Open Finance: The Missing Piece of the Open Banking Puzzle?
Open Banking: A Success Story?
More than three years on from the UK launch of Open Banking, the service has seen considerable growth. In 2018 there were 67 million API calls; by 2020 this had risen to nearly 6 billion. More than 2.5 million consumers and businesses now use Open Banking services.1 2.5 million users is impressive; but it still represents a relatively small proportion of the 50 million people who have a UK bank account.2
The CMA9 were mandated to implement Open Banking, but a large proportion of consumers – especially those of a younger demographic – are multi-banked and hold products and services with institutions that don’t fall under the current Open Banking regime.
Today, you can add current accounts, savings accounts and credit cards to financial management dashboards which are powered by Open Banking. However, without your mortgage, stocks and shares ISA, loans and pensions, you don’t have a complete view of your financial position. You’re missing pieces of the puzzle. Step forward Open Finance.
Open Finance: Filling The Gaps
Open Finance looks to build on the UK’s world-leading Open Banking implementation and seeks to extend data sharing and third-party access to a wider range of products and sectors. From a consumer’s perspective, the fact that Open Banking does not cover all the products and services they hold can lead to frustration – and may mean customers have an incomplete view of their financial situation. Open Finance could help to fill these gaps.
(e.g. gas and electricity). By expanding the number of products covered, additional companies are brought into scope – and it is hoped that Open Finance could help consumers to:
- Automate the comparison and switching of providers – and that the increased competition will drive innovation, with firms offering more bespoke and tailored products.
- Better understand and optimise their overall financial position (cash flow, savings, investments, goal setting, etc).
- Obtain those products and services best suited to their circumstances, as third-party creditworthiness assessments have a more complete view of their financials and so become more accurate.
Scope vs. Speed
In the early days of Open Banking, a major source of customer frustration was that not all accounts were included – and it took time to broaden the scope to include the basics such as savings accounts and credit cards. It’s possible that early adopters would have looked at Open Banking, decided it wasn’t particularly useful given its limitations, and then not revisited it further down the line. Even with this phased roll-out, many of the CMA9 found the Open Banking implementation timelines extremely challenging. Analysing complex new requirements, designing a robust technical solution and integrating core infrastructure with cloud-service providers – all whilst maintaining the highest levels of security and fraud prevention – was a challenge. Moreover, the people element cannot not be overlooked – it’s not possible to upskill everybody overnight and it takes any organisation time to build a knowledge-base and the requisite SME expertise.
Open Finance therefore needs to strike a balance between scope and time-to-market. Delivering everything together as a ‘big bang’ isn’t feasible in a cost-constrained, agile world. It therefore makes sense to phase the delivery of Open Finance – starting with the use-cases that deliver the greatest customer value and have the lowest costs of implementation.
Mandating banks to include additional accounts – such as loans and mortgages – is one logical starting point. Banks’ Open Banking infrastructure already exists, and so the uplift required is less than for those firms starting from scratch.
However, some of the most interesting Open Finance use-cases relate to investments, utilities and insurance. Imagine not having to waste a Saturday inputting your details into a price-comparison site, just to find the best deal for car insurance or electricity and gas. Imagine not having to phone up your existing provider and getting passed from pillar-to-post before being allowed to cancel. Imagine your stocks and shares ISA automatically transferring to the provider with the best performance or lowest fees for your risk appetite. The potential is massive – but that potential needs to be balanced against implementation cost and complexity.
What happens next?
Following its call for input, the FCA has published a feedback statement3 outlining respondents’ key considerations for Open Finance delivery. In summary:
- The majority agreed that a regulatory framework would be required for Open Finance to deliver successfully and for consumers to have redress where required.
- Even with a regulatory framework, the right commercial incentives must exist in order for Open Finance to gain traction.
- For a number of institutions, Open Banking was more costly to deliver than expected. This is a significant concern for Open Finance, as smaller firms will be brought into scope.
- Many smaller firms will have numerous legacy systems – and so developing and maintaining an API infrastructure is a significant undertaking.
- Care is needed to ensure the burden on smaller firms is not such that they lose significant market share or revenue.
The Open Banking Implementation Entity (OBIE) has been critical in establishing Open Banking – and it’s highly likely that a similar entity will be required to oversee Open Finance.
The FCA plan to work closely with Treasury to establish the work required to inform the legislative framework – but irrespective of any legislation, the right commercial incentives will have to exist for Open Finance to flourish and deliver maximum value to consumers.
Open Finance is still in its early stages, but the potential is clear. Bringing new products and firms into scope opens up exciting new use-cases which can deliver real value to consumers. However, the complexity of delivery should not be underestimated, and regulators must ensure that smaller firms are protected from excessive costs or loss of market share. Given the challenges of implementing Open Banking, regulators must work collaboratively with the industry to set an Open Finance roadmap that is realistic, and which is mutually beneficial for both firms and consumers. Just like Open Banking, Open Finance isn’t going to reach its full potential overnight.
BCS Consulting has extensive experience implementing Open Banking for the CMA9, and understands the challenges associated with delivering API solutions against a backdrop of complex regulation and legacy infrastructure. If you would like to know more about Open Finance, please contact me at [email protected]