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Open Finance - What’s in it for the industry?

  • United Kingdom
  • Payment systems and digital commerce

12-02-2020

The FCA has launched a call for input (CFI) regarding the development of Open Finance and the role that the FCA proposes to play in shaping and furthering this concept. Indeed, one of the key drivers behind the CFI for the FCA is to ensure that Open Finance delivers a competitive environment where financial service providers are incentivised to participate and good customer outcomes are achieved.

Open Finance is an extension of Open Banking data sharing principles to enable third party providers to access customers’ data across a broader range of financial sectors and products, in a safe and ethical environment with informed consumer consent.

Unlike existing Open Banking principles which only apply to ‘payment accounts’, Open Finance is expected to impact on several financial services sectors across a range of everyday products such as savings, mortgages, pension funds, investments, insurance policies and many more!

What this means for customers? 

The FCA’s vision will see customers benefit from sharing their data (which they own and control) with third party providers by gaining access to new innovative products to manage their finances efficiently, automatically switch between products and services, and receive tailored advice.

It’s not hard for consumers to see the appeal of giving third party providers digital access to their account data to avoid admin-heavy paper collection exercises when applying for new products such as mortgages and loans. 

Similarly, we expect consumers to be attracted to the convenience of viewing and managing their financial products holistically as Open Finance paves the way for the development of one-stop real time financial management dashboards (rather than the existing Open Banking dashboards which are limited to payment account information). 

What this means for you?

Open Finance will undoubtedly  shake up the industry as more fin-techs look to enter the market and obtain access to customers’ data. This will probably feel like déjà vu for many payment service providers (PSPs) as the implementation of Open Banking has been costly and time consuming. However, there are rewards to be reaped from the new Open Finance concept if the industry works together to shape its future! To name a few: 

  • Mortgage lenders obtaining direct access to customers’ data could generate more accurate creditworthiness assessment reports and by extension, benefit from greater certainty over borrowers’ credit risk profiles.
  • Debt managers would have a more accurate financial understanding of their clients’ financial circumstances as a result of having direct visibility on the borrowers’ accounts and finance, and by extension, will be able to offer more-tailored advice to customers.
  • Brokers and other intermediaries  would gain direct access to consumers’ account information to pre-populate product application forms and by extension, would be able to offer consumers quicker processing times for switching products such as bank accounts and insurance policies.

What can we learn from Open Banking?

The FCA is particularly keen to use the concept of Open Banking as a springboard for the development of Open Finance. Indeed, the UK has led the way internationally in creating a secure environment to enable customers to consent to third party payment providers accessing their payment account information or making payments on their behalf. However, that’s not to say that  some important lessons can’t be learned from Open Banking as the concept continues to evolve. For example:

  • Regulatory regimes – The CMA9 have found themselves required to comply with two separate pieces of legislation (the CMA’s Retail Banking Market Investigation Order (CMA Order) and PSD2). This may result in a two tier system within the Open Banking market with differing and more stringent functionality requirements for the CMA9 banks. As an aside, CMA9 members have also found themselves struggling to interpret the two pieces of legislation to ensure that their operational processes satisfy both regimes. Therefore, it will be key to have a consistent set of rules/principles which apply to all market participants engaging in Open Finance.
  • Financing the new regime – The Open Banking Implementation Entity (OBIE) is currently funded by members of the CMA9 and the implementation costs have been much greater than originally envisaged. If the FCA plan to establish  a similar body to implement Open Finance, it will be crucial that the FCA and any other relevant bodies agree an adequate and sustainable funding structure.
  • APIs – The FCA has suggested that Open Finance data must be digital and sufficiently standardised and there is a suggestion that PSPs and third party providers could make use of the existing APIs created for Open Banking. Whilst this may be welcomed by many institutions who already have an API infrastructure in place, there will no doubt be additional technical changes required to achieve the intentions of Open Finance. It is also important to consider that APIs were not mandated under PSD2 but were under the CMA Order and consideration will need to be given to whether a specific access solution can be mandated across all markets.
  • Identification of third party providers – Third party payment providers intending to offer Open Banking services are required to be authorised and registered as an AISP or a PISP with the FCA or use passporting permissions if authorised outside of the UK. There is also a requirement to identify themselves to the account servicing payment service provider with an eIDAS certificate. It would seem important to have a similar regime to ensure both customers and financial institutions are only sharing data with identifiable and appropriately authorised institutions. However, clear rules on authorisation and identification will need to be defined given there continues to be a lack of certainty in the Opening Banking industry in relation to direct acceptance of eIDAS and the ability to complete additional checks on authorisation.
  • Lack of consultation and challenging timescales – PSPs have been frustrated with the lack of consultation process during the implementation of Open Banking, particularly the extension of the OBIE roadmap to mandate certain functionality which was previously classified as optional. Therefore, it will key to ensure a timely consultation process for any proposed roles where all market participants have adequate time to provide their feedback.

What are the other potential challenges for Open Finance?

  • Regulatory regime – The current Open Banking authorisation regime only applies to specific services in the payment accounts market. Whether a third party provider providing services in, for example, the consumer credit market, needs to be regulated will depend on its activity. It will, therefore, be key for the government to decide how third party providers offering Open Finance services should be regulated (i.e. perhaps they can make use of the existing AIS and PIS authorisation regime under the PSRs with the Open Finance mandate also bringing in new authorisation hurdles).
  • Operational resilience – Providing access to third parties will likely require significant IT infrastructure changes regardless of whether the FCA mandates the use of existing Open Banking APIs. This will be a significant challenge for certain providers given the resource already dedicated to implementing OBIE’s new Open Banking roadmap and the already increased scrutiny in relation to IT failures and cyber-attacks.
  • Competition – There is a risk that certain institutions, who do not have the resource to implement Open Finance (and don’t already have any existing API infrastructure as mentioned above) could be excluded from the market (reducing consumer choice).
  • Data security - The parameters of GDPR and how this could impact the concept of Open Finance will also need to be considered in detail to determine how Open Finance will be operable in light of strict data protection principles.
  • Poor consumer choice– Whilst the development of products such as automatic switching could benefit a large proportion of customers, there is a risk that these concepts could lead to consumers becoming less engaged and over time unaware of the suitability of their products (automatically accepting switching recommendations).
  • Increased risk of fraud – Reducing the friction associated with current financial management services (including pension consolidation and investment transfers) could result in consumers not adequately assessing who they are sharing their data with. This is against a backdrop of greater recognition of consumer vulnerability and additional obligations now being placed on providers concerning this.

What’s next?

We would encourage all institutions to review the CFI and consider how Open Finance could benefit your organisations and what lessons should be learnt from the implementation of Open Banking and from your experience in other sectors. Customers having the ability to manage all of their finances in one place just got one step closer, as has the drive to keep the UK at the centre of innovative new products and simpler processes to select tailored products, but there is still a long way to go to build the necessary trust and security. Only then will the customer feel truly empowered to take advantage of the significant benefits of an Open Finance regime.

The deadline for responding to the CFI is 17 March 2020 (click here to access CFI).