Open banking for US lenders and financial institutions: 6 things to know

The ‘Personal Financial Data Rights’ rule, finalized in October 2024 by the Consumer Financial Protection Bureau (CFPB), has set the stage for consumer data rights (which we’ll be referring to as open banking) in the United States. With this landmark regulation, the race is on for US lenders and financial institutions to adapt to a new way of working—one that prioritizes consumer control over data while fostering innovation and competition in financial services.

But what does this mean for lenders and financial institutions? At Carrington Labs, we’ve seen firsthand how open banking can transform lending practices. In this article, we’ll break down six key things you need to know about open banking and what it means for your business:

1. What is open banking?
2. Why is open banking important for lenders and financial institutions?
3. What does open banking mean for customers?
4. How will open banking change credit risk and lending processes?
5. What steps can lenders and financial institutions take to prepare to integrate open banking? 
6. Do all lenders and financial institutions need to integrate open banking?

1. What is open banking?

At its core, open banking is about giving customers control. It allows them to securely share their financial data—such as transaction history and account balances—with third-party providers, including lenders, through secure APIs.

For lenders and financial institutions, this means the opportunity to move beyond traditional credit reports to gain real-time insights into a borrower’s financial behavior. Unlocking this access to additional data creates a new opportunity to make lending decisions that are faster, more accurate and more informed, especially for borrowers who don’t fit the traditional mold, or those with thin credit files.

By embracing open banking today, lenders and financial institutions can not only stay ahead of regulatory requirements but also offer smarter, more inclusive services while building trust with customers through transparency and personalization.

2. Why is open banking important for lenders and financial institutions? 

Open banking represents a fundamental shift in how financial institutions approach lending, risk management, and customer relationships. Here’s why it matters:

• Better credit risk assessment
  Open banking provides dynamic, real-time data that goes beyond credit scores, offering a clearer picture of a borrower’s financial stability. Whether it’s tracking income patterns or identifying signs of financial distress, open banking can enable more confident and informed lending decisions.

• Fraud prevention
  With real-time account verification, lenders can reduce the risk of fraud and ensure the accuracy of borrower information. This adds an extra layer of security to the lending process.

• Personalized lending
  Every borrower is unique, and open banking makes it possible to design loan products tailored to individual financial situations. From repayment schedules to loan limits, lenders can offer solutions that align with borrowers’ needs while minimizing default risk.  

• Expanding financial inclusion
  By incorporating alternative data like rental payments or subscription activity, open banking may pave the way for lenders to serve borrowers who may have been excluded by traditional credit systems, opening doors to underserved communities.
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• Best customer experience
  Open banking enables lenders to offer faster application processes. Rather than the need to manually upload documents, the process should be accelerated by looking at transaction date.

3. What does open banking mean for customers? 

Open banking empowers customers by giving them greater control over their financial data and how it’s used. Here’s how it impacts them:

• Benefits for customerssome text
  • Transparency: Customers can see who has access to their data and for what purpose.
  • Improved access to financial products: Borrowers can benefit from more personalized lending products, faster application processes and overall enhanced customer satisfaction.
  • More competitive options: Open banking allows customers to share their financial data securely with multiple providers, enabling them to easily and seamlessly compare and switch between financial institutions and products.  comparison and switching 

• Challenges for customers:some text
  • Privacy: Borrowers may hesitate to share sensitive financial information without clear guarantees of security and transparency.
  • Trust: Financial institutions will need to build and enhance trust by communicating openly and protecting customer data.

4. How will open banking change credit risk and lending processes? 

Open banking is set to revolutionize how lenders approach credit risk and lending. Here’s what to expect:

• Dynamic risk models:
  Real-time cash flow data allows lenders to create adaptive models that better reflect a borrower’s financial situation. For instance, gig workers with irregular income can be assessed more accurately.

• Faster loan approvals:
  By automating data verification, lenders can streamline the approval process, reducing the time it takes to move from application to disbursement.

• Proactive risk management:
  Continuous data access enables lenders to identify early warning signs of financial distress, allowing for timely interventions to prevent defaults.

• Alternative data insights:
  Transaction-level insights provide a richer, more nuanced understanding of a borrower’s behavior, making it easier to identify creditworthy borrowers who might be overlooked by traditional systems.

5. What steps can lenders and financial institutions take to prepare to integrate open banking? 

Getting started with open banking requires a deliberate and strategic approach. While the first phase of the open banking roll-out isn’t expected until April 2026, it’s a good idea to start planning early in anticipation of the changes. 

Below are some things lenders and financial institutions can start thinking about now to prepare for open banking.

1. Invest in secure API infrastructure
   Partner with reputable open banking providers to ensure seamless, secure data sharing.

2. Adopt advanced analytics tools
   Start refining data analytics processes to interpret open banking data effectively, turning raw data into actionable insights that are meaningful for your business. 

3. Educate customers
   Build trust by communicating the benefits of open banking clearly and reassuring borrowers about data privacy.

4. Focus on compliance
   Stay aligned with CFPB regulations and ensure robust data governance practices to minimize risks.

5. Pilot and iterate
   Start small, testing the impact of open banking on specific products or customer segments, and refine the approach as needed.

6. Do all lenders and financial institutions need to integrate open banking? 

The CFPB’s ‘Personal Financial Data Rights’ rule mandates a phased rollout of open banking compliance for financial institutions, with the largest banks expected to implement changes by April 2026. 

Full adoption of open banking across the financial ecosystem is anticipated to significantly accelerate by 2030, aligning with broader shifts toward open finance.

Key takeaways: 

• Open banking is reshaping lending by offering real-time access to customer-approved financial data, empowering lenders to make smarter, faster decisions.

• The CFPB’s new rule emphasizes customer control and security, creating opportunities for more personalized, inclusive lending practices.

• To succeed in this new landscape, lenders must prioritize secure infrastructure, compliance, and borrower trust.

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