The introduction of Open Finance in the UK in the coming years is essentially a certainty. Secure consumer data-sharing is a key objective of the UK Government's National Data Strategy. And the Financial Conduct Authority (FCA) has committed to working with the Government to deliver the Smart Data initiative by facilitating the necessary design changes to the legislative and regulatory framework.
If designed and implemented effectively, Open Finance will be a crucial enabler of increased competition and innovation in financial services and enhance consumer choice and financial capability. But in achieving these benefits, it will also inevitably disrupt traditional financial market structures and business and revenue models.
Yet, in our experience, many firms are still unclear about some of Open Finance's key concepts, timelines, and potential impact on financial services. Above all, firms are unsure about which challenges and opportunities Open Finance will present for their own businesses and how - and when - to start preparing for it. This blog explores some of these questions.
What is Open Finance?
Like Open Banking, Open Finance will give consumers and SMEs the right to authorise Third Parties Providers (TPPs) to access their data and initiate financial transactions on their behalf. But while Open Banking only applies to payments, Open Finance will apply to all - or most - financial services accounts, e.g., savings, insurances, mortgages, and investments. Open Finance is part of the UK Government's broader Smart Data initiative to enable secure and consent-driven cross-sector data sharing with TPPs, starting with communications, energy, and finance.
The UK plans to mandate Open Finance by law in the same way that the second Payment Services Directive and the CMA 2017 Retail Banking Order mandated Open Banking. Account Service Providers (ASPs) – or data holders – will likely be required to put in place and maintain secure Application Programming Interfaces (APIs) to share data with TPPs – or data receivers – at the customer's request. The FCA expects that TPPs will need regulatory authorisation to operate.
While the exact impact of Open Finance will vary by firm and use case, we have identified some general strategic considerations:
- Changes to traditional market structures – as the illustrative case studies in Figure 2 below show, TPPs could increasingly control the primary customer interface and weaken the customer's relationship with ASPs. One-stop-shop solutions for multiple account management, better product comparison tools, easy switching, and balance sweeping solutions are likely to erode customer stickiness. In the absence of a clear Open Finance strategy, ASPs could be relegated to a utility through inaction rather than choice.
- Pressure on traditional income sources and increased costs - increased competition and customer churn could potentially put pressure on firms' revenues and reduce cross-sell opportunities for ASPs without a clear Open Finance strategy. Technology costs will also increase for both ASPs and TPPs. ASPs will have to build, test, and maintain APIs – either in-house or through a third party. TPPs will need to invest in connecting their systems to the ASPs' APIs or buying API connectivity services from an external provider.
- Data competitive advantage – TPPs' competitive advantage will grow due to the ability to access data held by ASPs and generate insights through advanced data analytics capabilities. This means Open Finance will erode traditional ASPs' historical advantage – albeit often untapped - of holding large customer datasets.
However, the roles of ASPs and TPPs are not mutually exclusive. Firms can be both data holders and receivers in an Open Finance ecosystem, depending on their strategic choices. For example, an insurer ASP may be required to share customer data it holds with an authorised TPP providing automated financial advice (Figure 2 - Case study A). However, that same insurer could also position itself as an InsurTech TPP and receive data from other ASPs to offer better commercial insurance to SMEs (Figure 2 - Case study B).
What are firms' strategic options?
Firms will have to choose their position in the new Open Finance value chain or be forced into one. Table 1 below gives a high-level overview of four possible conceptual archetypes. However, a successful strategy will likely draw together elements from the different approaches based on each firm's unique strengths and weaknesses.
How will the broader regulatory landscape affect Open Finance strategies?
Firms should not develop their Open Finance strategies in a vacuum. While Open Finance data-sharing can enable innovative and commercially attractive products and services, the other applicable regulatory requirements may determine their viability.
