Open Finance: Where are we in 2024?

00:00:33 [Maya]

Bruno, thank you for joining us today. As the Head of Research at SBS, your role is pivotal in identifying investment opportunities early on and shaping the strategic and market positioning of SBS. Your enthusiasm for digital transformation and its impact on the industry, especially the possibilities opened by data transparency in financial education, is truly commendable. Your active participation in key organizations like the Global Competitiveness Cluster Finance Innovation, the Berlin Group, and the European Commission, adds significant value to our discussion.

In our previous episodes, we underscored the necessity for banks and fintechs to transition towards open finance. Today, we aim to understand open finance’s current position within the banking sector. To begin, could you elucidate the distinctions between open banking and open finance?

00:01:36 [Bruno]

Open finance and open banking represent a confluence of technologies, services, and regulatory frameworks designed to foster new use cases through collaboration among various stakeholders in the banking and finance sectors. This collaborative foundation is pivotal for the industry. The primary goal of both open finance and open banking is to enable market participants within the ecosystem to develop value-added services that benefit individuals and, notably, small and medium-sized enterprises.

Distinguishing between open banking and open finance, it’s apparent that open banking has often been perceived as a marketing term without a precise definition. It generally encompasses facilitating third-party providers to offer more customized and personal services through data access. However, its scope can vary significantly, from specific mandates like PSD2 and Open Banking UK, which are primarily payment-focused, to broader interpretations that encompass various banking services.

Conversely, open finance, as outlined by the European Union’s recent proposals, extends beyond banking data to encompass a wider range of financial information, including wealth, savings, and insurance data, with the exclusion of data that could potentially lead to financial exclusion. Open finance thus encapsulates the sharing of payment data and the facilitation of third-party payment initiations, embodying a more comprehensive approach to financial services.

Notably, while open banking is often associated with payment-related regulations, open finance is envisaged to encompass a broader spectrum of financial services. This distinction is critical for understanding the evolving landscape of financial services, where the focus is shifting towards a more inclusive and service-oriented approach.

In practice, open banking regulations have mandated the free sharing of data and payment initiation services, reflecting the historical context where third-party providers offered such services without charge. In contrast, open finance, as proposed by the EU, introduces the possibility of monetizing certain data-sharing services, marking a significant departure from the principles underpinning open banking regulations.

This nuanced understanding of open banking and open finance highlights the ongoing evolution of the financial services industry, driven by technological advancements, regulatory changes, and the imperative for greater collaboration and innovation.

00:08:05 [Maya]

It’s widely acknowledged that global events and macroeconomic factors can significantly drive the evolution of various technologies. Regarding open finance, do you believe that the COVID-19 pandemic has played a role in its development?

00:08:31 [Bruno]

Absolutely, the pandemic has significantly influenced us. Firstly, it demonstrated the feasibility of conducting transactions and interactions in a trusted, contactless environment, serving as an unexpected test for open finance regulations. In this sense, COVID-19, despite its challenges, acted as an accelerator, not only for open finance but for digital business as a whole. It pushed us to practically apply existing frameworks, leading to positive developments. This momentum also contributed to the advancement of regulatory frameworks, including the proposal for open finance and revisions to PSD2.

00:10:04 [Maya]

Where would you say we stand currently with open finance? What are some of the challenges and some of the stakes at hand?

00:10:14 [Bruno]

The EU Commission’s proposal for the FIDA regulation marks a significant advancement in open banking and finance within Europe. This has led to a notable maturation in open banking regulations, exemplified by PSD3, which refines PSD2. This revision has achieved two main outcomes: the establishment of PSD3 itself and, perhaps more notably, the introduction of the PSR. The PSR, uniformly applied across EU member states, encapsulates all regulatory technical standards from a business perspective, garnering widespread consensus among stakeholders. This development is particularly beneficial for Europe, as the PSR obviates the need for delegated acts and ensures consistent application of payment service regulations across different countries, enhancing the harmonization within the EU.

The journey since 2019 has been marked by extensive dialogues and the exchange of opinions with the EBA, culminating in a comprehensive understanding of each customer’s financial landscape — the essence of open finance. Currently, the focus is on the bifurcation of PSD2 into PSD3 and PSR, alongside the FIDA proposal centered on data sharing. The Berlin Group’s standard, adopted by a significant majority of European banks, underscores a unified approach to implementing PSD2 and the EPC SPA scheme, with Version 2 anticipated shortly. This progress, especially with SPA’s focus on value-added, billable APIs beyond PSD2’s scope, is promising for the sector’s future, setting the stage for FIDA’s implementation. Reflecting on the past year, the momentum at the close of 2022 seemed to be at an inflection point, a sentiment that resonates strongly today, signaling an exhilarating phase for open banking and finance.

