Food for thought: open finance, open data and beyond

The world’s ready for open finance, which could bring about a new regulatory landscape and market opportunities. But just how ready is the UK?

At a glance

Open banking has transformed financial services for millions of UK consumers and businesses (six million, to be precise). In May 2022 alone, a staggering five million payments were made…that’s over 200,000 a day.

But open banking’s success isn’t confined to the UK’s borders. By 2028, the global open banking market is estimated to be worth $75.7 billion.

Open banking is also transitioning into open finance and it’s a global phenomenon. Take the US, which passed the Dodd-Frank provision, known as Section 1033, to give consumers the right to access their financial data. Or Australia, which passed the Consumer Data Right (CDR) legislation to give customers control of their data and share it with third parties.

It’s evident the world’s gearing up for open finance, which could bring about a new regulatory landscape and market opportunities. But just how ready is the UK?

What is open finance?

First things first. Let’s define open finance…

Open finance is the next step in the evolution of the open banking journey. It revolves around consumer consent, and empowering them to take control of their data and make more informed financial decisions. It enables the sharing of data and gives third party providers access to a wider range of financial data (think mortgages, pensions, insurance, and lending products).

It is envisaged that open finance will help transform the landscape, increase competition among financial service providers, and lead to innovation and development of new services which ultimately benefit consumers.

Looking at open finance in the UK

In November 2022, the Financial Conduct Authority (FCA) held a two-day policy sprint to shape the UK’s future open finance regulatory framework.

We have also seen initiatives extend beyond open finance to unlock an open data economy. The Smart Data initiative, which focuses on data portability, and the National Data Strategy (NDS), which has an ambitious, pro-growth strategy to build a world-leading data economy in the UK by making data secure, accessible, and usable are examples of these initiatives.

Needless to say, open finance in the UK is bound to happen.

However, regulators and the industries must consider building an ecosystem that extends beyond open finance and lead with use cases that drive real value.

The question is: what does the journey there look like?

To ensure open finance goes beyond financial products to telecoms, utilities, government data, and even healthcare we need agile regulators with governance, interoperability, infrastructure readiness, clear guidance, data standardisation, and a strong vision for the ecosystem.

Lessons learned from open banking

As they say, “history is a great teacher”. And when we consider how to tackle challenges associated with open finance, open data, and beyond, we need to look back at what we’ve learned from open banking so far.

So, what exactly have we learned?

  1. It has highlighted the need for better dispute management, liability, and a commercial framework, with the latter serving as an incentive for all parties within the ecosystem.
  2. Data reciprocity and inclusivity, in which both data sources and recipients fully participate, will help create healthy competition within the dynamic ecosystem.
  3. Conformance to standards must extend beyond the CMA9. There needs to be aligned incentives to boost collaboration in the ecosystem, where there is a common goal to serve customer needs.
  4. Consumers will need to be educated on the benefits of open finance. The creation of a Trust framework (e.g. accredited by the FCA) could help enforce ecosystem standards, trust and participation.

What are the benefits of open finance?

1. Customer-centric mindset, and a focus on value-add

Vast opportunities in an open data economy mean companies will need to compete harder for business. Value-add for consumers has never been more critical, which aligns with the FCA’s UK Consumer Duty Act focus on creating good outcomes.

This starts with a mindset change towards taking a value-add, customer-centric approach. Historically, companies have extracted value from open banking through fees. In an open data economy, companies will need to use data to present better options to customers… if they wish to keep them as customers, that is.

This is especially evident in the lending and savings market, where companies will need to adjust their rates automatically when a fixed term comes to an end, if they wish to retain the customers.

2. Seamless customer experience, automation and operational efficiency

For a moment, imagine a world where you can opt-in to a service that constantly monitors the market for the best savings and mortgage rates, and automatically switches and deposits payments on your behalf, all with a click of a button.

There’s potential for a seamless, improved customer experience and operational efficiency when you combine open finance with open banking payments, variable recurring payments, and account opening capabilities.

But while the potential is limitless, it does pose further questions on consent rights and liabilities, and how different ecosystems and industries could work together.

3. Financial inclusion

Leveraging data to better understand and assist vulnerable customers is another key open finance benefit. But strong governance is needed to prevent data from being used for financial exclusion.

Two good examples of firms using data are Toucan and Kalgera. This could potentially extend to a fully-managed financial management service which includes automated loan consolidation or product switch based on the best market rates.

For instance, a forbearance request from a visually impaired customer who finds themselves in financial difficulty could be automated by pre-filling an income expenditure form using open banking data. There could even be a proposed reduced payment plan based on automated affordability checks, and submission could be activated by voice.

By leveraging data and technology, firms can deliver a considerate customer journey for vulnerable customers. However, there are different categories of vulnerability. Just like there are complex issues around the power of attorney, liabilities and access rights, and how this fits into the new ecosystem.

Fundamentally, the legal definition of data ownership needs to be addressed.

What’s next?

Whilst open finance will be a reality in the foreseeable future, consumer education is needed. Moreover, industries like mortgages, insurance, and pensions may not have the infrastructure to share data via open APIs.

But without clear benefits to them, there’s little motivation for institutions to engage with open finance and invest in upgrades to their legacy systems and capabilities. That’s why initiatives and mandates, such as the UK Pension Dashboards Programme, are crucial to the success of open finance.

Privacy and customer control need to be at the epicentre of an open data economy. Whilst there are still unknowns around how different industries and ecosystems can work together, usability and a user-centric approach to the management of consents, dispute management, and liability framework must remain front-of-mind.

And funding, as divisive as it is, could promote a more centralised approach to address some of the gaps mentioned within the ecosystem.

We can also learn from the strategic rollout of the CDR regime in Australia, with a focus on the biggest sectors like finance, energy, and telecommunications for speed to market. Its reciprocal and fair value exchange that benefits all parties within the ecosystem incentivise participation.

Ultimately, the leap to open finance requires a clear vision, guidance, and mandates from regulators with a focus on aligned incentives and customer empowerment. It calls for an open finance sandbox where firms can test solutions within a controlled environment and a phased rollout that leverages existing regulations, where possible. A focus on the biggest value-add use cases will accelerate the UK’s open data economy.

Have your own thoughts about the journey from open banking, to open finance, to open data and beyond? Join the conversation with us on LinkedIn or Twitter.


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