Background
The digital economy holds significant potential as a key driver of growth in Europe. Within the financial sector, the advent of digital technologies, the emergence of new players with innovative business models, and shifts in consumer behavior have hastened structural changes. This transformation is leading to increased decentralization in finance, giving rise to various non-bank forms of credit. The potential benefits include heightened consumer welfare due to the introduction of innovative and more tailored financial products, accompanied by heightened competition.
To propel this process, access to data and the establishment of a robust regulatory framework for data sharing are deemed crucial. The European Union (EU) is currently transitioning from its Open Banking model, which mandated data sharing in the payments system, to Open Finance. This expanded approach encompasses a broader array of financial sector participants and data types. The overarching goals are to enhance competition in offering diverse financial services, provide consumers with greater choices, and facilitate the entry of new and innovative financial service providers into the market.
A pivotal tool in this pursuit is the Financial Data Access Regulation (FIDA), proposed by the EU Commission in June 2023. FIDA is considered a significant stride in financial liberalization and has the potential to act as a catalyst for digital finance in Europe. While representing a sensible move in the ongoing regulatory efforts to foster innovation and integration in the EU financial sector, FIDA also raises pertinent questions related to data privacy, data governance, financial stability, and the associated supervision of financial markets [1].
Objective
The objective is to establish a resilient Open Finance system for the European Union that entails
- Imposing obligations on various incumbent financial institutions holding data to share data and, in certain instances, facilitate interoperability with a diverse array of existing and emerging data user service providers
- Implementing standards that ensure efficient, secure, privacy-respecting, and cost-effective interoperability and portability, especially in cross-border operations
- Devising a compensation model that aligns with the right incentives for all involved parties.
Open Finance has the opportunity to build upon the early achievements of Open Banking by extending its framework to amalgamate information from various sources such as mortgages, pensions, insurance, and more. The recognition by the Labour Party of the potential inherent in Open Finance is centered on enhancing financial inclusion, bolstering household savings and investments, and establishing a new data conduit to stimulate innovation. This encompasses the creation of personalized solutions for customers. The forthcoming Data Protection and Digital Information Bill is poised to furnish the government with the necessary regulatory groundwork for the future infrastructure of Open Finance. In collaboration with regulators and industry stakeholders, a Labour government aims to formulate a comprehensive roadmap for Open Finance, demonstrating its value and realizing its potential to enhance the financial well-being of individuals.
The adoption of Open Banking will lead to intense competition among banks for the deposits of customers who embrace this approach. This competition will result in the creation of competitive banks actively participating in Bertrand’s competition to attract and secure these deposits. Conversely, there will be minimal, monopolistic competition for customers who do not adopt Open Banking and remain “captive” to traditional banking services. The strategic decision of whether to be a competitive or monopolistic bank lies with individual banks. Although competitive banks may opt for a riskier strategy compared to monopolistic banks, the overall profit, at the margin, should be equivalent for both types of banks.
The establishment of an Open Data Platform, akin to Open Banking, necessitates the evaluation and assessment of criteria for trusted status by regulators, government institutions, security firms, and data source providers. Similarly, to ensure the platform’s objectives are realized and accessible to all, it is crucial to enforce guidelines for user experience and establish a code of conduct.
Participants in this platform are expected to implement robust user authentication, utilizing multi-factor authentication at a minimum, along with security controls to safeguard the confidentiality and integrity of users’ security credentials. Any governing body overseeing the platform should strongly advocate for the adoption and adherence to robust information security management frameworks, such as ISO27001 or the National Institute of Standards and Technology cyber-security framework. This includes stringent requirements for auditing compliance.
The governing body could facilitate industry groups, involving participants, to encourage the sharing of threat intelligence, development of standards, and support engagement, communications, and the growth of a developer community. To identify vulnerabilities and implement mitigating actions, the network platform must undergo regular security and cyber-penetration testing, ensuring its security and resilience [2].
Significance
The significance of Open Data Access in Open Finance lies in its capacity to enable financial institutions to directly extend their core systems to customers and partners, fostering a more open data-sharing environment. This open access to data brings several advantages:
- Improved Fraud and Risk Management:
Utilizing an open finance API instead of screen scraping eliminates the need for consumers to share their usernames and passwords, reducing the risk associated with credential sharing.
- More Precise Customer Profiles:
Access to real-time financial data allows financial providers to understand where and why consumers share their data. This insight aids in identifying opportunities for product development and partnerships.
- Enhanced Customer Experiences:
With greater control over their financial data, consumers can connect and share information on their terms. They can easily manage and revoke access, fostering trust and improving relationships with financial providers. This approach leads to higher customer satisfaction and loyalty.
- Personalized Services:
Analyzing financial data enables businesses to identify specific customer needs and preferences. For instance, a bank can offer investment opportunities to customers with higher disposable incomes or provide budgeting tools to those struggling with financial management. Tailoring services fosters a stronger connection with customers, increasing loyalty and retention.
- Data-Driven Decision Making:
Open Data Access allows businesses to gain insights into trends and patterns previously unnoticed. This information empowers businesses to identify new opportunities, optimize operations, and make informed decisions regarding product development and marketing strategies [3].
Sources:
[1] A. Lehmann and J. S. Marcus, “Requested by the ECON Committee What can an enabling framework,” no. October, 2023.
[2] P. Eccles, P. Grout, P. Siciliani, and A. Zalewska, “Open banking, shadow banking and regulation.” 2023.
[3] “How Open Finance Creates a Better Money Experience.”