00:14:34 [Maya]

You talked a lot about Europe.  But what I want to know is, what do you think about the current move around open finance globally?

00:14:45 [Bruno]

That’s an excellent observation. As I’ve pointed out earlier, approaches to open finance vary globally. Initially, I highlighted the differences between North America and the UK/Europe. Yet, despite these origins, it’s clear that no one operates without regulation. Every instance occurs under some form of regulation, which, at a minimum, focuses on the protection of personal financial information, as seen in the US.

The UK’s approach is notably prescriptive, with an established operator managing the evolution of standards, player qualifications, and oversight. Meanwhile, entities like the EU find themselves in a middle ground, advocating for a specific political and socioeconomic stance on what needs to be accomplished, thus creating a level legal playing field for what’s permissible.

In North America, the CFPB has recently proposed enhancements to the Dodd-Frank Act’s Article 1033, echoing similar sentiments to what’s being discussed in European Open Finance. This proposal, announced at Monet 2020 in Las Vegas, marks the beginning of a significant discussion, with the feedback period open until the year’s end. Although I haven’t delved into all the details, the proposal extends beyond merely legalizing the right for individuals to share their financial data with third parties, which is promising news.

In regions like Africa, the focus shifts towards interoperability, a fundamental yet critical aspect, especially given the prevalence of mobile payments even in remote villages. However, interoperability issues introduce unnecessary complexity and costs. Open banking initiatives must first tackle this basic level of interoperability, likely in ways that differ significantly from approaches in Western countries. In more authoritarian regimes, the methods imposed for implementing such systems vary greatly from those in more democratic or federated regions like Europe.

00:20:14 [Maya]

Okay.  So through data sharing, I think we can say that open finance is leading us towards what some people are considering an open everything across all sectors.  What are some of the opportunities that you see in that regard?

00:20:34 [Bruno]

The notion of “open everything” might seem broad and conceptual, but let’s distill it to its essence, using the example of a fridge. This fridge, as an illustrative device, embodies the potential of hyperconnectivity by hypothetically managing grocery orders based on user preferences and habits. It’s a vivid example meant to convey how open banking could operate in various scenarios, showing that with enough connectivity and data exchange, even everyday appliances could theoretically perform tasks autonomously to enhance user convenience and well-being. This scenario, while imaginative, highlights the broader implications of open banking principles extending beyond financial transactions, facilitated by technologies like IoT, AI, and data exchange, all underpinned by a foundation of privacy and open finance.

00:24:00 [Maya]

Before you mentioned that we have to make sure that not everyone knows.  If we were to imagine to have this fridge that could do everything for us, we wouldn’t want everyone to know what was going on with our fridge in our kitchen, and what we were eating, and what our diet was, and all of that.  So how can we really protect end customers if everything, ultimately, is going to be open?  What can be done about that?

00:24:28 [Bruno]

The primary response is to recognize that while GDPR primarily focuses on data protection, FIDA adds an extra layer concerning open finance, which is integral to the broader concept of openness. Essentially, it emphasizes that end users, the consumers, should consent to sharing data and with whom they share it. FIDA enhances GDPR by emphasizing transparency. For instance, it ensures that financial players, as outlined by FIDA, maintain dashboards illustrating data access, which fosters trust.

Consent, rooted in a trustworthy framework, is seen as the fundamental solution. Reflecting on past experiences, such as consumers willingly sharing banking credentials for smoother transactions, prompts questions about how much protection consumers need from themselves. Take, for example, digital IDs stored in proprietary wallets in the US. They enable seamless transactions and border crossings but raise ethical considerations regarding societal norms and individual freedoms.

Ultimately, it’s about defining acceptable behavior within societal bounds and considering the stakes involved. Consumers may accept various measures, even in democratic societies, based on societal norms and political ideologies. Regulators play a crucial role in creating a fair playing field aligned with societal values. Technologically, robust measures like consent mechanisms and identification protocols, as highlighted by FIDA, are pivotal. By implementing specific capabilities across the financial landscape, regulators aim to ensure consumer comfort and trust within the evolving financial ecosystem.

00:29:25 [Maya]

AT the beginning of our conversation, we were talking quite a bit about Europe.  I’m going to go back to Europe now.  And I want to ask you about the open finance framework.  Can you tell me how data standardization and interoperability are addressed in the open finance framework?

00:29:45 [Bruno]

We had a lot of discussions on this.  Should we impose a data standard?  Should we impose the responsibility, the role and responsibility in the ecosystems in regard to the data?  And should we set this into the stone of a regulation?  Considering how it happened in the UK, because it’s a very good way to go quick.

00:30:12 [Maya]

Right.

