When Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB), unveiled plans for new open banking regulations in June 2023, it signaled a major shift for financial services in the United States. His vision centers on giving consumers more control over their financial data, making it easier and safer to share that information with trusted third parties. This move marks the US’s transition toward a structured, consumer-focused approach.
Open banking, a revolutionary way of doing banking, gradually transforming how people manage their finances by giving them greater control over their data and easier access to personalized financial services. This shift has sparked competition among banks and fintechs, pushing the industry to innovate and improve. While countries around the world are adopting open banking in their unique ways, the UK and the US stand out as leaders with very different approaches.
In the UK, wanting to create a level playing field for smaller banks to deliver better services to the British, the CMA, using the European PSD2 directive, required the nine largest banks to follow strict rules and provide standardized APIs, creating a clear structure for open banking. Conversely, the US has let the market lead the way, allowing banks and fintechs to develop solutions on their own. This approach has encouraged creativity but has also led to uneven practices, standards fragmentation, and gaps in consumer protection.
Now, the US is stepping up its game. The Consumer Financial Protection Bureau (CFPB) has introduced new rules designed to bring more consistency to open banking while encouraging innovation. These changes aim to fix existing issues, protect consumers, and make the US a strong competitor in the global push for better financial services.
Here’s a closer look at five ways the new US open banking regulations outshine the UK’s approach:
Seamless integration of “Pay by Bank”
Pay by Bank is shaping up to be one of the most exciting features of open banking, especially in the US. Unlike the traditional card-payment systems, this method enables consumers to pay merchants directly from their bank accounts through secure open banking APIs. What’s the appeal? For starters, it bypasses the middlemen, meaning lower fees for merchants and often a smoother user experience.
One significant advantage of Pay by Bank is its suitability for regular transactions such as subscription services and utility bills. Unlike in the UK, where cumbersome strong customer authentication processes have limited its practicality, the US approach is geared toward reducing friction in these workflows. This makes it a natural fit for businesses and consumers seeking more straightforward and reliable recurring payment options. Additionally, the adaptability of ACH processing, while not real-time, offers an affordable and secure foundation for batch-based transactions. Industries like e-commerce and travel are also beginning to adopt Pay by Bank for one-off payments, where its secure authentication mechanisms reassure users while offering merchants lower fees compared to traditional card-based systems.
The US model has taken lessons from challenges in the UK, especially around user experience. By prioritizing smoother customer experiences and capitalizing on existing banking infrastructure, Pay by Bank in the US is positioned to achieve broader adoption. It’s fast, reliable, and addresses real consumer and business needs without over-complicating the process.
A balanced approach to regulation and innovation
The UK’s open banking journey was propelled by the Competition and Market Authority (CMA) propelled the UK’s open banking journey, which sort of weaponized the European Payments Services Directive 2 (PSD2) in 2018. This strict regulatory approach mandated traditional banks to share data with third-party providers (TPPs) via secure APIs, ensuring a level playing field. While this structure brought clarity and standardization, it left little room for businesses to shape the ecosystem organically.
The US, on the other hand, allowed market forces to lead the development of open banking. Although this initially resulted in uneven adoption and inconsistent security practices (e.g., screen scraping), the CFPB’s new rules aim to strike a balance. By combining regulatory oversight with industry-driven innovation, the US ensures a framework that fosters creativity while protecting consumers. This flexibility makes the US model more adaptable to evolving market needs than the UK’s top-down approach.
Simplified authentication for recurring payments
One of the UK’s challenges in Open Banking has been its complex Strong Customer Authentication (SCA) protocols, which make recurring payments cumbersome. This has hindered the use of Open Banking for subscription models or standing orders. In contrast, the US regulations aim to reduce friction in authentication processes, ensuring that recurring payments are as smooth as card-based systems. This approach not only supports user adoption but also fosters innovation in recurring payment solutions
Higher adoption driven by consumer demand
Despite Europe’s strong regulatory push, adoption rates for open banking remain modest. As of 2023, the UK reported around 10.6% adoption of open banking services, driven mainly by compliance rather than consumer demand. In other European markets, adoption lags even further, with only 5-7% of users engaged with open banking solutions.
In the US, consumer-driven adoption has propelled open banking forward. By 2021, 81% of US adults were connecting their bank accounts to third-party applications. This organic growth reflects a broader appeal, particularly among tech-savvy millennials and Gen Z, who demand smooth, personalized financial experiences. The recent US regulations formalize this landscape, ensuring consistent security and privacy protections without stifling the momentum.
Greater cross-industry integration
The UK’s open banking framework is predominantly bank-centric, focusing on data-sharing between financial institutions and regulated Third Party Providers (TPPs). While this has spurred innovation within the financial sector, it has limited cross-industry collaboration.
In contrast, the US open banking ecosystem has expanded beyond traditional banking to include partnerships with tech giants, e-commerce platforms, and fintech innovators. For example, third-party providers in the US are developing solutions that integrate financial data with lifestyle apps, healthcare platforms, and social networks. This broader scope enables richer, more interconnected user experiences, making financial services more accessible and relevant to diverse consumer needs.
Enhanced focus on financial inclusion
The US open banking regulations explicitly address financial inclusion, targeting underserved communities that lack access to traditional banking services. By enabling secure data-sharing with alternative lenders and fintech companies, the US is unlocking credit access for low-income individuals, immigrants, and the unbanked.
While the UK has made strides in supporting those with limited credit histories, its open banking framework doesn’t prioritize financial inclusion as a core goal. The US approach, grounded in the Dodd-Frank Act’s Section 1033, ensures that open banking isn’t just about convenience but also about bridging the financial divide for marginalized populations.
Flexible security measures with room for improvement
The UK’s open banking framework benefits from strict security protocols, including API-based data sharing under PSD2. However, the rigidity of these rules sometimes creates friction for end-users, discouraging adoption.
The US initially faced criticism for its reliance on screen scraping, where fintechs collect consumer data by mimicking user logins. While less secure than API-based sharing, this method allowed for rapid innovation and consumer engagement. The recent CFPB regulations, however, mandate secure API connections, enhancing data protection without stifling the flexibility that has driven US adoption. This ability to adapt security measures over time ensures the US model remains relevant as technology evolves.
Key differences at a glance
| Feature | UK approach | US approach |
| Regulation | Regulator-driven via PSD2 and PSD3 | Market-driven, moving towards CFPB oversight |
| Adoption | 10.6% of the banked population | 81% of adults connect to third-party apps |
| Focus | Financial innovation within banking | Broader cross-industry collaboration |
| Financial Inclusion | Not a core focus | Explicitly targets underserved communities |
| Security | API-driven, rigid standards | Transitioning from screen scraping to APIs |
The US’ hybrid approach
While the UK remains a pioneer in structured frameworks with its PSD2 and PSD3 directives, the US is demonstrating how a hybrid approach — combining industry-driven innovation with thoughtful regulation — can achieve better outcomes. Features like Pay by Bank, tailored for everyday and recurring payments, highlight this forward-thinking strategy.
It’s an exciting time for open banking, with the US and the UK offering valuable lessons for the rest of the world. As these systems evolve, the true winners will be consumers and businesses, who now have access to more transparent, innovative, and inclusive financial ecosystems.
Want to see how these developments could impact your business? Stay tuned for more insights.
