The Consumer Financial Protection Bureau’s final rule implementing the open banking requirements of Section 1033 of the Dodd-Frank Act is Section 22 for community banks. The agency killed them with grace by exempting more than 3,300 banks with $850 million or less in assets (nearly 75% of FDIC-insured depository institutions) from compliance.

Yes, the technology costs of implementation can be challenging or even insurmountable for some banks. But the CFPB essentially said, “Okay, you can stay out this one time,” pushing community banks to the edge of innovation where some could slowly die. Rather than breathing a sigh of relief, these banks need to work together to help themselves and stay in the game.

With open banking, consumers can allow their financial data and funds to be transferred almost anywhere they want to access competitive products and services, whether it’s a faster or cheaper payment app, loan service or non-bank investment account.

Open banking is built on the principle of financial self-determination and has taken root globally in places like Europe, Australia and India. This principle has broad support in the U.S. Just as consumers should have control over their own health records, social media data, or other personal information, they also need control over their financial data. That’s why the CFPB’s proposed rule seemed like a welcome step toward financial access, inclusion, and consumer financial independence.

Importantly, open banking also holds the promise of allowing financial services innovations, particularly payments innovations, within the trusted regulated territory of a bank and a banking relationship without the risks of external pooled accounts common to many banking-as-a-service models. With consumer-permitted information sharing, the consumer’s financial data and the consumer’s core banking transactions occur on a bank ledger that is subject to bank-level financial controls and risk management, including cyber controls.

But for community banks, the future reality of consumer-driven but bank-protected innovation has become much darker.

The CFPB’s rule rightly assumes that different financial institutions will face different challenges in harmoniously adapting their technologies, infrastructures, and internal processes to the new reality of open banking. Opening up their systems will require extensive planning, time and resources. All true. But instead of creating a framework within which community banks can thrive, the final rule exempts them entirely. This is not kindness, this is murder. Open banking is the future and one thing we know is that if you are not meeting the needs of your future customers, you are unlikely to be around in the future.

Community banks have a tremendous opportunity because they don’t actually have some of the restrictions that larger banks have. In many ways, they can be more agile and innovate faster. But when it comes to open banking, the cost of the technology is their Achilles heel.

Latest 2024 Conference of State Bank Supervisors (CSBS) Annual Anatolian Banks Research It found that bankers ranked the cost of technology as one of the top five risks facing community banks and the second-most important internal risk: nearly 80% of respondents rated it as “extremely important” or “very important,” and this share has been stable over the past several years. increased accordingly.

It seems unreasonable to expect community and regional banks, already pushed to the brink, to voluntarily undertake expensive technology projects; But that’s exactly what needs to happen in order to survive.

There are some government initiatives that may help; for example, early adopters may be awarded Community Reinvestment Act credits. Regulators can promote specific community bank compliance standards. We need to look at these and many more options to help community banks. Just as government had a big role in bringing communications and broadband to rural America, it should also help bring a necessary part of the future of banking to community banks. But no matter how promising, such ideas are unlikely to come together quickly given the speed at which the government is moving.

Rather than settling for a slow death, community banks and the technology companies that serve them should come together and seize the opportunity to modernize before it’s too late.