By Roy Urrico
Finopotamus chatted with Don Cardinal, FDX managing director, for his take on recent FDX announcements and fintech trends for 2023.
Banking technology continues its steady march toward an open standard. In December 2022, The Financial Data Exchange (FDX) announced an update of its common open finance standards with the release of its FDX API version 5.2, which adds more functionality to the fintech and financial institution ecosystem.
FDX, an independent subsidiary of the Financial Services Information Sharing and Analysis Center (FS-ISAC), is a Reston, Va.-based nonprofit dedicated to uniting the financial industry around a shared, interoperable, royalty-free standard for data sharing through an industry consortium of financial institutions, data aggregators, fintechs and consumer groups. Some 42 million consumer accounts now use FDX’s API (application programming interface) for open finance and banking data sharing.
FDX has a global membership and predominantly operates in the U.S. and Canada. The organization is comprised of more than 200 financial industry members and stakeholders, including Community Savings Credit Union, Mountain America Credit Union, Navy Federal Credit Union, Servus Credit Union and UW Credit Union, as well as the Canadian Credit Union Association (CCUA).
The release of FDX API version 5.2 also aligns with other global standards like the Open ID Foundation’s financial-grade API (FAPI) security standard, which provides specific implementation guidelines for online financial services, and the insurance industry’s ACORD annuity standards to promote greater interoperability and industry adoption.
What is the Importance of FDX API 5.2?
With its update, FDX API 5.2 clarifies what FDX describes as “must” versus “should” language; including new requirements for certification by data recipients (fintech apps that interact with financial Institutions), and management of payment initiation for users.
“With 5.2, the FDX API has already surpassed the level of a robust API fit for purpose for the open banking ecosystem,” Cardinal told Finopotamus. “The additions and refinements in 5.2 were very targeted and specific, giving evidence that the core open banking features appear to be complete.”
Added Cardinal, “If you look at what went into (FDX API 5.2), there were not a lot of new additions as far as personal financial management and the base-blocking and tackling of open banking. It tells us that the spec itself is pretty mature and fit for purpose as it stands. We have these ancillary areas that we are starting to look at.” Cardinal mentioned verticals such as payroll, corporate treasury and small business. “It's great to have a standard, but it doesn't get to be ubiquitous and plug and play like a USB [universal serial bus] or a Bluetooth until everyone certifies their instance.”
Additionally, the FDX API 5.2 now includes a prescribed journey in the user experience (UX) guidelines for setting up and consenting to payment functionality, explained Cardinal. Further, the FDX 5.2 user experience guidelines clarify to implementers what to display to the end user including in detail the consent journey and how to edit or revoke consent through dashboards implementers must provide.
These updates also provide more specific information about sharing data and standardizes the enumeration structure for developers; and for tax filing, it enables the inclusion of data needed for filing information returns electronically (FIRE) with the Internal Revenue Service.
The FDX API updates originate from FDX’s global financial industry membership, operating across more than 30 different technical groups and task forces. Collectively, these technologists work to identify and develop enhancements as well as updates to FDX standards (to meet market needs).
The Role of FDX
Cardinal stated, “Part of the reason, we can do things at speed is we have standards. Just like, we can drive down modern highways now (because) you have rules about what the lines on the road mean. What traffic lights mean, how wide the lanes are, et cetera.”
The FDX managing director explained standard bodies like FDX help the ecosystem as a neutral party coming together to determine what the “rules of the road” are from a technical standpoint. “You need a neutral arbitrary, not-for-profit with no commercial interest, with no skin in the game big tent, that clearing house to allow people to come in make decisions, contribute their ideas. And do so in a safe space. So that's our job, to herd the cats and to help the ecosystem decide what the standards should be.”
Cardinal further explained it is essentially an ecosystem that includes data providers, data access platforms, data recipients, and the companies who service them as well as consumer groups and academics. “We really have this large consortium of over 230 organizations, plus some individuals. Anyone impacted by open finance, and has something to contribute, has a seat at the table. And you kind of need that.”
He added, “I think it is one of the areas the other jurisdictions really missed. They had a handful of big financial institutions, a couple of consulting firms and maybe one or two academics and said, ‘Okay, here is our group.’ The bad news is there were really hundreds of voices that were not at the table. Now, FDX, when we come to a consensus decision, we can say, ‘Hey, this is the industry viewpoint.’ I think FDX is built to last because of that.”
Financial Institutions Trend Toward Fintech and APIs
Cardinal discussed the importance of credit unions, community banks, and regional banks having fintech partners because many financial institutions lack the technological staff and resources. “There’s that (customer) demand, but to the extent you can partner with (fintechs), have two-way data sharing and learn from that app is incredibly useful.”
Cardinal pointed out the technological maturation among credit unions and community banks is real because they recognize their customers are already using innovative tools. So, these financial institutions are asking, “How do we incorporate them?” He mentioned these innovations might include buy now, pay later programs, embedded finance, or some other capability such as pre-filling mortgage or credit applications, and helping with “electronic know your customer (eKYC)” processes. “There's a number of things that this data in real time for free can help. Let's ride the wave. Let's use it. Let's benefit the consumer and deepen a relationship.”
“I see credit unions and regional banks and community banks making much more informed and mature decisions about what capabilities the customers (or members) are using today,” claimed Cardinal. Then these financial institution must decide how to better engage these accountholders, whether through a partnership acquisition, a simple agreement, or something built themselves. “It’s a matter of how these financial institutions get on board with these fintechs.”
Regulations are Coming
In a speech at Money20/20, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra said, “Around the world and here at home, financial services are slowly moving toward open banking and open finance. A more decentralized and neutral consumer financial market structure has the potential to reshape how companies compete in the sphere.”
Chopra announced the agency expected to propose requiring financial institutions that offer transaction accounts to set up secure methods for data sharing, and develop requirements to limit the misuse and abuse of personal financial. Chopra outlined how in the first quarter of 2023, the CFPB will publish a report about input received about the proposed rule that they plan to issue later in 2023. “We then hope to finalize the rule in 2024 and move to implementation.”
Cardinal recommended financial institutions not wait until the third quarter of 2023. “That's not the time to decide, I need an open finance strategy, what do I do? That is really waiting until the 11th hour. The ecosystem is moving forward already with standards, best to get involved, best to learn about what you can do to take part in the community, learn from your community.”
Cardinal suggested financial institutions start those fintech relationships now. “Because when everyone is in a mad dash when these rules drop, you are going to be competing for resources, talent, and for an understanding with partnerships, with everybody else. If you know it is coming, you might as well get ahead of it, doing nothing is really just not a strategy anymore. The deer in the headlights look is not the correct response.”