Following the Market - An Interview with Don Cardinal

The following article is an adapted transcript based on the audio recording of Episode 3 of the Mr. Open Banking podcast. The audio version is available here. 

As open banking evolves around the world, there is one common but important question that comes up again and again: Is open banking exclusively a set of laws and regulations? 

After all, wide use of the term open banking can be traced back to a European law: the revised Payment Services Directive or PSD2, an act passed by the EU in 2015 that aims to protect consumers, drive competition, and promote innovation in the banking sector. Ultimately, that law is what drove the explosion of open banking activity that Europe is experiencing today and that other countries are moving quickly to emulate. As a result of this government-driven history, many people automatically equate open banking with regulation. 

However, in this article, we challenge that assumption. We discover how one region is trying to get there without any regulation at all and, perhaps, that a market-driven approach might be the better way. 

The United States remains home to one of the most innovative financial sectors in the world. US fintech activity continues to thrive, US banks are laser-focused on digital innovation, and US companies still handle the vast majority of global payments. However, there still remain over 10,000 financial institutions in the US that need to be stitched together and no easy, secure, standardized way to do so. 

Enter the Financial Data Exchange or FDX, a not-for-profit organization that aims to unify the US financial industry around a common interoperable standard for secure access to financial data, and to do so in a way that is fundamentally market-driven. The guest for this interview is the Managing Director of FDX, Don Cardinal. 

Prior to joining FDX, Don spent over 10 years in traditional financial services at organizations such as Bank of America, the University of The Incarnate Word, and Thomson Reuters. In 2019, Don testified before the US Congress to advocate for the future of financial technology, encouraging the empowerment of consumers to take control of their financial data. 

To understand FDX, it’s helpful to know where it began. For many years, US fintechs and FS-ISAC - a group of global financial services firms working to share data for cybersecurity - were unsatisfied with the existing legacy data sharing model. 

This decade-old credential sharing model was designed to hold and grant access through the storage and re-use of millions of customer IDs and passwords, a process sometimes known as screen scraping. Access was unintentionally provided through the APIs exposed for the mobile app and web-based ‘e-banking’ channels. Needless to say, this was not an effective strategy. 

Banks were seeing about 25% of their daily sessions coming from third-party software, which is a lot of infrastructure wasted on serving non-human clients. At the same time, fintechs were facing the privacy risk of holding customer passwords while also having to sort through data that wasn’t always uniform. 

So in 2018, these two groups, banks and fintechs, joined forces. Together, they launched FDX to work on behalf of their common customer and shift to a lower-risk, API model that acts as a reliable data source. Since then, FDX has grown to 115 organizations, migrating about 12 million consumers to this new digital-friendly model. 

Still, Don estimates there’s another 80 - 100 million insecure account migrations left to go in North America. 

That means there are 100 million usernames and passwords in North America alone, all providing access to real bank accounts, all floating around out there in the databases of various fintechs without any clear guidance around risk management or liability approach. 

Despite being dangerous and unreliable, these credential sharing techniques are actively used the world over. This proves two things: First, there is a significant risk that currently exists in the system today. All of these banks and fintechs are sharing data using unreliable, inefficient and - worst of all - insecure methods. And second, the demand is there. People want to share their financial data if it means getting better financial products. They simply want to do it in a safer way. 

That is exactly what FDX is trying to achieve. Interestingly, this is also what open banking is trying to achieve. Although Don talks about the development of a standard for banks to share data, he does not mention the actual term open banking. The fact is, the term open banking is not very widely used in the US (at least, not yet). 

In America, they have a market-based solution to open banking. Why a market-based approach? Don provides this answer:

“No one can be as close to the consumer as the people who actively depend on them for their livelihood.”

He says this market-based approach is more durable and meets real, pressing consumer demands. One term being used as an equivalent for open banking in the US is consumer-permissioned data sharing. This shifts the term from a focus on banking to a focus on consumer rights. 

One might see parallels here between the work FDX is doing and what’s being done in Australia under the consumer data right (CDR). However, although the CDR is also focused on consumer data rights, it is heavily regulatory-driven and is much broader than just the banking sector, whereas, FDX is taking a much more market-driven approach. 

So, does the government have any role to play?

US regulators are certainly interested in the progress FDX is making and want to stay informed, Don explains, but they generally leave the standards body alone to continue doing what they’re doing. This demonstrates trust from the regulators, and an expectation that FDX’s independence will help rather than hinder their progress. Still, Don stresses that regulatory clarity is important, especially for coders and programming engineers.

Some worry that, with a market-driven approach, incumbent players may actively slow the development of the standard, because it affects their competitiveness. Don says that this has simply note been the case within FDX, as all members work towards one common goal: 

“Permissioned, tokenized access through an API to make [banking] better for everyone.”

Although he stays aways from the term open banking, Don describes sharing data in a standard format via API and both the reduction of risk and the opening up of innovation that comes with that. The name aside, the approach being taken by FDX in developing a standard and the approach being taken by others in developing similar standards (by whatever name) seem to be heading in the same direction.  

