Long reads

The Future of Regulation: The step change facing Open Banking

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

Do we need to let go of Open Banking to embrace Open Finance?

This is an extract from Finextra's The Future of Regulation 2022 report.

Few concepts embody the essence of fintech in the way Open Banking does. Its fundamental purpose of opening-up the banking industry by paring back once unwavering control over client data by incumbent banks, is allowing financial technology to edge significantly closer to reaching its potential.

While jurisdictions have diverged on their decision to regulate Open Banking (typically by mandating that banks must share consumer data —with consent), the advancement seen across all regions pursuing Open Banking initiatives is undeniable.

A 2021 report by Mastercard, ‘The Rise of Open Banking’, highlights that Open Banking should now be considered mainstream whether consumers realise it or not. In fact, over 75% of North Americans are linking their accounts to financial apps and services to automate financial tasks, and this trend is particularly strong among young and diverse consumers.

Research from Temenos and The Economist Intelligence Unit also finds that while 87% of countries reportedly have some form of open APIs in place, laying the foundations for further development of Open Banking depends on the degree of customer confidence in sharing their data, interoperability, enhanced user experience, and the added value of products and services.

Source: Temenos and the EIU

Running in parallel — and generating as much, if not more interest than open banking — is the proliferation of Open Finance. Recent research from the MENA Fintech Association explains that Open Finance should be considered as being more than merely open banking with a broader scope, rather, that “an open finance framework is a step-change.”

The report continues: “Where an Open Banking framework is designed to spur the innovation of products and services, open finance takes those products and services and then connects them across a shared framework as well. The result is a consistent and richer customer experience regardless of the businesses involved.”

It furthers that Open Finance is able to maximise the potential value of financial data and then create an umbrella for the standardised and connected provision of products and services in a non-hierarchical ecosystem.Importantly, the report explains that the shift from Open Banking to Open Finance increasingly coincides with a “consensus among stakeholders that some degree of centralised control is required. While many such regulatory controls are familiar from Open Banking, the shared cross-sector functionality of Open Finance calls for additional considerations.

In this vein, when discussing Open Banking, it is challenging to ignore the growing role Open Finance is playing, as it vies for a greater share of the spotlight and investment pie.

Source: MENA Fintech Association

Why is Open Banking still relevant to Open Finance?

The Covid-19 crisis served to increase the use of digital services and democratise videoconferencing, according to Société Générale’s open banking director, Yves Blavet. He argues that even clients which were originally reluctant to use digital tools, have now begun to adopt their bank’s online services more regularly.

Contactless mobile payments at point of sale and familiarity with videoconferencing like Zoom for personal use means that clients became more open to remote meetings with their banking specialists. This trend, Blavet believes, will help banks redesign their client interactions and upgrade their level of service.

“Such are the macro-changes affecting retail banking as a result of Covid-19.”

While this rapid digitisation and adoption of digital services continues, Blavet explains that progress towards Open Banking remains relatively slow. “The absence of European norm to truly standardise APIs and the cumbersome client experience resulting from mandatory Strong Client Authentication (SCA) do not help. For the industry [banks and fintechs], Open Banking in 2022 means making sure that the existing services operate seamlessly.”

Agreeing with Blavet’s view that Covid-19 lit a fire under digitisation across the board, John Pitts, head of policy, Plaid, states that while post-pandemic banking is certainly more open in the UK and US, “to say that all banking is now open is unfortunately not true.”

Pitts explains that regulations created as a result of PSD2 in the UK still do not allow for all of one’s financial accounts to be shared and are generally limited to checking and savings accounts. He furthers that there is still a long way to go insofar as “opening” all aspects of a person’s financial life. This, for example, may extend to student loans, payroll information, or mortgage accounts.

As distinct from the UK, Pitts notes that the US experiences little formal regulation and is “more open than ever before. There is real progress in terms of sharing alternative forms of data to build credit or share your payroll information as part of a picture of credit. However, because the system is still developing, there are hurdles to overcome when it comes to streamlining the ways in which people can share their information.”

In 2022 and beyond, Open Banking in the UK will be concentrated on iterating the infrastructure which already exists. For instance, Pitts references the CMA’s recent decision to drop the 90-day reauthentication rule which interrupted connectivity and caused high volumes of drop off within Open Banking connectivity. “I think we will see more steps taken to broaden what Open Banking really means and how it functions to get banking truly “open”, which really means Open Finance or the idea that a consumer can share more than just their checking and savings accounts.”

Pitts predicts that Open Banking in the US will entail a regulatory framework likely to be introduced by the Consumer Financial Protection Bureau (CFPB) as proposed rulemaking, and that this new framework will be aligned with an Open Finance future.

“Overall as we move forward both in the US and the UK, Open Banking will really evolve into Open Finance and it will be crucial that government entities stay in close communication with the private sector so that regulations and frameworks not only stay up to date but are best serving the consumer at any given time.”