For example, most incumbent firms will need to upgrade their technology and data infrastructure significantly to compete in an Open Finance ecosystem. The FCA estimates that over 90% of UK firms are still reliant on legacy infrastructure and applications. But, the enhanced UK regulatory framework for operational resilience means that significant technology transformation programmes – which are among the top causes of operational failures and disruptions - will come under considerable regulatory scrutiny. Similarly, under the new FCA Consumer Duty rules, supervisors will also probe how firms' technological infrastructure and digital business models can support their ability to deliver good customer outcomes. For example, firms will need to consider non-financial costs when assessing whether a product or service provides fair value to consumers. One such cost flagged by the FCA – and relevant to Open Finance – is a firm's use of consumer data where consumers knowingly or unknowingly 'pay' with their data, privacy, or attention.
Firms must also consider how newly emerging policy initiatives will affect their Open Finance approaches in the long term. For example, in 2022, UK authorities will consult on regulating Artificial Intelligence (AI) and modernising the UK data protection regime. These initiatives will determine the parameters of how firms can use customers' personal data and AI to augment and automate their decision-making and digital customer journeys. Similarly, the UK Government's plans for a new Digital Market Unit to oversee a new, more stringent, regulatory regime for digital markets will affect how financial services firms can partner - or compete - with large digital platforms.
Many other relevant regulatory requirements will be use-cases specific – e.g., MiFID II requirements for automated financial advice services.
Therefore, firms must consider the cumulative impact of the evolving legislative and regulatory landscape on their Open Finance strategies from the outset and keep it under review. In addition, firms will need to invest to ensure that their product design, governance, and risk and compliance capabilities can identify and respond effectively to future regulatory changes.
What is the regulatory timeline for Open Finance?
The FCA and the UK Government have committed to introducing a legislative and regulatory framework to mandate and oversee Open Finance and clarify which types of entities, accounts and datasets would be in scope. We expect the initial proposals for such a framework to emerge in late 2022 or early 2023. This will pave the way for a phased Open Finance implementation in late 2023 or 2024, likely starting from use cases with the best cost/benefits balance.
Some Open Banking requirements will read across to the future Open Finance framework, but we also expect important differences. For example, Open Banking requires that a TPP's access to payments accounts data be equivalent to that of a customer via online banking. Such an approach could probably work for savings or investment accounts, but it is unlikely to be suitable for insurance data.
The regulatory framework will also address the risks arising from Open Finance, such as security and fraud, financial exclusion, poor consumer outcomes, and operational resilience. Heeding the lessons from Open Banking, UK authorities acknowledge they need to ensure coherence between Open Finance rules and other FS and cross-sector rules, such as consumer and data protection or the developing UK Digital ID trust framework. We believe this will be crucial to Open Finance's success. For example, in our experience, the real or perceived tensions between Open Banking and the General Data Protection Regulation (GDPR) have kept many firms from making better use of payments data.
Authorities will also have to clarify the next steps and timings concerning the other key building blocks necessary for Open Finance to become a reality. These include an Open Finance Implementation Entity, common APIs and user experience standards, and a fair liability model between different ecosystem participants.
When should firms start preparing for Open Finance?
While it will take time for the final regulatory framework to emerge, Open Finance will undoubtedly become a reality. Therefore, this is a good time to consider how the business strategy and model will evolve. Today's investment, infrastructure, and product choices will benefit from considering this strategic view. Engaging with internal and external stakeholders, choosing and designing an Open Finance strategy, and obtaining leadership buy-in and sufficient investment will also take time.
For many firms reaping the opportunities or fending off any challenges of Open Finance will require multi-year strategic, operational, and technological transformation programmes. For example, firms will need to digitise business processes, upgrade their technology and data infrastructure, develop or procure API connectivity solutions, and enhance their governance, risk, and compliance framework.
Our Open Banking experience suggests that, once detailed regulatory requirements emerge, the focus of such programmes will shift to achieving compliance rather than enabling strategic capabilities. Therefore, while firms will need to fine-turn their Open Finance strategies as more information emerge, we believe they should start designing and implementing the core elements early on.
Finally, ambitious strategies without adequate long-term budget and resources are a common pitfall that many firms fell into when implementing Open Banking. Open Finance will be a marathon, not a sprint. A successful Open Finance strategy and implementation will require the planning and preparation needed to cross the line successfully.