28

May

From Open Banking to Open Finance

Open Finance is a trending topic around the world. For the past two years, Europe has talked about Open Banking but what is Open Finance? In Europe, the phrase “Open Finance” is used as shorthand to mean any Open Banking activity that goes beyond the regulatory scope of PSD2’s Access to Account provisions. So, data sharing and payments initiation through APIs that go beyond the payment services, payment accounts, and payment service providers defined by PSD2 (Payment Services Directive 2).  

Statements from regulators like the FCA Feedback Statement on Open Finance, or Industry stakeholders such as KPMG, recognise the importance of Open Finance, and present some of its expected benefits: 

  • “Improves user experience through tailormade products and services.” 
  • “Allows for wiser financial decisions and better financial management.” 
  • “Improves efficiency and productivity for Corporates and SMEs.” 
  • “Improve competition among financial services providers, spurring innovation, development of new services and increased demand”. 

The Regulatory Position on Open Finance 

In September 2020, the European Commission issued a communication on the Retail Payments Strategy for the EU. It defined several priorities for the Digital Finance Strategy of the EU. One of them was to promote data-driven innovation, namely enhanced access to data and data sharing within the financial sector. The Commission also recognises that an Open Finance Framework should be in place by 2024 and says that it will propose one in mid-2022. 

There is a paradox in defining Open Finance as the non-regulated, value-added space because services that are introduced today as Open Finance will no longer be Open Finance if they then become regulated. However, that’s a problem for another time. 

Open Finance access is authorised, given that only the owner of the data or a third party allowed by the owner can reach the data. Additionally, due to the risks and sensitivity of financial information, there must be a level of controlaround the access to the data which is possible through contracts, qualified certificates, or other methods. Open Finance is also an ethical process, as it is transparent and beneficial to those involved. 

Open Finance is not limited to just Account Servicing Payment Services Providers (ASPSPs or banks) and Third Party Providers (TPPs) or regulated entities. It’s relevant to financial institutions (e.g., banks, financing companies, insurance companies), as well as merchants, utility companies, corporates, Small and Medium sized Enterprises (SMEs), and individuals, among others.  

The Key Differences between Open Banking and Open Finance 

The differences between Open Banking and Open Finance are not always clear. However, based on what is happening around the world, through regulatory actions or market driven initiatives, we can point some: 

  • API Providers (ASPSPs): Open Finance APIs can be provided by ‘other’ types of account holder such as insurance companies, pension funds, and wealth managers. 
  • API Clients (TPPs): Open Finance APIs can address different clients’, such as TPPs regulated by a National Competent Authority (NCA) according to PSD2 or organisations not regulated by an NCA. 
  • Security: Open Finance client identification may/may not use NCA issued authorisation numbers, PSD2 eIDAS certificates, and/or scheme lists.
  • Contracts: Open Finance APIs may require commercial contracts between the API Provider and the API Client. 

The Challenge of Standardisation 

For Open Banking players, these differences create one major challenge, how to build upon the PSD2 Open Banking foundations whilst still improving what already exists.  

To be PSD2 compliant, API providers had to create an infrastructure that allowed easy, safe, and controlled access to payment accounts. In moving towards Open Finance, ASPSPs want to build upon what they already have because it works, is proven, and is efficient. However, Open Finance is an opportunity for disruption, which may break any ties to the PSD2 infrastructure. The goal will be to find ways to improve on PSD2 Open Banking using the existing foundations. This may result in more standardisation, allowing for uniformity in the API offers and a better user experience. 

Approach for the Future 

These Open Finance differences and challenges require decisions that may lead to distinct positions on how the various players approach them. 

API providers may adopt a position of independence that allows for more rapid development with greater control over functionality and to use APIs as a differentiation tool. This approach is already represented in the market by the premium APIs offered by banks that go beyond the PSD2 requirements.  

Alternatively, API providers may opt to collaborate so that they face lower development costs, are more certain to reach critical mass (in usage and adherence) and build APIs that converge with the needs of the API clients. 

The APIs that result from the latter approach bring standardisation, scale, and reach, and although it is hard to put them in place, they are extremely powerful once they are operational. The frameworks for collaborative APIs are usually set by schemes, i.e., by a group of players that come together to solve a collective challenge. In Europe today, there are already some Open Finance Schemes being developed, such as the openFinance API Framework, the ERPB SEPA API Scheme, and the EPC Request-to-Pay Scheme. 

Open Banking to Open Finance to Open Data 

Like Open Banking, Open Finance is not an end but a new step. As it will bring us closer to Open Data and a data-driven world in which all ecosystems (utilities, health information, telco) are connected.  

Therefore, the Industry must embrace Open Finance and incorporate in its culture. A new blue ocean is forming and those who thrive in it are more likely to succeed in imminent Open Data reality.  

By João de Azevedo Ferreira 

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This article has been written as part of the Open Banking Europe Membership Program. To access our resources, join our webinars or get involved, please contact us at info@openbankingeurope.eu