Data Minimization in Open Banking: Collect Only What You Need

When you sign up for a budgeting app that connects to your bank account, what data does it really need? Do you really want it seeing every single purchase you made at a pharmacy, a liquor store, or a dating service? Most people don’t. That’s where data minimization comes in - the idea that you should only collect the financial data you absolutely need to deliver a service. No more, no less.

Why Data Minimization Matters in Open Banking

Open banking lets third-party apps access your financial data with your permission. It’s how apps like Mint, YNAB, or even your landlord’s rent verification tool can pull your account balance or transaction history. But with great access comes great risk. The more data an app collects, the bigger the target it becomes for hackers, and the more likely it is to be misused - even accidentally.

The 2024 CFPB Rule 1033 changed the game in the U.S. It legally requires that financial institutions and third-party providers collect only the data necessary for the specific service you’ve asked for. No fishing expeditions. No storing your entire transaction history just because they can. If you’re using an app to track your monthly spending, it doesn’t need your investment portfolio details, loan applications, or credit card rewards history. It needs your account balance and transaction categories - nothing more.

This isn’t just about privacy. It’s about trust. A 2024 Matomo security analysis found that limiting data collection reduces breach risk by up to 68% compared to apps that harvest everything. When consumers know their data isn’t being stockpiled, they’re more likely to use open banking tools. And when they trust the system, adoption grows - which means more innovation, not less.

How Data Minimization Works Technically

It’s not enough to say “collect less.” You have to build it into the system. That’s where APIs come in. Open banking relies on standardized Application Programming Interfaces that act like controlled doors between your bank and third-party apps. These APIs don’t hand over your entire financial life. They hand over exactly what’s requested.

For example:

• A rent verification service only needs a yes/no answer: “Does this account have enough funds to cover rent this month?” It doesn’t need to see your last 12 months of grocery receipts.
• A budgeting app needs aggregated spending categories - “$450 on dining,” “$120 on transit” - not the name of every restaurant or bus stop.
• A loan application tool might need your income history and account balances, but not your peer-to-peer payment history with friends.

These restrictions are enforced through technical controls:

• Field-level filtering: APIs only return specific data fields, not entire datasets.
• OAuth 2.0 authorization: You approve each data access request individually - and you can revoke it anytime.
• Consent logging: Every time data is shared, the system records what was shared, with whom, and why - so you can audit it later.

The Gramm-Leach-Bliley Act and PSD2 in Europe already required strong authentication and banned shared passwords. Rule 1033 builds on that by making data minimization mandatory, not optional. Banks now have to design their APIs to block over-collection. If an app tries to request your full transaction history when it only needs a balance, the API rejects it.

What Data Is Allowed - and What Isn’t

Not all financial data is created equal. Here’s what’s typically considered “minimum necessary” under current standards:

• Allowed: Account numbers (masked), current balance, transaction dates, categories (e.g., “groceries,” “utilities”), income deposits, recurring payments.
• Not allowed: Full merchant names (e.g., “Walmart Supercenter #1234”), transaction notes, investment holdings, loan terms, credit scores (unless explicitly requested for a loan application), social security numbers, passwords.

The CFPB explicitly bans using open banking data for advertising, profiling, or resale. That means if you give a budgeting app access to your spending habits, they can’t sell that data to a fitness brand hoping to target “people who buy protein powder.”

Even the way data is stored matters. Rule 1033 requires that data be deleted by default when you revoke access. No more “we kept it just in case.” If you stop using the app, your data vanishes - unless you’ve given separate, specific consent to keep it for another purpose.

Where the System Still Falls Short

The rules are clear. But enforcement? Not so much.

The Bank Policy Institute points out that while Rule 1033 sets strong standards, it lacks consistent oversight. There’s no central watchdog constantly auditing third-party apps to make sure they’re not sneaking in extra data requests. Some fintechs still use clever workarounds - like asking for “full transaction history” under the guise of “personal finance insights,” even if they only need totals.

Also, not all banks implement the rules the same way. A small regional bank might have a basic API that doesn’t support field-level filtering. A big national bank might have a sophisticated system that blocks over-collection perfectly. That inconsistency confuses users and creates security gaps.

And then there’s the consent problem. Most people click “Allow” without reading what they’re agreeing to. The CFPB requires clear language - “This app will access your checking account balance and last 90 days of transactions for budgeting purposes” - but not all apps follow it. Some still bury the details in legalese.

How Businesses Can Get It Right

If you’re a fintech startup, merchant, or service provider using open banking, here’s how to stay compliant and build trust:

1. Map your use case first. What exact problem are you solving? Write it down. Then list the data points you need to solve it. Cross out anything that isn’t essential.
2. Design your API calls to match. Don’t ask for “all data.” Ask for “account balance,” “monthly income deposits,” or “last 30 days of categorized transactions.” Be specific.
3. Don’t store data longer than needed. If you’re verifying a one-time payment, delete the data after 24 hours. If you’re building a monthly budget, delete it after 12 months unless the user opts in to keep it.
4. Use consent layers. Let users choose what to share. “Do you want us to see your spending categories? Yes/No.” “Do you want us to see your account balance? Yes/No.” Give control, not just access.
5. Test your system. Run penetration tests. Ask a developer to try to extract more data than allowed. If they can, your API isn’t locked down properly.

Chargebacks911 advises a simple rule: “Only listen to the data you absolutely need.” If you can get a “yes/no” answer from the API instead of a full data dump, do it. Less data means less liability, less cost, and more trust.

The Bigger Picture: Trust as a Competitive Advantage

Open banking isn’t going away. It’s growing - into lending, insurance, payroll, and even tax filing. The more it expands, the more sensitive the data becomes. A company that handles your mortgage application now has access to your income, debt, and spending patterns. That’s powerful. But it’s also dangerous if mishandled.

Organizations that embrace data minimization aren’t just complying with the law - they’re building a reputation. Consumers are starting to notice. Apps that say, “We only collect what we need,” get higher adoption rates. They get better reviews. They get chosen over competitors who feel “creepy” or “overreaching.”

The OECD found that small businesses using open banking for accounting saved 30% on administrative time - but only when data was handled responsibly. When data was misused or over-collected, trust dropped, and usage fell.

Data minimization isn’t a limitation. It’s a strategy. It forces you to focus on what really matters: delivering value, not collecting data. The most successful open banking services won’t be the ones with the most data. They’ll be the ones with the clearest purpose and the cleanest data practices.

What’s Next for Data Minimization?

The next wave of open banking will include:

• Granular consent controls: Instead of “Allow all” or “Block all,” you’ll be able to say, “Allow access to my checking account for 30 days, but only for balance and transaction categories.”
• Automatic data expiration: Data will self-delete after a set time unless renewed.
• Interoperable standards: Banks and fintechs will use the same data definitions so apps can’t game the system by redefining what “necessary” means.
• Consumer dashboards: A single place where you can see every app that has access to your data, what it’s using, and when it was last accessed.

Rule 1033 is just the beginning. The future belongs to companies that treat data like a loan - not a possession. You borrow it. You use it responsibly. And you give it back when it’s done.