What are the opportunities in open finance?
Open finance is coming to the UK. But what are the opportunities? And what’s already been put in place?
Envestnet | Yodlee hosted a discussion with FinTech Futures and three financial sector experts to explore the open finance landscape and draw comparisons with its older sibling – open banking.
US software firm Envestnet | Yodlee offers account aggregation services. The difference being, it opens up access to a wider variety of accounts than many of its peers – such as investment and pension data. Its markets cover the UK, Australia, India, the US, and South Africa.
Setting the scene
The Financial Conduct Authority (FCA), the UK regulatory body paving the way to open finance, started an advisory group back in 2018 – the same year open banking went live – to anticipate the next wave of innovation.
Then in 2019, the FCA launched a consultation on open finance which ran through into 2020.
What is open finance? Put simply, it will allow firms to plug into more account types than what open banking currently permits. So instead of just customers’ banking accounts or credit card data, firms will be able to access customers’ utility, investment, or pension account data too.
To make this happen, the FCA is putting together a trust framework. This will also apply to government-led projects like digital identity cards.
“The FCA has been incredibly forward-thinking,” says Ghela Boskovich, head of fintech and regtech partnerships at Financial Data and Technology Association, and founder at FemTechGlobal.
The shifting landscape
As the changes under open finance begin to take hold, the financial services landscape is set to shift. But how?
Jason O’Shaughnessy, head of international markets at Envestnet | Yodlee, thinks “open finance ultimately opens up the financial wellness landscape” because “everyone benefits from it”.
He adds: “Open banking is a great first step. But we’re still limited to data from bank accounts and credit cards.”
Each industry will be variably affected by the changes open finance brings. Tessa Lee, managing director at moneyinfo, works with fund managers.
She explains that for them, thus far, open banking has been a tactical solution, rather than a core proposition. But she envisions open finance will be a lot more useful to them.
“I hope there’s foresight in how it’s [open finance] implemented, so that we don’t take a step back before we take a step forward. Which is what we have done with open banking a little bit.”
Boskovich adds that open finance will likely “up” the application programme interface (API) game. So far, API quality has remained a large point of contention between fintech start-ups and incumbents.
How customers will benefit from alternative data
There are plenty of use cases for open finance. For businesses, Lee points out that aggregated data on the scale open finance proposes will give her customers “peace of mind”.
If wealth managers can instantly gauge a good picture of their customers’ financial lives, then it’s far easier for them to manage that wealth, and spend more time building rapport.
The appetite is certainly there for open finance in the wealth management space, according to Lee. She also cites the broader scope of data access open banking brings as being more directly applicable to them than what’s available under open banking.
Boskovich highlights two consumer-focused cases. One is fair credit checks, which mean customers use lenders that are an appropriate fit. And utility bills information blended with payment data, which could underpin automatic switching services – seriously heating up competition.
O’Shaughnessy adds that there’s an education piece to open finance too. He cites a future where apps can enable those which aren’t educated on the fundamentals of money to still benefit from the system and reduce their debt – be it their own or inherited.
“This is when open finance does truly breathe some great innovation,” he says.
Play ball, or get eaten
Banks are likely wondering whether they should be worried about the opportunities open finance is presenting for their competitors – be them fintech start-ups, fellow banks, or Big Techs.
O’Shaughnessy points out that incumbents are already figuring out the benefits of open banking, which bodes well for open finance.
Lee thinks banks “can look at it in one of two ways”. Either “as a threat which dimidiates them and takes away their customers”. Or, “as an opportunity”.
“I think it [open finance] gives them [banks] as much opportunity to innovate as anyone else.”
Boskovich agrees. And she thinks “banks which choose to obfuscate, drag their heels and resist the open banking model will continue to struggle even more so under open finance”.
“Incumbents have to play ball, or they’ll be eaten by their competition.”
What’s the rest of the world doing?
Open finance isn’t just a concept fast approaching the UK. It’s a movement taking hold of the world.
“Australia has gone straight to open finance,” says Boskovich. “They decided open banking was incredibly limited.”
In the US, California’s Consumer Data Act (CDA) sparked a federal proposal by Kirsten Gillibrand which edged America closer towards open banking.
Elsewhere in North America, Canada is looking at consumer directive finance. Whilst in South America, Brazil and Mexico have leapfrogged into open finance, even though they might still be calling it open banking.
Over in Nigeria, Kenya, and South Africa, the banks are ready for open banking, which is currently being spearheaded by lobbying bodies.
Whilst in the Middle East, countries are still setting up the frameworks – with Bahrain and the UAE being the furthest ahead.
O’Shaughnessy does point out, however, that those banks creating European-type open banking feeds do risk copying some of the bad UX experiences too.
But by and large, the innovation is vast and taking many different forms. “It is definitely a tidal wave that covers the entire globe,” says Boskovich.
You can listen to the full discussion here (available free on demand).