From Open Banking to Open Finance? UK developments

Following the possibility provided by PSD2 of opening up banking data for third-party access, the UK's Competition and Markets Authority instructed the 9 largest banks to do so at the request of the consumer. This initiative called ‘Open Banking' enables consumers to share their data with third-party providers that can use the data to develop innovative financial products and to provide ‘traditional’ services in a more convenient way (see our post here).

Three years post this experiment and building on the experience gained from Open Banking, the UK’s Financial Conduct Authority may be ready to take the next step to ‘Open Finance’. The FCA published a Call for Input in December 2019 on the shift to Open Finance and following the receipt of a large number of responses from industry representatives it published its Feedback Statement in March 2021.

Open Finance refers to the extension of Open Banking-like data sharing to a wider range of financial products, such as savings, investments, pensions, and insurance. Open finance enables consumers and SMEs to access and share their data with third-party providers outside banking, which can then use that data to develop innovative products and services which meet consumers’ current and future needs. The idea is greater ownership and control of consumers and SME's over their data.

Open Finance could potentially offer significant benefits to consumers, including increased competition, improved financial advice, and improved access to a wider and more innovative range of financial products and services. The FCA also sees this as an opportunity to enable access to creditworthy but previously excluded consumers to financial services such as credit.

In addition to consumers, SME’s would also benefit from open finance, by improved integration of payment, accounting, and lending platforms for internal management, leading to greater cash flow control. SME's could better compare the products and services available to them from a range of providers, and through this avenue, they would benefit from greater access to commercial lending. 

Overall, both consumers and SME's could gain access to a wider range of products and services, have greater control over their data, and could potentially better engage with their finances.

However, Open Finance would create or increase risks and raise new questions especially around data protection and digital identity. However, the FCA is also concerned that Open Finance would create or increase risks and raise new questions especially around data protection and digital identity. Further digitalization might deepen the exclusion of some consumer groups such as those that are less digitally savvy and greater responsibility might result in a choice of inappropriate or even dangerous financial products. The initiative will therefore have to be followed by an appropriate legislative and regulatory framework, common standards, and a designation of an implementation entity, as for Open Banking.

There is no doubt Open Finance could be highly beneficial for consumers, however, with greater control comes greater responsibility, and the big question from a consumer protection perspective is, are consumers ready to take this on?

The brave new world of open banking: a bit more on PSD2

The 13th of January 2018 is an important date in advancing the framework of financial consumer protection. From today the Second Payment Services Directive (PSD2) became applicable in Member States.

As we already mentioned in previous posts, PSD2 is bringing many benefits for consumers by using the product regulation technique, a technique that is rarely applied on EU level as a consumer protection tool. The PSD2 abolishes charges for credit cards, regulates the price of cross-border payments, and bans firms to charge for fulfilling their information duties under the Directive. In addition, it also aims to protect consumers by transferring the risk and associated costs of a fraudulent payment or payment by mistake on the payment institution (see the summary here). These are without a doubt important milestones in advancing consumer protection, we must therefore hope that the rules will be enforced properly conferring the intended benefits on consumers.

There is another important aspect of the system of protection established by the PSD2 that we have not mentioned so far. PSD2 goes into the heart of a relationship of a customer and payment service provider enabling customers to decide on the fate of their data and enabling third parties to access data upon the customers' consent. PSD2 gives the possibility of opening up banking data for third party access, leaving the final choice in taking up the possibility to national regulatory authorities. Seeing the great potential for opening up the banking sector for competition, UK's Competition and Markets Authority instructed the 9 largest banks to open up their data, calling the initiative 'open banking.' This is said to be 'Britain's gigantic financial experiment' (see more here and here) that will be come to life gradually in the coming months. Banks must start allowing third parties, such as retailers, technology groups and rival lenders to access the accounts of customers who authorize it, accessing information such as bank statements and account balances. This is said to bring the biggest shake-up in the retail banking since the ATM has been invented 50 years ago (see here)! Sharing customer data via Open Application Programming Interface intends to increase innovation in the banking sector, opening up the market for fintech enterprises who are able to offer competitive prices and more innovative products to those provided by traditional banking.

Those UK customers that participate in the open banking project could benefit from bespoke budgeting advise and more convenient payment services. Several apps has already been launched that aggregate all of a persons financial information held by multiple banks, offering tailored products and services to customers. For example, Plum a savings account provider whose app analyses the customers income and spending habits calculating an affordable amount to save and then depositing this amount on a separate account. Or the online mortgage broker app Trussle that alerts consumers when they should remortgage to find a better deal taking into account information such as the value of the home, early exit fees and the cost of the new deal (see more here). In the future, there could also be apps that enable consumers to compare how much they spend for electricity bills with other people like them, or to receive real time offers from shops while they are shopping.

Sharing data however is not without risks. As mentioned above, PSD2 already incorporated a safety mechanism of transferring the risk of fraud and mistaken payments to payment service providers. The other risk that remains are those related to data protection, that are addressed by GDPR. Even though the supporting framework is in place, opening up access to personal, financial data is not an easy choice. There seem to be a lot more work to be done on informing consumers (this seem to be an area where information could be a useful consumer protection tool given the established framework of protection). Consumers should be at least made aware of what data will be shared, with potentially which providers and what are the limits of data sharing, or how will they be protected should something go wrong. Consumers should the be further educated in understanding the new offers, and in being able to compare the exciting opportunities offered by fintech firms.

Open banking and fintech therefore opens up a brave new world, it will be seen whether consumers are brave enough to participate in it.