Open Banking: what happens to the funding model after the roadmap?
Written by Ron Carey · August 21st, 2020
The UK Finance ‘Open Banking Future State’ report looks at the evolution of the Open Banking ecosystem beyond the final roadmap. The future of Open Banking and how the ecosystem needs to be supported as we move forward to Open Finance and Open Data is of paramount importance for the industry and regulators. But what does the future funding model look like? And what does this mean for the fintech community?
Data sharing - the UK and beyond
The world is catching up, with many jurisdictions starting their Open Finance and Open Data journeys. Australia has launched the Consumer Data Rights legislation; Hong Kong has a phased open banking approach; Brazil has announced a four-stage rollout of open banking standards set to commence in 2020; and Mexico’s financial authorities have updated their legal framework to allow companies to connect to financial institutions using APIs. It is clear that the UK cannot standstill if it wishes to remain relevant in the global debate on access to data.
In December 2019 the FCA issued a Call for Input: Open Finance, which now, due to the pandemic, closes on the 1st October 2020. The FCA states that Open Finance ‘has the potential to deliver transformative benefits for consumers and open finance participants’.
Prior to this, the department for Business, Energy and Industrial strategy (BEIS) undertook the Smart Data Review with the aim of identifying the steps that the government, regulators and others need to take to:
- Accelerate the development of innovative intermediaries and other services which can improve the consumer experience in regulated markets
- Ensure that a wide range of consumers can benefit from these innovative services, not just those who are already highly engaged and digitally confident
- Establish a regulatory and policy framework which builds consumer trust in data portability and innovative intermediaries and supports an effective market for these services, including addressing any undue barriers to roll out
The initial output of this review, is still pending. These delays (due to COVID-19) means there is uncertainty for the progress towards Open Finance and Open Data - with a possible additional cost to revisit and loss of benefits to consumers and businesses. Despite the delays to government and regulator roadmaps, Open Finance is a live topic. The implementation of the final Open Banking roadmap will bring the tasks of the Open Banking Implementation Entity (OBIE) to an end. So it is timely to move forward the discussion on Open Finance.
A future funding model
Open Banking in the UK has become a beacon for Open Banking standards across the globe, providing a voice for various stakeholders, that shapes how open banking APIs will meet the needs of all sectors of the industry and society. It is imperative that any future funding model supports this engagement.
The UK Finance report provides five distinct parts to the future state of the functions undertaken by the OBIE. One of these is the future funding model for the services currently provided by, and to be provided by the body that will take on the mantle of OBIE. We will call that entity ‘FutureCo’ (simply to highlight that that future state is not limited to Open Banking). The funding model for this entity will, we believe, be a significant factor in the success of FutureCo and of Open Finance and Open Data.
We agree that the monitoring function required under the CMA Order, should be separated out from the other services provided by FutureCo and should of course be funded by the CMA9. We also agree with reusing the OBIE capabilities and segmenting the future functions, so that cost can be fairly and proportionately allocated. We can take this opportunity to raise that a ‘fair and equitable’ contribution may not be proportional to size of firm or usage; that it is necessary to be clear and transparent about the costs allocated to CMA Order compliance (born by CMA9), PSD2 compliance maintenance (costs born by ASPSP) and costs attributable to the development of premium (non PSD2/CMA) APIs.
Looking towards Open Finance
Funding models will be the cornerstone of a vibrant Open Finance economy. As a supporter of Open Finance and with the need to move with speed to a wider data sharing economy, we are ready to contribute to the development of Open Finance APIs. However, we call out that ‘proportionate’ should mean just that. And in our opinion a pay per click model disadvantages the fintech community, that cannot cross subsidise its products. This approach would be against the very foundation of PSD2 and Open Banking, which was improving competition by facilitating innovation.
The report itself states that there is further work necessary on the funding model. We accept that it is not appropriate for the cost of non CMA/PSD2 functionality to be borne solely by the banking sector. At the same time, we have grave concerns about funding models that could disportionately disadvantage fintechs and new entrants, as that undermines competition and innovation. We believe the approach should be hybrid and have various parties contribute in different ways. Possible additional funding models are,
- Based on market share (based on end users) of the regulated firm or;
- A contribution to costs only once a firm has reached a certain size to mitigate barriers to entry or;
- Discounted rates for firms contributing to the development of standards
We also believe that it will be important to distinguish between costs for aggregation and payment initiation services in addition to a phased approach for the introduction of new charges.
We welcome comments and discussions from the fintech community around the future of the open finance and the future funding model required to support it.