The future of banking is decentralized: What does that mean and why does it matter?
The CFPB issued a proposed rule to implement section 1033 of the 2010 Dodd-Frank Consumer Protection and Wall Street Reform Act in October of 2023. Commonly referred to as the “Open Banking Rule”, it is intended to establish a framework for how financial institutions share consumer data. The final rule is expected to be released in October of 2024. Rohit Chopra, the Director of the CFPB, has said “With the right consumer protections in place, a shift toward open and decentralized banking can supercharge competition, improve financial products and services, and discourage junk fees.” So, what exactly does he mean by decentralized?
Decentralization is the distribution of authority, control or decision making away from a central governing body. You may have heard this term as it relates to blockchain technology. However, it can be applied to many different industries including business, economics and finance. In fact, the credit union model is an example of decentralization. In a credit union, the governance is distributed amongst its member owners through elected officials. But why is decentralization so important for consumer protection? It’s all about user control—consumers controlling their own financial data, decisions and choices. In a decentralized open banking system, users have more control over who can access their financial data and how it is used. This aligns with the principle of user consent and gives individuals greater autonomy over their financial information. So, the CFPB is basically saying that Decentralized Finance is the future.
Because credit unions are decentralized already, it should be an easy transition to decentralized finance, right? Well, maybe not. The systems we all use are inherently centralized. Yes, I am talking about the core. These centralized closed systems are exactly what Mr. Chopra is telling us is wrong with our system today. Consumers don’t really have a choice in what they can do because they are limited to whatever the financial institution allows them to do. This is the very definition of limited accessibility and lack of financial inclusion. By decentralizing access to financial data and services, open banking creates a more competitive environment. This can lead to better services, lower fees, and more choices for consumers. That is what the Open Banking Rule is aimed at.
Does that mean opening up our core systems even more than we already do? That is a scary proposition. Is there another way? Yes. Credit unions are in a unique position to take advantage of this new rule by leaning into our decentralized cooperative founding principles and embracing systems that utilize decentralized protocols. Focusing on providing members with user-centric control over who can access their data and for what purpose is a good place to start. Implementing portable decentralized digital identity and integrating decentralized finance platforms for lending and payments are crucial as well. Credit unions are member centric organizations already—we just need to utilize systems that allow them to have more control.
Sadly, researching decentralized system integrations is likely not on your roadmap. Are you talking about this in your planning sessions this year? What are you going to do when the rule goes into effect? Do you have a plan? If your plan is to open your core up to more third parties, I’d suggest you look into alternatives. Decentralized Finance isn’t going away, in fact it will continue to grow and gain traction. Credit unions should be at the forefront of adopting this member centric technology.
