3 Exciting Developments for Open Finance
Following the publication of the FCA’s Feedback Statement the road to Open Finance is more clear, helping the financial industry coordinate and streamline efforts.
A summary of the Statement can be read here.
This post focuses on three intriguing topics raised by the FCA that differentiate Open Finance from other services and help guide its development. These innovative ideas embody the plan for Open Finance and mmob look forward to watching them develop.
The idea of using digital identification is crucial to fulfilling Open Finance’s potential. With digital identity systems in place, users will be able to identify who they are, confirm they are who they are claiming to be, and share information attached to that identity with providers.
The Statement confirmed that a digital identity would improve Open Finance as data is shared more easily with providers and opens up competition as providers can authenticate at different levels. The providers will be able to understand their users better, improve services accordingly and identity gaps in their demographic to improve inclusivity.
It is hoped using digital identities within Open Finance will promote an identity that covers all financial services, if not wider industries as well. As planned, this will be aided through services such as pension dashboards that require governmental verification and so once users are identified they have access to other products.
Digital identity services have been emerging and growing as seen in the support offered by the FCA’s Regulatory Sandbox. A more recent pilot of a digital sandbox saw digital identity services testing well and the Government’s Digital Identity Unit (DIU)’s recent ‘trust framework’ will see the legal practicalities of digital identity put into action.
Digital identity services are particularly exciting in their ability to achieve Open Finance with the possibility to change the way we identify ourselves in many other industries too.
The FCA seeks to create a set of common standards that enable Open Finance to work easily and efficiently between consumers and TPPs. These standards help achieve a system that is interoperable (exchanging information across sectors) and cohesive (as a customer journey). For instance, if a user uses a marketplace to find an insurance quote, the system will be capable of using that user data to produce insurance quotes from a number of companies without the user having to leave that system.
Common standards are useful for both consumer and company, as trust is built through recognisable user journeys and implementation is easier, cheaper, and more accessible. There are also practicalities of ensuring these standards are followed which is where an implementation entity similar to the OBIE will be useful in developing Open Finance.
The Statement is less sure how the common standards will be developed, with a majority of respondents seeking an industry-led standard structure over regulatory-led. Certain regulatory involvement may be needed to ensure customers are prioritised. The FCA recommends collaboration across the industry to create these standards, including a data set that is standard for APIs to read with the help of use cases. From there, regulatory bodies and the Government can determine the practicalities and offer changes. The FCA can also organise opportunities that foster conversation between consumers and financial services to develop the standards.
The Feedback Statement had several responses that detailed the costs of Open Finance. Mainly costs were greater than previously expected and attempts should be made to reduce costs where possible and share costs equitably to avoid disproportionate spending. As a key part of Open Finance is to increase competition and accessibility of financial services, the infrastructure should reflect that and keep costs down where possible.
The Statement emphasised that Open Finance is a great undertaking for companies to embark on and broke costs down into three categories: technology, business, and regulatory costs.
- Technology costs are generally thought to be the greatest and focus on developing and implementing improved technology. Standardising and digitising data, connecting APIs to legacy platforms, updating cyber security and fraud detection systems are all additional costs involved in Open Finance. However, by implementing Open Banking it is predicted technology costs for Open Finance will be reduced as technology can be shared across industries and the ground has already been broken.
- Business costs include changes to the business brought about by involvement in Open Finance, such as strategy development, customer research and interest, proposition design, third-party partnership and management, and liability processes. These costs incorporate changes companies must consider when embarking on an Open Finance development.
- Regulatory costs focus on costs needed to conform to regulations, including costs for implementing conformance tech, testing, legal advice, training and maintenance, any payments to regulators or bodies, and costs for maintaining records and information.
The degree companies are affected by these costs depends largely on their existing systems and what they use Open Finance for (e.g., ‘read’ or ‘write’ functions). While these costs are daunting, fintech companies, a key contributor to Open Finance development, receive more investment than any other industry, easing the financial burden for Open Finance to develop. Nevertheless, the next steps in developing Open Finance will be important to assure companies the costs do not outweigh the benefits of being involved in the ecosystem.
The three areas examined above are particularly interesting as highlighted in the Feedback Statement as they are specific to Open Finance development and have been largely untouched in previous research. Digital identity has been developing independently and with better coordination will play a key part in fulfilling the potential of Open Finance.
Similarly, common standards are important for ensuring the ecosystem is accessible within finance and beyond, and the user journey is simple and uniform. By breaking down the predicted costs of Open Finance, less companies will underestimate the financial costs needed for Open Finance and hopefully more will be done to keep costs down for all involved.