Waiting on open finance legislation in the U.S. is pointless

Last year the Biden administration announced a sweeping executive order launching a "​​whole-of-government" approach to improving competition in the American economy. One measure in particular seemed poised to revolutionize American leadership in financial technology — and unlock unprecedented financial freedom and protection — with focused rulemaking under Section 1033 of the Dodd-Frank Act.

Stating that consumers should have rights over and access to their financial information, Section 1033 famously helped augur the financial technology industry as we know it. Despite early praise for the executive order and the U.S. entering a period where the need for financial innovation is more acute than ever, we now find ourselves 12 months down the line and there has been no discernible progress. For those hoping that a shift forward for open banking regulation would pave the way for more secure and open sharing of a broader array of financial data, it's all but a lost cause.

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Open banking as a concept is not new in financial services. And progress on the regulatory side is largely owed to folks across the pond, with data-sharing regulations getting passed in 2015 in the European Union and 2016 in the U.K. that have allowed the systems to take root. In the U.K., more than 6 million consumers and businesses use open banking to do everything from paying their utility bills to getting approved for mortgages and loans. All told, open banking facilitated 21.1 million transactions over the six months through March 2022, streamlining processes while keeping data secure. The momentum of open banking and the ongoing push toward its more evolved form — open finance — reflects a market with a hands-on, proactive approach to legislation that makes a positive impact.

The approach stands in contrast to how innovation in financial technology has emerged in the United States. With half-century-old legislation unfit for purpose and constant pushback from legacy players, much of today's progress has been driven solely by technological innovation within the sector. On a positive note, after years of ambiguity, the industry has seemingly reached a consensus around the interpretation of Section 1033, and the opportunities it affords to consumers. 

But while the benefits of open banking for the consumer are understood, for businesses to benefit in the same way, the concept must extend to the systems where they use and manage financial data, for example their enterprise resource planning (ERP), accounting and e-commerce systems.

The vast majority of small businesses do not manage their finances from a bank account. In fact, the major advantage of the open banking movement for businesses has been that it has led to wider availability of features to automatically sync data into accounting and ERP systems, the main hub of business financial data. A new wave of digital businesses are also increasingly looking to their e-commerce and payments tools, like Shopify or Toast, as the destination to better understand performance and make decisions. 

For businesses, it's opening up these systems that will be the real lever for greater freedom, flexibility and growth: the ability to accurately predict cash flow, make faster and cheaper payments, quickly access more suitable business funding and much more. We know from experience that the real-world impact of such abilities is significant.

In the most progressive open banking regimes, conversations are just starting to happen about what comes next, and it has taken years to get there. And so, in the U.S., where we are yet to have a way forward on the most basic form of open banking, waiting around for regulation to develop enough that it covers these broader applications is pointless. The positive impact that the opening up of financial systems will have for small businesses is so huge that waiting for bureaucratic progress to be made at steamroller pace seems borderline negligent. 

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Meaningful change here must be driven by market innovation and adoption. A more effective lobbying channel than the various government agencies is to invest in directly influencing the data platforms being used by small businesses around the country. As they continue to see the potential advantages of opening up further — increasing their access to data and enhancing their offerings — considerable progress is more likely to be achieved.

In short, we can't rely on the U.S. government to help progress the cause of open finance. Instead, here are two recommendations:

If you're an open finance provider, spend your time and your money on working with partners to build out solutions instead of working with the government to push policy forward. 

If you're a provider that holds financial data for businesses or consumers, recognize that even without regulation, the tide of consumer sentiment to control and share their data is rising. Get ahead of the curve to open it up on your own terms.