From Open Banking to Open Finance

As I discussed in my previous blog post, there was an upsurge in Open Banking users in 2020, however there is still a long way to go on that journey. With over 2m end users this still only represents ~4% of the consumer banking population of the UK.

Open Banking is a huge step in the right direction towards Open Data, however it only provides a thin slice of a customer’s finances, we still don’t have a holistic solution that allows us to view and manage our complete “financial health” based on our own unique lifestyle circumstances. So, could Open Finance be the answer?

What is Open Finance?

It’s currently little more than an idea, but aspirationally, Open Finance will take the core principle of Open Banking (securely sharing data with 3rd parties via APIs), and extend the use cases to all other consumer financial products including savings, investments, mortgages, credit, pensions and insurance.

Open Finance will build on the Open Banking principles of allowing Third Party Provider (TPP) access to customer accounts (by way of customer consent) through a standard set of secure APIs in order for TPPs to ‘read’ a customers financial data and allow ‘write’ access to initiate transactions on the customer’s behalf (e.g. payments, apply for credit, switch accounts, make investments).

Potential Benefits

As consumers, in order to better understand and manage our finances, at a minimum we are going to need a technology solution that provides:

1. A single view of our current financial position (health) across all of our existing financial products and services - allowing customers to easily understand if they have spare money to put into savings, make a mortgage overpayment, or top up pension pot, and to allow the TPP to do this on the customer’s behalf (with the possibility of automated machine learning or rule based systems).

2. A ‘cross market’ view of the most competitive products (tailored to lifestyle circumstances) and a clear comparison against existing financial products (in terms of APR, interest rates etc)

3. The ability to easily switch products to the most competitive/most suited to lifestyle circumstances - ensuring customers get “best of market” deals that complement their lifestyle and spending habits (again opening up the possibility of automated machine learning to make the switch as soon as it becomes financial beneficial to the customer).

4. The ability to easily make payments and move money across financial products

On a personal level, I’m really excited to see how Open Finance could disrupt the £6 trillion pensions industry, an area ripe for digital innovation (PenTech). Previous attempts to increase transparency of pension funds for consumers has been blocked by complexity and lack of incentive for traditional pension providers.

Unsurprisingly, because of the lack of transparency and “openness” in the UK pensions market, 60% of pension savers don’t know their current pension balance and there is currently over £20 billion in lost or unclaimed pensions in the UK alone.

However, in recent years it’s been refreshing to see new tech start-ups such as Pension Bee disrupting this very out-dated market, simplifying the consolidation and management of pensions through an app, and fighting for the rights of pension savers.

However, Open Finance creates further opportunities for pension providers to combine transaction, savings, investment and pension data to make automated, informed assessments on whether customers are setting themselves up for a financially stable retirement – what’s not to like?

Potential Obstacles

Open Banking is paving the way for Open Finance, and there are lots of positive learnings that will be taken onboard. However, there were also lots of teething problems that slowed down Open Banking that should not be overlooked for Open Finance, these include:

• “Big bang” approach to technology change was required across financial organisations (Strong Customer Authentication and secure APIs aligned to same regulatory date) led to industry delays.

• Numerous pieces of legislation, guidance and documentation. Analysing and understanding what organisational or technology change was needed took painstaking effort and a raft of experts in different disciplines.

• No compliant way to apply strong customer authentication in e-commerce card payments.

• Challenges of applying a legal framework to an area defined by rapid digital innovation.

• Immature TPP authentication standards - no UK eIDAS service providers existed, resulting in the FCA allowing screen scraping to be allowed in the interim.

• Concerns over customer data security and allowing third party access to data.

Due to the additional range and complexity of financial products that Open Finance will introduce into the ecosystem, there will be further challenges and risks to overcome, notably:

• Lack of incentives on organisations to share data may prevent Open Finance from taking off. Therefore, as with Open Banking, organisations will need to be mandated to open up their data.

• API standards spanning a variety of very different financial products - the scope of API standards extends only so far and certainly not far enough to encompasses the entirety of Open Finance. Legislation and/or FCA regulation will be needed to ensure a safe and compliant Open Finance environment. That would also ensure adherence to particular standards for data disclosure and API design.

• Lack of “digitisation” of financial sector products such as pensions and wealth management will slow down the pace of delivery. This will result in foundational technology work needed to “bridge the gap” and get to a point where data can be made “open”, before Open Finance can be fully implemented. This further necessitates the need for a phased roll-out.

• Applying Open Banking principles to the likes of insurance, pensions and investments is highly complex (more so than Current Accounts); consideration needs to be given to what data should be shared.

• Risk of excluding customers who do not agree to data sharing may result in them obtaining less favourable deals. It’s also important not to exclude the 11.9 million people in the UK that are not digitally able.

• Risk of increased risk of fraud and resultant harm to the customer

• Risk of incorrect data leading the customer to obtaining the wrong advice or recommendations, or the customer switching to an inferior product or for the wrong price which negatively impacts their financial health.

• Risk of TPPs partnering with firms (possibly involving financial or other incentives) which may result in TPPs only offering, or preferentially listing, partner products and services.

None of the above challenges are insurmountable, and hopefully the FCA and partners within the ecosystem will learn from the teething problems with Open Banking. I would welcome a phased and evolutionary approach to the implementation of Open Finance, coupled with a realistic delivery schedule that allows for thorough testing and piloting between financial organisations and TPPs, before being rolled out to the public.

What’s next?

I believe that Open Finance will definitely happen, in one form or another, and will get the green light this year. However, due to the technical complexity, the need to fully regulate and implement common data standards it’s going to take time to get it right.

The FCA is currently reviewing the Call for Input comments received last year, and will use the responses when discussing Open Finance with the Government. I expect we will hear more from the FCA on Open Finance soon, so watch this space…

As a business leader who may be impacted, it’s best to start planning now for how you can leverage the opportunities Open Finance will bring (and plan for the costs of compliance within your change programme).

If you would like to discuss how Scott Logic could help, please get in touch with Nick Betts at Scott Logic.