The current Consumer Financial Protection Bureau (CFPB) rulemaking on Section 1033 of the Dodd-Frank Act of 2010 (Section 1033) has pushed the conversation on consumer data sharing and privacy rights to the forefront. Section 1033 grants the CFPB authority to craft rules governing data sharing and privacy in consumer financial services transactions, which can be applied to a range of actors involved in data sharing and privacy such as data aggregators and third party processors. This rulemaking process has the potential to set new standards in the US for the rights of customers to share their own personal financial data with other entities, providing an opportunity for all entities involved in data privacy and sharing to advance a more inclusive financial system.
Data sharing and privacy not only drive financial services provision but are crucial elements of building a more inclusive financial infrastructure. Financial service providers rely on consumer financial data to determine creditworthiness, conduct risk assessments, verify customer identity, personalize service offerings, and more. Establishing rules of the road for different financial services providers to access that data has the potential to spur innovations and market competition that may result in tailored products and lower costs.
If we are to measure the performance of our current financial infrastructure based on the results it delivers for consumers (as we believe we should), today’s infrastructure falls short:
- A 2022 Oliver Wyman report identified 28 million US adults as being credit invisible and an additional 21 million US adults as credit unscorable.
- Approximately 10 percent of rural households lived in a banking desert in 2017 and 43 percent of households with incomes of under $50,000 in 2021 had $0 in emergency savings.
- 27.2 million people (8.3 percent) did not have access to public or private health insurance in 2021.
- In 2021, 1 in 5 US households lacked access to traditional financial services and had to rely on more costly and/or less reputable alternatives as a result.
Building an inclusive financial system requires closing these gaps, by offering individuals and households a full suite of financial services and products, including credit, savings and investments, public and private benefits, and payment mechanisms that result in positive financial outcomes in their lives.
The current data sharing and privacy discussion is missing the mark. We have heard calls for customer-centricity in system design. We have also heard the “need for speed” to catch up to what technology can enable, and what other countries are already able to do. Both are valid and important points. However, if customer-centricity combined with speed means quickly designing the system based on information from the current population that is conducting all of almost all their financial transactions in the digital financial system, we will continue upholding a system that excludes those who are not yet fully participating. That includes not only the 5.9 million people who are unbanked, and the 18.7 million who use alternative financial products (the underbanked) but anyone who is operating in cash as well, which accounted for 20 percent of all payments in 2021. There is an opportunity today to design with intention from the beginning before ensuring consumer financial data from low-income individuals and households are included in the rulemaking and addressing marginalized consumer confidentiality concerns.
Consumer data used by large segments of low-income households must be included in the final rule. For example, Electronic Benefits Transfer (EBT) cards are used by over 41 million Supplemental Nutrition Assistance Program participants and meet the Section 1033 “covered persons” standards. However, these cards were left out of the original rule proposal. If the 1033 rulemaking and other policymaking exclude services like EBT cards, it risks deepening the two-tiered system where financial services used by the middle class and wealthy reap the benefits of open banking, while services relied on by low- and moderate-income households fall further behind.
Another related element that should be addressed is the technology needs of smaller financial institutions which directly impact their ability to comply with data sharing and privacy requirements. Marginalized consumers are often customers of community banks, community development credit unions, and minority depository institutions. As the CFPB develops these recommendations, it is important that smaller or less technologically sophisticated financial services providers are not left behind. Consumers have long put their trust in the banking system to provide much-needed, high-quality financial offerings. In June 2022, over 4,800 credit unions served approximately 132 million members. According to a 2016 Federal Deposit Insurance Corporation Community Banking Conference report, community banks were the only banks operating in more than 20 percent of the 3,100 US counties. However, with smaller banks and credit unions before lagging behind in technology adoption, they will likely struggle with adopting the APIs that might be required for open banking, a third-party data sharing and privacy system, that if implemented equitably can foster financial inclusion. To establish a level playing field for these institutions and ensure their customers’ data becomes part of the updated financial infrastructure, it is important that public, private, and social sector actors commit to investing in these banks’ technology systems.
Developing effective and inclusive data sharing and privacy is a key foundation of building an inclusive financial system. At the Aspen Institute Financial Security Program (Aspen FSP), we identified four driving principles for establishing an inclusive financial system: (1) focus on underserved populations (e.g., low-income, rural, racial and ethnic minorities) (2) set household financial outcomes as the success metric (3) establish a regulatory environment that prioritizes consumer protection alongside innovation and (4) advance market growth and integrity. We believe these principles should be applied in Section 1033 rulemaking.
Experts from around the world have recognized that if a financial system is to be inclusive, it needs to be designed with inclusion as a goal from inception. Data sharing and privacy innovations like open banking have created new possibilities for the way data sharing can rebuild inclusion in our financial systems. Policymakers have opportunities now to make sure everyone is included in this new wave of innovation. Financial literacy month may be in our rearview mirror, but the work towards building a more financially literate and included society is just beginning. We encourage you to join us as we push for a watershed moment in data sharing, privacy, and financial inclusion.