This is an excerpt from The Future of Digital Banking in Europe 2023, a Money 20/20 special edition.
Justin Basini, CEO, ClearScore, believes that we have reached a tipping point in the open finance space. “The pandemic drove increased consumer adoption of digital channels and an increased propensity for consumers to share data online. Furthermore, the
macroeconomic environment has shifted rapidly and traditional means of assessing consumer finances are not accurate, reflective, or reliable enough. Consequently, the time is right to consider alternative data sources that are more granular, more comprehensive,
and more real-time – in order to ensure consumers are assessed fairly. A lot of data is out there already, but the challenge most organisations have is where to use it, and how to make sense of it.”
In March 2023, Mairead McGuinness, commissioner of the financial services, financial stability, and Capital Markets Union at the
European Commission, addressed European Parliament and explored what the future holds for the move from open banking to open finance. She posited that strategies around data
access using open banking as a starting point is fundamental. “On access to data, our starting point is Open Banking. So banks that hold the payment data for their customers must give access to it to other providers under certain conditions.”
She continued: “It’s hard to see how Open Finance could work if we don’t give access rights to new data, beyond payment accounts. We are still assessing how far that should go, based on what data would bring most value to customers. And just as important,
we should exclude data whose use could give rise to risks of financial exclusion,” McGuinness said. In May 2022, the Commission opened consultations into revisions to the Second Payment Services Directive, PSD2.
Tasha Chouhan, UK and IE banking director, Tink explains that “open finance goes beyond the scope of data and services available at your bank, covering the financial information and services that may exist across other areas of finance. It captures all of
open banking and more. With the customer's consent, personal financial data related to pensions, tax, and insurance could all be accessed and retrieved by a trusted Third Party Provider (TPP). This opens opportunities for better-tailored consumer services
and payments, as well as other financial products.
“Just as with open banking, open finance — and by extension open data — is not defined by the sharing of data and services, but rather by the access to it. While regulators talk about open finance as a potential opportunity to unlock innovation and competition,
industry participants talk about open finance as the next frontier for open banking – with untapped potential. Specifically, to some people open finance refers to an umbrella term that may capture all of the commercial opportunities outside the regulated scope.
“However, to most people in Europe, open finance describes the access to financial data and services that fall outside the scope of PSD2 and the UK open banking initiative. It refers to the opportunities for banks to provide premium APIs which would allow
them to commercialise access to savings information, credit card information, investment information, and so on. Commercialising access to financial information beyond payments would give banks an opportunity to earn back their investments from their compliance
Since PSD2 was implemented in 2016, the payments, fintech and digital banking landscape is substantially different. New entrants leveraged the opportunity that this new ecosystem provided to develop products and services that put the customer first. Open
banking allowed these organisations to succeed and with initiatives like embedded finance coming to the fore, innovation and collaboration accelerated. Consumers and businesses alike were able to consent to share data from their bank with third parties to
make payments seamlessly, and Strong Customer Authentication (SCA) provided extra protection for online payments.
The Commission’s consultation may lead to revisions to PSD2 and perhaps, a new legislation that could be referred to as PSD3 or PSD2 2.0. The revised legislation could consider embedded finance, digital wallets, cryptocurrency payments and buy-now-pay-later
– leading to increased standardisation and interoperability with APIs. Also, with ISO20022, the new PSD2 could help further simplify the processing language behind transactions and unlock the value of data to ensure open finance becomes a reality.
However, as Kilian Thalhammer, global head of merchant solutions - fintech and platform, Deutsche Bank AG says, there is still potential on how the fintech business models are embraced across the European market to further unlock the advantages of open finance.
“Whilst Europe has come on leaps and bounds over the last decades, the divergence in the level of adoption and embrace of fintechs varies widely still across countries, with markets such as UK, Netherlands and Nordics very much as pioneers versus other markets
still in the infancy of their journey towards a digital payments economy.
“Fintechs still have two dependencies i) the regulatory guardrails and the associated legal frameworks of the respective jurisdiction and ii) their banking partners. Whilst banks provide fintechs scale and access to local markets, it is national regulators
that define the local requirements and consumers that shape the demand. This means thinking global, acting local and having a clearly defined macro scalable platform with the ability to fine tune at the micro level depending. Whilst the diversity of maturity
levels in the market remains high, this juxtaposition of global and local is a continuous balancing act.
“Therefore, for open finance to truly take off, the gap in digital payments adoption needs to narrow so that the focus of financial service providers can pivot from the banking and market regulation view, more towards use cases, experiences and value add
for the end consumer (or corporate). With the ability to increase adoption through elevated consideration and focus on customer needs, the region can generate a positive network effect that will see open finance boom.”
Victor Trokoudes, CEO and founder, Plum agrees: “Many European countries are still some way behind on enabling open access to data, perhaps due to a lack of customer trust in technology, a less innovative banking system or varying regulatory approaches.
This has been a big challenge for us as we expanded, and a major reason why we could not launch in all European regions as quickly as we would have liked, despite strong interest for our product across the continent.
“One benefit for those that have been less quick off the mark is that they have the opportunity to learn from and tackle some of the blockers that early adopters have been facing. The UK is a good example of a country which has seen many benefits from open
banking early on, but has also faced challenges, such as a strict 90 day reauthentication limit which can negatively impact customer experience. By knowledge sharing, countries across Europe will be in the best place possible to get the most out of open data.”
Amit Mallick, Accenture’s open banking and APIs lead summarises the key actions that need to be taken to ensure the industry is ready for open finance.
“Open banking and its ongoing evolution into open finance is the next step in the journey towards ‘openness’ and will accelerate the trend towards cross-industry, platform-based business models and give participants more opportunities to innovate, extend
their reach and expand their ecosystems. With PSD2 coming to the end of its lifecycle and the imminent arrival of PSD3 and open finance, Europe has the unique opportunity to follow a trajectory of rapid if not exponential growth in this space. However, there
are key actions that need to be taken:
- Upgrade regulatory framework: PSD2 in Europe has established a strong baseline for open banking to incubate but adoption has been slow, and the regulation has not evolved while other geographies like UK, Brazil and Australia are already leading the
charge in open finance. An updated and comprehensive framework that promotes open finance with a focus on standardisation, central infrastructure and encouragement to fintechs/third parties is needed.
- Align and learn from other regulators: Collaborate with regulators and authorities in other jurisdictions to align on open finance scope, approach, standards, learnings and KPIs to accelerate the journey towards open finance and help local fintechs
expand their footprint regionally and globally.
- Customer education and awareness: Educate consumers, businesses, and enterprises on the benefits of open finance - including increased access to financial services, better products, and a better digital experience - to build trust and encourage adoption.
This should be a joint responsibility among banks, regulators, policymakers, and industry bodies.
- Fintech promotion: Create a robust fintech environment through fintech hubs, VC funding, industry partnerships, and government grants. Provide industry-level infrastructure and policy support to encourage new open finance initiatives and develop
a thriving ecosystem.
- Foster innovation through sandboxes: Establish open finance sandboxes or innovation hubs through public private collaboration to incubate and test new open finance solutions. This allows participants and policy makers to understand the potential
risks and benefits while enabling banks, non-banks and fintechs to develop and refine their proposition.”