00:30:13 [Bruno]

When a regulation enforces a standard, it can sometimes be as stringent as the UK’s approach, solidifying these standards within organizations and making future evolution challenging. The UK currently faces the dilemma of adapting swiftly, particularly in transitioning from a primarily payment-focused domain to a broader open finance framework, which demands integrating diverse players—a complex endeavor.

Europe’s strategy, which I applaud, avoids imposing a singular standard or regulatory mandate through entities like the EPC. This flexibility allows for a more dynamic framework. Europe distinguishes itself by applying consistent principles across member states, diverging from the initial implementations of PSD1 and PSD2. This approach, crystallized in PSD3 and PSAR, reflects a significant lesson learned.

To achieve seamless, efficient, and effective operations across Europe, common standards and processes are essential. This necessitates industry collaboration. The European Union, through FIDA, doesn’t dictate specific schemes, data standards, or APIs but encourages the market to develop these. This fosters an environment where data holders—banks, insurers, etc.—are incentivized to share data efficiently, with compensation for their contributions. This model, while not unique to finance or FIDA, is evident in broader data-sharing initiatives like the Data Act, focusing on the modalities and benefits of data sharing. FIDA’s broad scope, encompassing a wide range of financial institutions, promises extensive discussions and potential for significant impact, marking an exciting phase in open finance evolution.

00:33:34 [Maya]

One last question for you I have is how open banking impacted competition within the EU?  Are there examples of any kind of new entrants or fintech companies that are gaining market traction, even though the adoption might be slower than might have been expected?

00:33:57 [Bruno]

I would like to share a few numbers.  As I mentioned at the beginning, I would say that open banking was born in the US in 2005.  What is very interesting, and it was very early.  I mean, almost 20 years ago.

00:34:21 [Maya]

Yeah.

00:34:21 [Bruno]

In North America, the adoption of open banking is relatively slow, with user numbers ranging from 3 to 5 million. Europe, on the other hand, shows a more robust adoption rate with 10 to 15 million users. This disparity highlights the significant impact of regulatory support in promoting innovation within the sector. Europe’s regulatory environment has facilitated the emergence of a multitude of third-party providers, each focusing on highly specialized use cases. This diversification reflects the varying stages of open banking adoption across different European countries, ranging from foundational aspects to more advanced features like creditworthiness and financial health assessments.

The discussion also touches on the evolving role of banks within the open banking ecosystem. Banks are increasingly open to integrating their services with third-party platforms, even at the cost of reduced direct visibility, to expand their market reach. This strategic shift is particularly evident in segments where banks see value in partnering with third parties for greater exposure.

The slower adoption of open finance in North America is attributed to regulatory complexities and the awaited developments from the Consumer Financial Protection Bureau (CFPB). Account information sharing has gained considerable traction, underlining open finance’s emphasis on broader access to financial data. However, payment initiation services lag behind, primarily due to regulatory frameworks that address only a fraction of the potential use cases.

Major financial institutions like MasterCard and Visa are recognizing the transformative potential of account-to-account payments. This is evident from strategic acquisitions such as Visa’s purchase of Tink and MasterCard’s acquisition of Finicity, signaling a significant shift towards embracing open banking and finance principles, despite the varied levels of regulatory maturity across regions.

The European Commission’s projections on the economic impact of open finance underscore the significant benefits expected for SMEs and the broader market. This optimistic outlook emphasizes open banking and finance’s role in fostering a collaborative ecosystem, driving innovation, and delivering tangible benefits to both consumers and businesses.

00:43:08 [Maya]

Thank you! The summary captures the essence of the discussions around open banking and open finance quite well. Open banking, as discussed, is indeed a concept that has evolved without a universally agreed-upon definition, mainly due to its evolving nature and the different regulatory environments across geographies. The shift towards open finance represents a broader and more inclusive approach, aiming to encompass a wider range of financial services beyond just banking. This expansion is geared towards offering more comprehensive financial solutions to both individuals and businesses, facilitating a more interconnected and accessible financial ecosystem.

The emphasis on building the “finance of tomorrow” in an open world suggests a forward-looking perspective, highlighting the potential for innovation and the creation of new opportunities within the financial sector. This transition to a more open and inclusive financial environment is poised to redefine how financial services are offered, making them more tailored, efficient, and user-friendly.

Your summary succinctly reflects the excitement and anticipation for the future developments in finance, driven by the principles of openness and inclusivity. It seems you’ve covered the key points from the discussion. If there are specific details or nuances you feel might have been overlooked, feel free to highlight them for further clarification or inclusion.

00:44:04 [Bruno]

The presence of advanced technologies, coupled with regulatory frameworks focused on security and trust, ensures a conducive environment for all ecosystem participants to confidently progress.