From open banking to open finance – what to expect?

Of all the trends and technologies predicted to change the landscape of financial services, open banking has proven to be the most transformational. Even as the dust has settled after the implementation of PSD2, leading banks show no sign of slowing down their efforts towards an open banking future. With another regulatory push toward open finance looming on the horizon, how should financial institutions prepare to stay ahead of the curve?

Even though PSD2 is no longer a headline in the industry, and has had somewhat of a bumpy road towards widespread adoption among banks, the directive has become a force to be reckoned with. Since it was implemented, there is according to a survey by Tink more than 500 TPPs registered across the European Economic Area (and the United Kingdom) – year-over-year growth of +53%. The attention to open banking is also a top priority, with 83 percent of executives respondents to the survey stating that open baking is having a revolutionary effect on the industry.

Just like PSD2 once acted as a catalyst that ignited a paradigm for open banking, the proposed open finance framework is looming on the horizon to stir things up once again. What is our key take-aways from the initial phase of PSD2 and open banking, and how should we prepare for the upcoming open finance framework?

As of now, little is known in detail of the open banking framework other than the fact that it will be announce sometime mid-2022, and is expected to be in place by 2024. The framework is part of the digital finance strategy in the EU, where data-driven innovation is one of the key topics. The Commission is also reviewing its competition policy to see whether specific measures are needed to ensure “fair access to platforms” for all financial service provides. The official statement from the European parliament reads:

In the context of the Digital Finance Strategy, the European Commission announced the intention to adopt a legislative proposal for a new open finance framework by mid-2022.

In addition to the open finance framework, there are also other objectives in the digital finance strategy that will shape the future of financial services.

The objectives are to tackle fragmentation in the Digital Single Market for financial services; to ensure that the EU regulatory framework facilitates digital innovation; and to apply the “same risk, same rules, same regulation” principle to address new challenges and risks associated with the digital transformation.

EIOPA has also published a public consultation on open insurance, focused on access to and sharing of insurance-related data. In its Discussion Paper, EIOPA explores questions on whether and how far insurance value chains should be ‘opened’ up by the sharing of insurance-related and specific policyholder data amongst insurance and non-insurance firms, to protect policyholder rights and to allow for innovation in products and services. It is fair to assume that the outcomes of the consultation will act as input to the open finance framework.

There are some indications of what we should expect from the coming legislative framework. The open finance framework is expected to be proposed as a successor to PSD2, building on many of the same principles, but extending its reach beyond payments, thus the name open finance rather than PSD3. With this as a backdrop, this is what we should assume (based on rumors, leaks, and hearsay) that open finance will not only affect banks but also include asset managers, insurance companies, and other financial institutions. It is also rumored that the framework will include sectors that closely interact with financial services, such as utility company\ies.

Even though a level playing field for increased competition through innovation remains one of the key goals from the European Commission, we should expect that open finance will be considered a “second-tier” regularity framework, where financial stability, KYC/AML, cyber security, data protection, and privacy concerns will be the primary concern for financial institutions.

Just like PSD2 was no open door to payment data, the open finance framework is expected to follow the same rulebook, where access is authorized, 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 control around the access to the data which is possible through contracts, qualified certificates, or other methods.

Although the final scope of the open banking framework is yet to be announced, the general outline tells us the upcoming open finance framework is set to re-write the playbook for open banking strategies. As open finance extends beyond payments, we should expect that certain banking-as-a-service-strategies could become commoditized as what is offered today as premium APIs could become mandatory under the open banking framework. It is however a topic for discussion whether commercial agreements regulating API access should be included in the framework.

there are still numerous both known-unknowns and unknown-unknowns to have a precise prediction on how the upcoming framework for open finance will play out. What we do know for sure is that open finance will extend far beyond payments, and financial institutions need to reiterate their open banking strategies with the open finance framework in mind.

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