In terms of security and data elements, Don says every approach seems to be aligned. Every region is using RESTful APIs and JSON payloads. While this seems like an opportunity to consolidate around a global standard, according to Don, the FDX doesn’t have specific global aspirations. The FDX is supported by members all over the world, from Canada to the UK. It is committed to solving what the members want and isn’t tied to any one jurisdiction, which means it can provide a spec that will work for all members, no matter where they go. 

Simply put, Don believes the market will reveal what the global capabilities are. 

The kind of member-driven approach Don describes is the way most technical standards are developed. Working groups meet and, based on open participation and frank discussions, the best ideas and contributions are approved by a democratic process rather than a central authority. Ideas are tested by the market, which decides what works and what doesn't. He mentions HTTP and Bluetooth as examples. 

So, what is preventing the US from getting there faster relative to other markets? The US famously still supports things like the magstripe quite widely, and even carbon paper swiping of credit cards.

With over 10,000 different FIs, the US market tends to do things in a non-disruptive way. Don gives the example of online banking, which consumers were fairly slow to adopt. Similarly, the US is taking open banking slowly and cautiously. Don elaborates: 

“Tech firms have a fail-fast mentality. Financial services can’t fail ever. So there’s a big difference there.” 

Even though the US is a highly distributed market, with over 10,000 financial services institutions, there are still a handful of dominant players. In 2008, during the financial crisis, those players were accused of being too big to fail. In some circles, open banking was considered a reaction to that kind of concentration. 

Although FDX is most focused on solving tech problems for its members, creating a unified standard to pull data from is creating a level of equality. Instead of building countless custom interfaces for all the banks, fintechs can build one interface and simply change the URL it points to. This can stretch startup funds much further and level the playing fields so even the smaller fintechs can enter and receive funding. So, despite there not being a regulatory or legislative element, there is very much a fairness element to what FDX does. 

The question is whether they can get there without regulation. A recent report from Juniper Research says that the number of open banking users worldwide is going to double by 2021. However, that same report says that a quote “lack of central regulatory intervention in the US” was likely to limit the potential growth there.

To those out there who say the US is behind in open banking, Don begs to differ and has strong adoption numbers to back it up. More and more American consumers are demanding innovative financial services. More and more providers are moving towards standardized, secure API access. And FDX membership continues to grow (although the GAFAs are conspicuously absent). All of this success with no regulation. 

More importantly, even though this is a market-driven approach, the larger philosophy of open banking - the idea that customers should own their financial data - is clearly still very present in the FDX mission. 

Given FDX’s mandate and the way Don describes consumer data access, it seems this trend could be the thin edge of a wedge where we start with financial data, but ultimately, these data rights apply all the way up to social. Don’s response to that: 

“I’m going to try not to boil the ocean. I'm very focused on purpose and what our members are focusing on right now. And that is sharing consumer permission financial data.” 

Based on the tools consumers adopt, he believes the market will decide what comes next. The advice Don would give to other groups trying to develop a financial data standard focuses on three main factors for developing standards. First, take a market-based approach by solving real consumer needs and casting a wide net. Second, make sure your members are always getting value in exchange for their time. And lastly, stay hyper-focused on your mission and don’t let your decisions stray from it. 

In the development of a standard, one area that is often debated is consent management and consent flows, with much of the debate being centered around whether a standard needs to be explicit about what a consent flow looks like.

Don believes there needs to be some flexibility in that area to ensure branding is still captured. But overall, FDX is seeing a lot of commonalities in redirect flows for example, which will disclose exactly what the customer is agreeing to before agreeing to share their data on an app. 10 years from now, Don says these similarities will be important for the consumer to have clarity.

It sounds like open banking, FDX, and common data standards for the financial services ecosystem are the pipes that we're building for the 21st century. But Don says they are only some of the pipes. New uses will always be discovered to change how those pipelines are built. 

“I think there will be new things to come as long as we build and secure robust, extensible pipes and a lot of people have a say in what goes into them.” 

Back to the original question: is open banking just a set of regulations? While it still goes by many different names, it seems to be something more. 

In some places like Europe, it is indeed driven by laws and regulations. However, in other places like the US, the same goals of competition, innovation, and transparency are being met by the market. Don advises standard builders out there to lean towards more market-based approaches, as they tend to lead to more durable, flexible solutions. Solutions that can react to ever-changing consumer needs. Make sure members of standards bodies are getting real value back for their time and effort. And always tie decisions back to the core mission, whether that's getting rid of risky credential sharing, increasing competition, or giving consumers control of their data. The goal must always be clear. 

Don also points out that open banking is not one size fits all. The road travelled by one region is not necessarily the right road for another and often the difference comes down to a decision around the role of the regulator and the role of the market. 

In the end, the answer is different for each region. The best you can do is try to strike the right balance and strive to get all the stakeholders to sit at the same table and collaborate. 

Instead of getting stuck in the endless debate over which is better, market-driven or regulatory-driven, just get on with it. Because regardless of how you get to open banking, whether pushed by regulation or pulled by market forces, you end up in the same place: a standard, secure, and open way for banks to share your financial data. 

For more information about FDX, visit their website at www.financialdataexchange.org and follow them on Twitter and LinkedIn. 

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