Q for Token — How is open finance the "next step" following open banking in the UK and Europe?
Open finance expands the reach and concept of open banking. At the outset of open banking, legislation in the UK and Europe required banks to make APIs available that would allow consumers to safely and easily provide companies with controlled access to their payment accounts and banking information. In the world of open finance, the same principle applies to more types of data and more types of companies; insurance companies, payroll, utilities, mortgages or pension funds to name a few. With the ability to access more user permissioned financial data from more sources, fintechs and banks can build new (and often very personalised) services and products on top of a more holistic picture of a consumer’s financial life.
Open finance goes beyond the initial scope of PSD2-based open banking, which is why open finance APIs are typically referred to as “premium” or “value added services.” While many open finance use cases will be centred around data, examples of premium APIs for payments include future dated payments, recurrent payments, or payments to multiple counterparties.
Q for Token — What does open finance mean for banks and fintechs?
Traditionally, financial products and services are “off-the-shelf” and address a specific need or milestone in a consumers’ financial life (or in a small business’ maturity cycle). Banks and fintechs attempt to predict and meet those needs with products and services based on their own proprietary data.
In the world of open finance, banks and fintechs will become more accurate, flexible and innovative in determining new opportunities by securely accessing real-time, verified data from untapped sources to efficiently build new products, services and AI-assisted recommendations that are hyper-targeted specifically to consumers’ or small businesses’ needs.
One of the most exciting areas for banks and fintechs will be blending payment initiation with new data sources to create smarter, predictive payment capabilities. Banks that help consumers link more apps and services to their primary accounts can also reassert their role as the lynchpin of consumers’ financial lives and become their preferred “first app,” resulting in greater loyalty and deeper engagement.
Q for Ecommpay — What are some examples of how merchants stand to benefit in an open finance world?
The most common example is creditworthiness assessment. A number of companies are already using open banking to access information about end users' income, savings and spending habits. With the open finance framework in place, those companies will be able to add additional data streams to the assessment process, making it faster, more reliable and less expensive.
As for more creative use cases, we have already witnessed the emergence of apps that aggregate data from the user's bank accounts to create a comprehensive overview of personal finances and provide financial advice. With those apps being able to access data from a broader variety of sources, we will see some dramatic improvements in the quality of service they provide.
Q for Ecommpay — With open finance still a few years off, how can merchants prepare for open finance opportunities now?
The best way to prepare is to become more aware of the concept and acknowledge that, at some point, every company will inevitably use open finance one way or another. As for fintechs, they can already benefit from open banking and adopt the same technologies to additional data sources when the legal framework for open finance is ready.
Open finance can also bring significant improvements to the operations of governments, municipalities and state institutions, introducing an unprecedented level of automation to the systems they use. So the government sector should also start seriously considering the opportunities open finance unlocks.
Q for Token — It sounds like businesses have a lot to gain by accessing more consumer data — but is open finance also good for consumers?
As open finance progresses, consumers will have greater control and ownership of their data. The freedom to decide when, where and who can access their data is empowering for consumers. A holistic view of consumers’ financial footprint can also enable smarter lending and underwriting decisions, and help consumers to better understand and manage their financial behaviours, which will drive greater financial inclusion and wider societal benefits.
Q for Ecommpay — If open finance is the "next step" following open banking, what's the next step following open finance?
While open banking only operates with data available from banks, open finance will introduce new data sources like insurance and asset management companies, pension funds and other non-bank financial institutions.
The next step, or open data, as we know it now, would add even more data sources to the mix. Those could be tax authorities, health institutions, utility companies, and more.
It might seem like a world where every aspect of human life is open to businesses, which might be frightening at first glance. But no data will be shared without the consumers' consent, and companies will be able to create better, more personalised offers for the consumers based on the received data.
Q for Token: What does Open Finance mean for the end-consumers? Сan you describe the examples of open finance usage in real life?
Consider a consumer who holds a mortgage with one financial institution, a primary account at a separate institution, uses an app for budgeting, a separate app to manage bill payments, another app to manage their investments, and holds insurance with yet another institution. Open finance could securely connect the data from all of these services and institutions. This would not only make it easier for the consumers to manage their financial life and activities in a secure and unified way, but, for example, could allow the consumers’ primary account provider to offer new lending products that better reflect the consumers’ wider wealth and spending patterns.
Another potential use case that open finance could enable is the connection of all of a consumers’ bank and investment accounts to their tax accounting software. Going a step further, in this scenario consumers could also use an account-to-account payment to securely pay their taxes within that same software.
Q for Token: What kind of current consumer behaviour trends are shaping the future open finance?
The demand for hyper-personalised products and services, consistent and convenient omnichannel commerce and payment experiences, and secure, unified methods of managing payments and data are all consumer trends that will contribute to shaping the future of open finance.
Q for Token: Which country/countries will be early adopters?
Europe and the UK have been pioneering and early growth markets for open banking use cases, and we will see the same with open finance. The European Commission is set to adopt a legislative proposal for a new open finance framework by mid-2022, with a framework in place by 2024, as market driven initiatives like the SEPA API Access Scheme also progress.
We should expect to see interesting use cases emerge even earlier in other countries, like Australia, which already incorporate aspects of open finance within their open banking approaches.