Of note is recent news that the CFPB is unlikely to release their long awaited proposal on consumers’ right to control their own financial data for at least a year. This is in contrast to dialogue during 2021 which had indicated – most notably in President Biden’s July Executive Order – that the US would be likely to outline an Open Banking framework during 2022.

Amit Mallick, Accenture’s global Open Banking lead, believes that Open Banking today is already evolving into Open Finance. “The consumer is able so share more of their financial data – such as insurance, mortgages or pensions – for a better overall financial experience. In geographies like the UK and Australia, we are expecting a further evolution into the Open Data model during 2022 and beyond, where all industries will share data using the principles of data exchange we’ve learnt from Open Banking.”

Despite this evolution, Mallick observes that regulators and competent authorities around the world are at various stages of observing, implementing, and providing direction to financial players in their jurisdictions on how to use, share and store data for Open Banking and Finance. “Regulators will continue to learn from each other to eventually create consistent and standardised product sets to be included under the Open Banking/Open Finance umbrella.”

Mallick adds that there has often been the assumption that innovation and regulation don’t usually go hand-in-hand, “but Open Banking and Open Finance are great examples of innovations catalysed by regulation. We believe that once innovation goes mainstream, regulation is required to protect the consumer and ensure rules are being followed.”

When it comes to how banking innovation can be successfully regulated, Pitts believes there must be an understanding from government agencies and private businesses that cooperation and collaboration is key. “Regulation, like innovation, should always be evolving - which is easier said than done. For this to happen, there needs to be collaboration and communication - a deep understanding of the market - so ultimately the consumer can both be protected and enjoy the innovations of the day.”

Blavet echoes the sentiment, stating that it is innovation which is driving regulation and not the opposite. “For instance, aggregators were born well before PSD2, and the Société Generale Group was one of the pioneers when it acquired Fiduceo (through Boursorama) and implemented this aggregator within the mobile applications of all its brands in France.”

“Regulation came later, to clarify the legal and regulatory framework of aggregation and foster the use of APIs instead of clumsy web scrapping. Of course, regulation can sometimes also help innovation, for instance by increasing competition, but it is generally lagging behind,” Blavet says.

Peaceful coexistence between Open Banking and Open Finance can succeed

According to Blavet, it is likely that we will see the extension of Open Banking in the EU to a wider range of products (loans, investments, etc.) as it already is in the UK. It is this development and refinement which he believes will lead to Open Finance, as a natural next step from Open Banking.

“But, to make sure Open Finance works, the industry should first fix Open Banking.

“As trusted third parties, incumbent banks have always protected their clients' data. They have been reluctant to use them, even for their own marketing purposes. Should they choose to use these data, for their clients' benefit and under their control, banks could create many new value-added services (around identity, credit worthiness, etc.). The true issue behind Open Banking and Open Finance, i.e., the platformisation of the finance industry will be a long process, but I am convinced that as a result, the distribution of financial products and services will be deeply transformed,” Blavet continues.

The question of ‘fixing Open Banking’ sparked fiery debate in early 2022, with a 53 strong group of fintechs accusing Starling founder and CEO Anne Boden of trying to stifle innovation. The accusation was in response to comments Boden made to the Treasury Select Committee in late 2021, where she said that Open Banking has failed in its efforts to encourage bank account switching.

The letter in response reads that the view shared by Boden is “uncompetitive and typical of banks trying to thwart the future of innovation in financial services. Although the technology has only been live since November 2018, Open Banking has already led to the formation of a whole host of new start-ups, raising hundreds of millions of dollars in new venture capital investment. There are now over 2.5 million Open Banking payments a month, compared to just 320,000 in the whole of 2018. Whilst the implementation has been far from perfect, and there are challenges, we are still in the early stages of the journey.”

More optimistically, Pitts sees that the “future of Open Finance is...open ended! Truly, there is still so much to unlock within the digital financial ecosystem in terms of new products and services, innovations, and ways to promote a healthier financial life.”

He hopes that the future of Open Finance entails a more aligned framework both in the US and the UK. As the financial services industry is incredibly complex as it is, “as it continues to evolve into the digital financial services industry there will be so much more to innovate and regulate.”

He sees the coming 12 months as grappling with more formal engagement with the term, the theory, and the actualisation of Open Finance. This includes regulatory agencies actively participating in its development and new companies spinning up new solutions based off the theory of Open Finance.

Mallick is optimistic about 2022 as Open Banking adoption increases, and we continue the transition to an Open Finance world. He notes that most Open Banking initiatives, whether driven by regulator or the industry, are rapidly maturing and going beyond just the banking product set.

Open Banking principles will therefore be applied to this newly evolved Open Finance model, with a wider range of products available under the umbrella. “We will also see further advancements internationally, in markets such as Australia, Hong Kong and Brazil.”

“Open Data is the ultimate endgame, which we could see happening over the next four to five years as other industries begin to understand the benefit of sharing data resulting in accelerated innovation due to cross industry data sharing,” Mallick concludes.

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