Conveniences like automatic deposit of your paycheck and scheduled debits to your monthly accounts can be a double-edged sword if you’re looking to switch banks. This is one of the reasons why so many people feel stuck in their banks.
But everything can change after The Consumer Financial Protection Bureau announced Tuesday that it has finalized what proponents call an “open banking” rule designed to make people’s financial history portable so they can more easily switch banks.
The new Personal Financial Data Rights rule stipulates that banks will be required to transfer your financial information from your current bank to the new institution upon your request. In a statement, the CFPB said the rule will increase competition and consumer choice, which it predicts will lead to improved customer service and better terms for bank customers on products such as loans. Regulators hope that requiring banks to provide customers with account verification data, information about transactions, upcoming bill payments and other day-to-day banking transactions—for free—will make it easier for people to switch banks, buy financial products and ultimately save money.
Consumer advocates who oversee banks praised the new rule.
“It’s too difficult to switch and risk incurring an overdraft or late fee if they miss a regular bill,” Adam Rust, director of financial services for the Consumer Federation of America, said in a statement. The CFPB noted that banks capitalize on this to keep customers from leaving, using tactics such as warning people that closing their account could hurt their credit score or their ability to borrow money in the future.
This rule has been around for a long time: lawmakers authorized reforms as part of the 2010 Dodd-Frank Act. The landmark banking law passed in the wake of the financial crisis aimed to reform financial regulation and empower bank customers. But consumers will still have to wait longer to feel the effects of the new rule. The CFPB says large banks will have to comply starting in 2026, and smaller banks until 2030.
Consumers will gain more control over their financial data
In prepared remarks at the Federal Reserve Bank of Philadelphia on Tuesday, CFPB Director Rohit Chopra compared the new rule to a Federal Communications Commission policy that requires cell phone providers to allow people to keep their phone numbers even if they switch to a new provider. MMaking it easier for people to vote with their feet if they receive lousy terms or poor service would motivate the financial industry to improve both, forcing banks to be more competitive to keep customers from walking out the door, the agency said.
One aspect of the rule would allow people to borrow money based on financial data held by entities other than just the lender. Chopra said it could improve access to credit, for example by allowing a lender to write a mortgage based on information in a borrower’s checking account that shows their income, expenses and financial details. (Information will be obtained with the client’s permission.)
Long-term benefits of cash flow underwriting, as the practice is called, can include reducing the need for credit scores. Chi Chi Wu, a senior attorney at the National Consumer Law Center, calls cash flow insurance the “most promising” use of consumer financial data portability.
“We think this is a promising alternative to traditional credit reports and credit scores,” she says, adding that it could lead to a better and more accurate determination of borrowers’ creditworthiness than traditional credit reports. Circumstances beyond a person’s control, such as illness or job loss, can tarnish their credit.while cash flow underwriting provides greater transparency into people’s day-to-day financial activities, she says. “I think this has to be the future of credit underwriting.”
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