CFPB Rule 1033: Don't Just Comply - Compete and Win

The Timing of CFPB Rule 1033

Downward pressure on non-interest income combined with loan interest compression in anticipation of Fed rate-cutting has put bankers in a bind: how do you cut costs and maintain operating margins, and at the same time, position the institution for a rebound in loan growth?

Rule 1033 is poised to advance financial portability in the United States, similar to initiatives already implemented in Europe and other regions. The CFPB has proposed a staggered compliance schedule based on asset size:

• Financial institutions with at least $500B in assets: 6 months after Rule 1033 is finalized
• FIs between $500B and $50B: 1 year
• FIs between $50B and $850M: 2.5 years
• FIs with less than $850M in assets: 4 years after publication of a final rule

Whether or not this proposed schedule changes, the open question is, when will the rule be finalized? A look at similar government-driven technology initiatives may give us some clues.

The Check Clearing for the 21st Century Act, aka Check 21, was passed by Congress in October 2003 and took effect one year later. But check truncation schemes had been contemplated for many years prior and only became a serious topic following the terrorist attack on September 11, 2001, when aircraft were grounded and checks could not be transported for clearing.

Immediately on the effective date, all financial institutions were required to accept either image files or paper “replacement documents” for clearing. However, while image exchange began immediately among the money center banks, it took nearly a decade for most banks and credit unions to adopt “Day 1” and “Day 2” image clearing. Impediments included both the technology investment and ongoing development of standards to account for edge cases in the process.

Another analog is the new FedNow real-time payment service. It launched in July 2023, and in just seven months, over 500 institutions signed up to launch the service. However, FedNow was the outgrowth of the Faster Payments Task Force, which began laying the groundwork for industry standards in early 2015.

Additionally, no one was waiting around for the Fed: The Clearing House launched RTP in November 2017 and as of January 2024 reached 65% of US deposit accounts. The bank consortium Early Warning formally launched Zelle in 2017, but its forerunner, ClearXchange, had been in operation since April 2011.

We see two commonalities in the history of these initiatives: The federal government and regulators can create conditions for technology development, but broad adoption is constrained by the slow, painstaking work of establishing industry standards.

The money center banks do not wait for the regulators; they have the technical capability and scale to adopt new network-based systems ahead of the industry. When they do so, they accrue early benefits and position themselves to steer the industry-often to their advantage.

Ultimately, Rule 1033's compliance schedule is the upper band on timing. The lower and more critical band is, when and how will the biggest banks implement portable banking?

Risks to Financial Institutions

In this context, the question of “when” has already been answered: the largest banks are rapidly striking partnerships with financial data aggregators of all kinds-a press announcement is made almost daily. And the current state of their digital offerings shows the maturity of the money center banks' approaches to portable banking.

In terms of “how”, when reviewing the rulemaking comments submitted in the Federal Register by the largest banks, one is struck by their granularity and efforts to ensure that the final rule aligns with current initiatives and strategy. For example: JPMC (among others) makes an extensive argument for the inclusion of fees charged by the “data provider” institution for sharing information with 3rd parties. While the commentary focuses on costs, there is no doubt that financial information is a product created from investment in customer relationships.

Wells Fargo asks that third parties redirect consumers to Wells Fargo's login screen to validate their Wells Fargo credentials and provide explicit consent to share banking information. In other words, the Wells' brand would be inserted into the middle of a 3rd party's product application.

The broader point is that, regardless of timing or the ultimate shape of Rule 1033, adoption and compliance are the least of the risks; financial institutions of all sizes need to proactively develop and begin executing strategies to compete in a portable banking marketplace. Rather than viewing it as a new compliance burden, forward-thinking financial institutions can and should view Rule 1033 as an opportunity for innovation and enhanced competitiveness.

Leaning In: Harnessing Rule 1033 for Competitive Advantage

While portable banking introduces new competitive pressures, it also allows institutions to become more customer-centric by providing greater transparency and control over financial data. Over time, portable banking can be leveraged to create higher levels of value and greater trust with consumers and small businesses. However, financial institutions need a place to start. To accomplish this, Ascent has built a platform that makes it easy for banks and credit unions to deploy the needed technology and pay back the investment quickly.

Ascent's platform includes two major components: The Permissioned Data Core and the lending add-ons. The Permissioned Data Core merges 3rd party data with the institution's data to provide a holistic view of the customer. External 3rd party data includes typical sources such as Plaid, QuickBooks, and credit bureaus, but Ascent is quickly adding other sources, such as KYC/AML, payroll, and gig-work data, and will continue to enrich these sources over time. These external sources can be merged with an institution's systems-of-record, such as the bank core, loan origination system, payment platform, and others.

Additionally, the Permissioned Data Core is built to enable sharing of data with other entities outside the financial institution on a permissioned basis. Not only will this help the institution comply with eventual sharing rules and standards, it also enables new use cases where institutions partner with other entities, whether they are other banks or credit unions, insurance carriers or brokers, health insurance carriers or providers, et cetera. These partnerships will foster creation of new financial products while also reducing the friction and cost of delivering them.

Ascent's Lending Add-Ons: A Game-Changer

Given the aggressiveness of larger institutions positioning themselves for portable banking, we believe banks and credit of all sizes need to begin investing and developing their capabilities now. However, most institutions will lack the necessary IT budgets and resources. To overcome this, Ascent has built a set of lending add-ons on top of the Permissioned Data Core. In all cases, the add-ons augment existing systems- there is no tear-out and minimal change to existing processes. These add-ons greatly improve the customer experience and reduce manual effort by bank staff. The add-ons quickly pay for themselves-and the Permissioned Data Core-by enabling institutions to grow faster while also reducing non-interest expenses. There are three add-ons available. They may deployed together or individually:

• Loan Origination-speeds new applications with data prefill and streamlined document collection. Augments the existing loan origination system.
• Loan Renewal-cuts time wasted by borrowers and bankers by automating existing renewal policies and procedures. Augments the existing LOS and core.
• Portfolio Monitoring-Improves portfolio performance and staff compliance through automated exception management. Augments the existing LOS, core, and other servicing systems.

Conclusion

As the financial industry gears up for portable banking and eventual adoption of Rule 1033, we believe it is paramount for institutions to take a proactive approach. Ascent's platform exemplifies how financial institutions can go beyond compliance and embrace the transformative potential of Rule 1033. Rather than waiting for the additional regulatory burden, portable banking is an opportunity to innovate, create value, and strengthen customer trust. Financial institutions that take the initiative can not only get ready to comply, but compete and win in this new era.