What is Open Finance?
Open Finance, what a simple yet confusing term. What does it actually mean?
This article is the first in a two-part series that explores what Open Finance actually means. Those of you that have an interest in the topic may feel that you already have a pretty solid understanding of what Open Finance is. If you fall into this bucket then that is great, but it is important to note that your understanding of Open Finance may not match that of your peers. And that is ok, no one can necessarily challenge your definition. Because the truth is that there are multiple independent themes, that can be viewed in isolation, that are regularly labelled as Open Finance.
This article explores the first of what we believe to be two of the most common of these independent themes that regularly fall under the Open Finance umbrella. That being “regulation”.
Open Finance as a Regulation
With a direct regulation mandating Open Finance the initial question of “Why?” returns the most simple of answers, “because the regulator is making us”. This makes regulation, arguably, the easiest of our themes to understand. Currently, there is no direct regulation mandating Open Finance, at least not here in the UK (yet), what we do have is a series of regulatory forces that could shape, with a few tweaks, an open data sharing ecosystem that could be labelled as Open Finance.
These regulatory forces have already given us Open Banking, which if viewed from a strictly regulatory point of view can be defined as the sharing of personalised financial data relating to payment accounts between regulated entities. The regulatory forces that have shaped Open Banking a long this definition are:
PSD2 (Second Payment Service Directive) — Makes it compulsory for providers of “payment accounts” (Banks) within the EU to give access to registered entities that have obtained the permission of the account holder to conduct the following operations:
- Request account information I.E: balances, transactions, account details etc from the payment account to be shared with a third party for a given purpose;
- Initiate a payment to be made from that payment account to a third party;
CMA Retail Banking Market Investigation Order — This compels the 9 largest banks in the UK to meet their PSD2 requirement via way of a standardised API.
What does this have to do with Open Finance?
Well if Open Banking is currently limited to payment accounts one does not have to try too hard to imagine that any regulation that extends the mandate to share data stored in other financial products, Individual Saving Accounts (ISA), General Investment Accounts (GIA), Pensions etc, will in effect be extending Open Banking into Open Finance.
This is already starting to happen in countries outside of Europe. Where countries like Mexico and Australia are implementing data sharing regimes that cover a wider range of financial products beyond the payment account.
Here in the UK, there is momentum gathering behind the push for Open Finance. The FCA has issued a call for input so that they can engage the industries thoughts on Open Finance and what the role of the FCA should be, should such a regime come into being.
If the existing Open Banking ecosystem is extended by changes in the regulatory environment to encompass additional products, in effect creating an Open Finance ecosystem that is primarily focused on sharing data, what will this mean? Let’s explore some of the benefits and challenges of Open Finance as a direct regulation.
Benefits of Open Finance being a Regulation
For the individual, to truly be able to take advantage of their data stored with the various financial service providers they engage with. They want to have the freedom to share it with someone that is going to help them maximise their return on it. This can only be done under a regulated “Open” ecosystem as opposed to a “Closed” ecosystem-based on individual contracts. Such a regulation would be a good thing.
How so one might ask?
If we take account aggregation in the form of a personal finance management (PFM) mobile app as the default use case for data sharing. Under a regulated “Open” ecosystem the individual has the option to share their data with any PFM application they choose, as long as that PFM application itself complies with the relevant regulations. Under a “Closed” ecosystem the individual is dependent on the custodian of their data, such as; the bank, their advisor, their investment platform, their P2P provider etc having direct contracts with a PFM application. This is a recipe for a highly fragmented system that will make it next to impossible for individuals to truly bring together all of their individual financial data points together.
Likewise for firms that are wishing to consume data to enhance their propositions. Having an “Open” ecosystem will be beneficial. It will create a fairer system that will drive innovation by leaving the door open for smaller startups to create products that can compete based on their benefits and features. As opposed to simply focusing on signing agreements with the existing data silos (The Banks).
Challenges of Open Finance being a Regulation
First and foremost for firms, if a financial data-sharing regime comes into force and it applies to the products and services they provide. There will inevitably be a cost of compliance. Minimising the monetary cost and the disruption to the business is always a challenge for firms as new regulations come into force.
For individuals, the challenges are not quite as obvious. One of the benefits regularly touted about data is how it can be used to better understand the individual customer which enables products to be personalised to better suit that particular individual’s needs. This sounds great initially but it is not without its downsides. Many may find themselves at a disadvantage by sharing their data, being punished for events that happened in the past or being inadvertently discriminated against by some big data algorithms. These are challenges that must be overcome as data is being increasingly fed into automated decision-making processes. Regulation will have to play a role.
Conclusion
This article has focused on Open Finance as an extension of Open Banking, of the favour we know here in the UK. This is largely being led by the regulator and is centred primarily around the sharing of personal financial data with some extra spice, known as payment initiation thrown in for good measure.
We are not making any predictions about future regulations. We are just highlighting that not much has to change for Open Banking to morph into Open Finance in terms of regulation. If such changes did occur then it would be super easy to just define Open Finance as a type of regulation. But as we’ll see soon nothing is that simple and perhaps there is more to Open Finance aside from a potential regulation. Follow us at Tapico to stay tuned.
