The fast track to open finance

The UK Government is poised to develop Smart Data legislation in 2021 to bring the benefits of open banking-style data sharing to new sectors.
This is great news for consumers who are still locked out of their own data in many areas, from utilities to insurance, despite wide ranging data laws (GDPR) aimed at data portability.
But developing legislation and building sectoral frameworks around the new smart data rules is likely to take a number of years.
We believe it’s possible to achieve open finance much more quickly in the financial sector, where the groundwork has already been laid by open banking.
It’s important that open finance happens quickly, to fully realise the benefits unlocked by open banking, and to ensure the UK doesn’t fall behind Europe, where open finance is being looked at by the EU Commission.
We hope the outcome of the FCA’s open finance consultation and the Treasury’s Payment Landscape Review will enable the UK to get ahead on open finance, through an agile, targeted set of rules and facilitated industry collaboration.
In what follows, we discuss how open finance can progress at speed by:
Building on the foundations of PSD2 and open banking
Introducing interim requirements for open savings and VRP
Incentivising data holders to develop well performing open finance APIs
But first: a note on definitions, use cases and sequencing.
What is open finance?
Open finance is the concept of extending open banking to a wider range of financial products. PSD2 limited open banking to payment accounts. This means consumers can’t currently get full control of their financial lives through a third party provider. For example they can’t view their savings accounts in a dashboard, or ask a third party provider to transfer funds from one ISA to another. The FCA believes open finance can eventually extend across:
savings and investments
consumer credit
mortgages
pensions
insurance
We believe there are specific use cases that should act as a focal point for open finance:
aggregating savings and investments data alongside the payment account data already available — to bring holistic financial management closer for consumers
allowing access to financial account information in savings and investment accounts, to power value-add services like financial advice, ID verification and KYC
enabling third party providers to initiate fund transfers between savings accounts, ISAs and other investments
enabling third party providers to initiate bank and ISA switching
Sequencing
To make open finance manageable for regulators and the industry, it should start by correcting some of the shortcomings of PSD2 — eg extending API access to savings and enabling variable recurring payments.
This is the logical step to build on the foundations of open banking and give consumers more holistic control of their transactional accounts.
In what follows we suggest ways to speed up the delivery of open finance, using insights from our experience with open banking.
1. Build open finance on the foundations of PSD2 and open banking
We believe open finance can progress at speed if it builds on the foundations of open banking, rather than an entirely new regulatory regime. This means:
replicating the PSD2 ‘right of access’ in legislation for open finance
ensuring both ‘read’ & ‘write’ access in open finance, as with PSD2
ensuring APIs are the basis of open finance
re-using the PSD2 authorisations regime
creating a permanent independent standards body to develop and maintain API standards, and oversee their implementation.
Access right
As we’ve argued before, one of the key foundations of the Open Banking regime in the UK was the legal right, stemming from PSD2, for customers to access their payment accounts through third party providers.
This right stopped banks from prohibiting the use of third parties and made it an obligation for them to facilitate third party access. It was revolutionary.
With open finance, as with PSD2, the legal right for customers to access open finance accounts using third party providers should be front and centre.
Enshrining this right in law is necessary to shift financial institutions away from the mindset that they own the customer’s data and account access. This is key to driving competition, so customers benefit from innovative new services offered by third party providers, and financial institutions are incentivised to improve their own services.
The PSD2 access right also gave banks (as data holders) a straightforward legal basis on which to release data to third party providers under GDPR. The same right should be introduced to ensure other types of financial institutions aren’t having to wrestle with GDPR and liability worries when allowing access to data.
Ensure both ‘read’ and ‘write’ access
The PSD2 access right did not just cover ‘read access’ of payment account data, but also ‘write access’ — the ability for third party providers to initiate payments on behalf of customers.
This has paved the way for a new type of bank to bank payment to compete with cards and other payment methods. Adoption of open banking payments has grown significantly since 2018, as more businesses start to understand the security and cost benefits.
‘Write’ functionality should be a pre-requisite of open finance.