks also began working together to take over the digital architecture that startups had begun building. For example, to meet the threat of Venmo, which significantly lowered the costs of transferring money, seven of the largest banks created an alternative, Zelle.

More alarmingly, as consumers persisted in using third-party fintechs for help in managing their money and accessing accounts, eleven big banks — including the likes of Bank of America, PNC, and JPMorgan Chase — acquired Akoya. Akoya provides an interface between banks and third-party digital helpers — a service that had previously been assumed by independent startups. Some of the banks that owned Akoya then began to inform competing, smaller industry players that if their customers wanted to continue to share financial data, they would be required to use Akoya's services or be blocked.

Regulation and compliance

It's time to deliver on the promise of the CFPB's open banking rule

December 25, 2023 10:00 AM

Realizing that a voluntary system of data sharing was no longer tenable, the CFPB recently took long overdue steps to make it easier for people to break up with their bank. It has proposed new rules that would require banks to let consumers take their account data with them when they move — known as data portability. It would also force banks to allow third-party digital access to accounts when customers request such access.

Similar laws have worked elsewhere. Cellphone carriers used to be hard to leave because the carrier had control over the phone number. After new laws required companies to let people take their phone number with them, many people switched and saved considerably. A law requiring stores to make their price and product information available in machine-readable form so that digital intermediaries could better inform consumers was found to overall lower prices 4% to 5% — and not just for those accessing the information. As expected, investing in competition pays off for consumers.

In an era when the value of consumer data has been compared to that of oil, it is unacceptable for entrenched incumbents to make tasks like transferring money or data unnecessarily difficult in order to lock consumers in. The final outcome of the CFPB fight is not yet clear. If successful, the new rule will help bring a healthy level of fear to big banks — the kind that all businesses feel when new entrants, and consumers, can flourish.