Open finance: exploring open banking’s natural evolution
Laziness. Lack of time. The all-too-frequent challenge of speaking to a helpful person by phone. There are many reasons why consumers and businesses don’t shop around and switch products and suppliers.
Failing to keep abreast of the best mortgage rates? Rolling onto the same insurance every year without looking for better deals? If so, open finance – a development coming down the track in the slipstream of open banking – could be of interest.
Open banking – which is gaining significant traction in the UK, having just reached – aims to encourage competition among financial services providers, digital innovation and drive behavioural change. It enables bank account holders to share their data with third-parties such as fintech companies through what are known as open APIs (Application Programming Interfaces).
Open finance channels the spirit of open banking into a wider range of sectors and products. It has been described by professional services group KPMG as ‘fundamentally strategic’ and having ‘profound implications’ for the future of financial services and regulation.
‘Transformative’ potential
How and when open finance will be implemented is to be decided. The Financial Conduct Authority (FCA) has pencilled in the first quarter of next year to publish a ‘feedback statement’ after recently completing a ‘call for input’ that had more than 150 responses.
The authority describes open finance as having the potential to “transform” the way consumers and businesses use financial services.
Examples of how open finance would work include the possibility of ‘personal financial management dashboards’ enabling people to properly understand and then ‘optimise’ their overall financial position (cashflow, investments and so on). Practically, this could, the FCA explains, help someone understand whether to put an additional £100 into a savings account, mortgage overpayment or pension – and even execute that payment on the consumer’s behalf.
Open questions on open finance
One vital trigger in making open banking happen was a decision to mandate the UK’s nine largest banks and building societies to share consented consumer information with authorised third parties (in a secure, standardised format – the API element).
As trustee of the Open Banking Implementation Entity (OBIE), the body set up four years ago to get open banking off the ground, Imran Gulamhuseinwala has first-hand experience of the challenges ahead for open finance. Whether (and which) companies will be encouraged – or forced (in the style of open banking) – to share consented consumer information is currently unknown but clearly very important.
“One of the key points of consideration for the FCA and government is to what extent is this mandated, and on which companies is it mandated, and what’s the timeline of mandating it,” Gulamhuseinwala tells Morning Wire.
“There’s a whole bunch of interesting questions. It’s my view that open banking has only really taken off because it has a mandatory element to it and, while you don’t need to mandate absolutely everything, having some sort of regulatory mandate to catalyse things is a really helpful way of kick-starting the overall process or otherwise things can go round in circles,” he says.
‘Building financial infrastructure is hard’
Rafa Plantier is UK & Ireland country manager at Tink, a Swedish open banking platform that expanded to the UK last year and which has ambitions in open finance. “Building financial infrastructure is hard,” he says. “The electronic financial infrastructure we have today has been created over decades, with a pragmatic and incremental approach. Financial products such as current accounts, credit cards and so on are important for helping people manage their finances but today, their financial lives are more complex and distributed than ever.”
But Tink is enthusiastic about open finance. He says: “We are excited because it brings the services open banking has started to facilitate further into the real world, with a bigger benefit for people – by including pensions and insurance, for example — and for businesses, with different types of accounts, cross-border activity and credit reports.”
OBIE’s Gulamhuseinwala picks out mortgages as an area of exciting possibilities. “What’s being contemplated is having all of a customer’s information in one place so that an authorised third-party, with the customer’s permission, can monitor it for them, and then, if interest rates change, if their circumstances change, then the person can benefit from an automated process for getting through all of that admin to get onto the right mortgage,” he explains.
Needs to be ‘safe, secure and easy’
As with open banking, there will be many technical and legal nuts and bolts to debate, finalise and set in place – everyone from software developers to lawyers with an eye on data rules will be involved.
Gulamhuseinwala advises all organisations championing open finance to keep their eye on the big picture. “For this to work, the end-user – whether a citizen or small business – it has to be safe, secure and easy,” he says. “For that to happen is that everything needs to be harmonised. The worst possible situation would that the mortgage providers do one thing, pension providers do another, and none of the system talks to each other. You’d then just have confused consumers.”
This brings us back to one of the most fundamental drivers of open banking and open finance – helping people and organisations to more easily, quickly, accurately (in real time) and comprehensively have visibility on their financial arrangements.
“Customer engagement is what regulators really see as the Holy Grail of financial services – that you solve a lot of problems around competition and innovation when you get people to engage. And it’s really hard to engage with financial services. But if you make it easy for people – and that’s what open finance is intended to do, and it’s what open banking has demonstrated that you can do – then people will actually engage. So that’s the gold medal outcome of open finance,” he says.
Morning Wire articles by Ian Hall on similar topics include his look at banking’s digital direction; ‘open APIs’; and the ongoing ‘Fintech Strategic Review’.