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CFPB's New Data Rights Rule Aims to Modernize U.S. Banking System, Boost Competition

Banks, credit card companies, and other financial institutions will now have to adhere to new data privacy regulations and retail account portability requirements under a broad rule introduced on Tuesday by the Consumer Financial Protection Bureau (CFPB).


CFPB's New Data Rights Rule Aims to Modernize U.S. Banking System, Boost Competition

This rule, known as the Personal Financial Data Rights rule, seeks to modernize the U.S. consumer financial landscape, expand banking and payment options for consumers, and enhance data privacy protections, according to the CFPB.


In essence, this new rule, which has been in development since 2010 in response to the aftermath of the financial crisis, will bring U.S. banking practices more in line with those in other countries that already have stronger consumer protections. The CFPB officially proposed the rule in October 2023.


“The payments infrastructure in the U.S. is lagging behind many other developed countries,” said Rohit Chopra, director of the CFPB, during a speech at the Federal Reserve Bank of Philadelphia on Wednesday. He emphasized that in order to make the U.S. banking and payments system more competitive, it needs to be more open and decentralized. “It needs to be open and decentralized using a common set of data standards, free of powerful gatekeepers and middlemen that can impose private regulations and extract fees,” Chopra stated.


Under the new rule, banks and financial institutions will be required to simplify the process for customers who wish to switch to a new bank. They will be prohibited from charging fees for such transfers and must include a customer’s account history and bill pay information, allowing consumers to more easily "shop around" for better interest rates and services. This measure is aimed at increasing competition in the financial sector, according to the CFPB.


In addition to portability, the rule introduces new guidelines that make it easier and safer for consumers to engage in “pay-by-bank” services when making payments at stores or online.


Chopra pointed out that monopolistic practices are rampant in the payments market, benefitting incumbent networks at the cost of consumers. “When it comes to making payments online or at a store’s checkout counter, the market is rife with monopolistic practices that enrich incumbent networks at the expense of consumers, businesses, and creators,” Chopra explained. “The result of this is that you pay more for loans and you earn less on your deposits.”


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The rule also sets new boundaries for financial institutions and third-party companies regarding the use of customer data. Institutions will be barred from using or sharing consumer data for purposes that do not directly benefit the consumer, such as using loan application data for targeted advertising. However, authorized third parties will be allowed to use consumer data without requiring separate permissions, provided the data is used to enhance a product or service that the consumer requested.


Consumers will also gain more control over their data under the new regulations. Banks and institutions will be required to offer customers a simple and instantaneous method to revoke a third party's access to their account.


The rule's compliance deadlines will be rolled out gradually, depending on the size and type of institution. Large financial firms will need to comply by April 1, 2026, while smaller organizations will have until April 1, 2030. Certain small banks and credit unions are exempt from the rule altogether.


This sweeping change is expected to reshape how financial institutions operate and compete, while offering consumers better services, more options, and increased protections. 

By fLEXI tEAM

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