Globally, the traditional financial landscape as we know it will be radically changed with the advent of Open Banking and Open Finance.
In our previous article, we discussed the concept of Open Banking. In a nutshell, Open Banking is concerned with current accounts/transaction data and the sharing thereof with third parties to enable them to develop applications or services around such data, including payment mechanisms.
Open Finance is a framework based on consent-driven data sharing that can empower banks to offer a broader range of possibilities to their clients specifically suited to their needs. Open Finance involves home loan providers, consumer credit providers, investment and pension funds, as well as general insurers and intermediaries. Open Finance enables banks to collaborate with various providers to deliver a wider variety of offerings to consumers including private mortgages, savings systems, pension funds, credit, insurance and the like at reduced costs.
Open Finance has a range of additional potential uses for consumers and financial institutions, such as utility comparison and direct payments without a credit or debit card. Providers, such as lenders, can use dashboards to offer more competitive services at better rates and access to comprehensive data, lowers the risk.
During 2020, the Financial Sector Conduct Authority ("FSCA") conducted an Open Finance survey involving more than seventy companies ranging from Fintech start-ups to large financial service providers. The FSCA's "Regulating Open Finance Consulting and Research Paper, 2020" ("FSCA Paper") based on the survey, sets out the following findings:
- Screen scraping and Application Programming Interface ("API") technologies are the main technologies used to facilitate Open Finance.
- Open Finance introduces benefits to customers and third parties, enhanced customer experience, enhanced credit scoring, new payments methods and greater levels of competition. It will also advance financial inclusion.
- "Account Aggregation" is regarded as the leading benefit likely to arise from Open Finance, as customers will most likely value "seeing all their financial relationships in a single view" to inform their financial decisions.
- Survey respondents unanimously indicated that Fintechs are most likely to benefit the most from Open Finance.
- The Open Finance benefits must be weighed up against its risks, including data privacy and cybersecurity concerns stemming from the large volumes of data that will be exchanged and aggregated by financial service providers in serving their customers. In addition, consumers may not be ready to adopt Open Finance owing to the lack of digital literacy and consumer education.
The FSCA Paper provides 5 recommendations for Open Finance, namely:
- consent and customer protection
The financial data generated and stored by financial service providers belongs to the consumer and not the institutions. As such, with informed consumer consent, their data can be shared with any licensed third-party financial service provider of their choice.
- dispute mechanisms
All stakeholders (including financial service providers, third party providers and consumers) should have the ability to raise and resolve disputes between the parties.
- standardisation
Open APIs that ensure interoperability, efficiency and usability for all participants in the Open Finance value chain should be the standard mechanism for data sharing in the Open Finance context.
- commercial models
Financial service providers should share consumer financial data with third party providers at no charge with the commercial basis for doing so being left to the discretion of the relevant parties.
- protection of data
To address data breaches and misuse, a liability framework aligned to the Protection of Personal Information Act, 2013 should be introduced to hold financial service providers and third-party providers accountable. In addition, to address the misuse of data algorithms that could lead to unfair discrimination, providers should have a data ethics framework in place and be able to fully demonstrate their comprehension of data algorithms to regulators.
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