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Earlier this year, the UK’s Financial Conduct Authority (FCA) published a feedback statement following a call for increased input relating to the development of Open Finance.
The progression of Open Finance, an extension of Open Banking, would unlock the sharing of banking data to a wider range of financial products, such as savings, investments, pensions and insurance.
The FCA has also advised that the building blocks of Open Finance should mirror the already successful Open Banking framework.
So, what’s the story behind Open Banking?
The UK Open Banking Implementation Entity (OBIE) is the body established in 2017 with the aim of delivering open banking. However, it’s in the process of being phased out and a replacement will be needed.
Under OBIE, the Open Banking system has flourished, accumulating more than 700 market participants. As a result, what comes after the OBIE represents a crucial matter for the UK financial services sector, as well as other industries in its orbit.
However, the successor organisation’s precise nature is still somewhat undecided as the Competition and Markets Authority (CMA) notes: “Although the core elements of Open Banking are now in place… it is not inevitable that it will continue on the same trajectory.”
Meanwhile, the current health crisis has transformed consumer finance and spending behaviour. Open Banking is now experiencing a renewed surge in investment and innovation, with monthly active user rates having doubled during 2020.
In a nutshell, the appetite for Open Banking products and services has never been greater.
In this context, and in the wake of recent organisational turmoil at OBIE and lingering concerns around fraud involving Open Banking payments, people are speculating whether the regulator's consumer-focused ambitions can be kept on track as banks and fintechs jostle for influence.
Is Open Finance the answer and what exactly is it?
Simply put, Open Finance represents a promising next step in the Open Banking journey. Financial data, such as mortgages and consumer credit, could be opened up to trusted third party APIs, subject to their agreement.
Open Banking already allows regulated websites and apps to access transaction data from bank accounts and payment services so that customers can “move, manage and make more” of their money.
The surge in Open Banking adoption is primarily driven by consumers who want more oversight and control of their overall financial health and are ready for the aforementioned API-based tech which will allow them to achieve that.
However, as it stands, the future entity will subordinate Open Finance to a secondary ‘Open Futures board’ outside of the primary governance structure. This is purportedly to avoid conflicts of interest and focus on “more macro, longer-term” considerations.
Eager to expand into Open Finance, UK fintechs have taken issue with this arrangement, saying that the development of Open Finance initiatives should be the “overarching aim” of the future entity.
Open Finance would create a variety of secure, trustworthy, and user-friendly tools that empower users to engage more meaningfully with their finances and data. This would have benefits for consumers and industries and would strengthen the UK’s position in an emerging market in which it’s already ahead of Europe and the US in terms of consumer adoption. From insurance to pensions and services catered to SMBs, there is an unlimited number of opportunities for disruption.
What’s the scope for Open Finance?
This is the FCA’s vision of Open Finance for consumers and businesses:
Gain access to a wider range of financial products/services
Have greater control over their data
Engage with their finances and empower better financial decisions.
The end goal is improved financial health driven by market innovation and competition.
Once rolled out, Open Finance will, for example, allow for the development of centralised financial dashboards, bringing together customer data such as investments, savings and cash flow.
By sharing financial data with trusted third parties, customers could be offered tailored products and services that represent a better deal.
Automated switching and renewals, combined with advice and financial support services, also feature highly on the Open Finance agenda, alongside accurate credit assessments.
How will Open Finance affect businesses and consumers?
There are many personal and business implications of adopting an open approach to finance.
Access to more cost-effective and well-rounded debt advice, product recommendations and increased engagement with a person’s financial situation are three ways in which personal finance management platforms might evolve.
But Open Finance doesn’t stop at recommendations and dashboards or read permissions. Open Finance could also have write permissions, executing cost savings on behalf of customers.
What needs to happen next?
It’s evident that the UK is on the brink of delivering another open data financial revolution, but the future is still uncertain.
Regulators must embrace their role in overseeing a new framework for Open Finance, which is currently unregulated, leaning on the successes of Open Banking and encouraging market participants to expand their focus for the benefit of consumers.
Conversely, trade body UK Finance needs to place Open Finance at the heart of the future entity so that it can fulfil its role as an ecosystem enabler and service provider. The FCA backs this up and is clear in its call for input that they “consider Open Finance to have the potential to transform the way financial services work for consumers and business”.
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