Open banking rule could force defending core deposits
Financial institutions will have to level up their games to hold onto core deposits under a newly proposed rule requiring banks to share consumer data.
The Consumer Financial Protection Bureau has proposed an "open banking" rule that would require financial institutions to set up data connectivity to make customer data available to third parties for free upon consumers' request. The agency envisions a more competitive banking system for consumers to switch providers more easily, and hopes to create an incentive for banks to provide cheaper loan rates and higher yields on deposits.
Core deposits — stable, relationship-driven and less sensitive to interest rate changes — are central to regulators' assessments of banks' safety and soundness, and banks lean on core deposit relationships for detailed, real-time insights into customer behavior, including deposit flows and payment history. Open banking has the potential to erase that advantage, because consumers can choose to hand over their profiles to other providers, which can compete for their business.
"Having access to the spending behavior is going to really empower banks to provide more personalized solutions," said Britney Pope, associate vice president at banking software company nCino. "It's going to be who is faster, who has the better rates or the better experience — they're going to win."
The convenience of switching banks could make deposits more fluid, and some banks fear that it will be easier for longtime customers to leave, said Ian Katz, managing director at policy research firm Capital Alpha Partners.
In its consultations with regulators including the Federal Reserve, the CFPB has not heard any concerns about open banking spurring instability, and there is no evidence to suggest that it would be an increased concern, a senior CFPB official said in a press briefing Oct. 19.
Proponents of the proposed rule argue that the stability of core deposits is rooted in banks' products and services. When open banking unlocks more consumer insights, they say, banks that are able to take advantage of what they have learned will gain more consumers.
While large banks have been practicing open banking proactively, there are concerns that smaller financial institutions cannot benefit equally.
"The smaller banks and credit unions have much longer time frames to come into compliance because many of them are going to have to depend on their core providers to set this up," said John Coleman, a partner at Orrick Herrington & Sutcliffe LLP. "Depending on their customer base and the current core provider, there could be significant expense associated with that."
The CFPB estimates that up to one-third of depository institutions would need to change core banking vendors to set up compliant API. The cost to change a core vendor can range from $50,000 to $350,000 upfront, and another $200,000 to decommission the prior vendor. For small depository institutions to build API in-house, the upfront cost could be $250,000 to $500,000, in addition to ongoing technology and staffing costs.
Source: S&P Global Market Intelligence