Introduction

The idea of Open Finance extends Open Banking to include all financial instruments and products offered by financial companies.

The Open Banking initiative applies to current accounts and was driven by a regulation known as the “Payment Service Directive version 2” (PSD2). Its scope was limited to ensuring that banks opened their doors to allowing third parties to access their payment mechanisms. PSD2 was accompanied by XS2, which similarly made account information (transactions and balances) available.

This POV will explore the future of Open Finance, building on the groundwork of Open Banking

Open Finance broadens the scope from current accounts, payments, and transactions to include information about insurance, pensions, investments, mortgages, and savings. The regulation therefore extends beyond banks to other financial services organisations, including insurance providers, investment firms, ISAs, and more.

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Challenges and Solutions

Open Banking was proposed by the European Union and implicated in UK regulatory law from 2017. In the United Kingdom, nine of the largest retail banks, known as the CMA-9, were instructed to implement APIs conformant with standards established by UK Open Banking.  The APIs for these organisations were to be live a year before everyone else. They were reported to have implemented the Open Banking roadmap requirements as of 2023. [1]

Banks are required to expose their payment capabilities through their website as APIs. The services provided by these APIs must match or improve upon the existing website services.

The Open Banking community made a record 1 billion API calls during May 2022

In January 2023 alone, over 10% of the UK population (consumers and SMEs) used Open Banking services, accessing innovative financial management and payment tools empowered by APIs.

“I am delighted that we have now reached 7 million active Open Banking users in the UK. It is significant that 1.2 million of these are first-time users. From access to cost-effective credit, building a regular savings habit or making more informed financial decisions – Open Banking is delivering the means for our citizens to improve their financial wellbeing.”

–   Henk Van Hulle, Chief Executive Officer, Open Banking Limited

Read our whitepaper on Open Banking: The Case for Investment

[1] Santander, HSBC, NatWest, Barclays, Lloyds, Nationwide, Allied Irish Bank, Bank of Ireland, and Danske

Open Finance

Implementing Open Finance will require Open Finance APIs to be developed with access to information about accounts, payments, and transactions, as well as materials for marketing and sales, terms and conditions, and contracts.

The Financial Conduct Authority (FCA) outlines their vision for Open Finance in three points:

Point 1: Consumers and Businesses

Consumers and Businesses must be given access to their data as it concerns any financial product owned by them, including transactional, balance and transfer value, and terms and conditions. They should have greater control over how that data can be used, and have mechanisms to, where appropriate, transfer holdings to another institution.

Information should be made available in a similar way to improve the quality of investment and other financial decisions. Access to information is through third parties (TPP) and can be aggregated to improve comparisons.

Point 2: Innovation

Increased use of Open Finance services is expected to spur greater innovation, benefiting consumers by providing a broader range of products and services that better suits their needs.

As with Open Banking, the desire to build an industry on the available data is only increased thanks to the wealth of information and services made accessible with Open Finance.

The desired output of Open Banking, and in turn, Open Finance, is an industry of businesses built on the data made available by these regulations. With 80% of current accounts being provided by the larger industry players, the regulation seeks to provide more opportunities for market competition by creating transparency and awareness of other options based on an individual’s financial situation.

Organisations such as ClearScore employ this initiative, allowing users to see their account information as well as get advice and pre-approval for credit cards, car loans, and mortgages, all in one place.

Point 3: Financial Health

Widespread use of new services improves the financial health of consumers and businesses in the UK.

One demographic that could see benefits from Open Finance include ‘unbanked’ people; people who cannot typically access banking services. Engaging this audience will open a new market to the financial services, encouraging competition and innovation.

Concerns for Open Finance

As with any large-scale project, organisations and stakeholders want and need to understand the business case for investing in Open Finance (beyond just being compliant). With the scarcity of industry development that was expected to arise from Open Banking, these stakeholders are eager to see what will change with Open Finance.

Initial stakeholder engagement identified four concerns:

Concern 1: Incentives

Will Open Finance develop without intervention? Crucially, do the incentives exist for firms to share their data?

Concern 2: Feasibility and Cost

Can all firms develop and offer the access needed to support Open Finance? What are the costs and barriers involved with investing in a new system?

Concern 3: Interoperability and Cohesion

What common standards are required for Open Finance to develop?

Concern 4: Underpinned by Clear Data Rights

Is an adequate framework of data rights in place? If not, what would it be, and how would it be provided so that consumers are protected?

These concerns are still to be addressed by policy makers and advisers, and are worth keeping in mind when looking at Open Finance platforms. Does the platform have the flexibility and cost to viably provide the capabilities for commercialisation?

Responsiv Open Finance Solution

Responsiv has worked in the financial services industry since our inception in 2015. Since 2017, we have operated an Open Banking Gateway for a large international bank as a managed service.

We specialise in delivering integration and automation projects, including secure APIs and connections to trusted partners and between internal systems and departments. Recent projects have delivered ISO20022 compliance and secure partnering.

Responsiv Cloud Open Finance Gateway (SaaS)

The Responsiv Cloud Open Finance Gateway is for organisations wishing to comply with UK Open Banking using a platform and delivery partner that can be extended to specific open finance products and services. This single-tenant solution can be customised to suit your exact requirements without fear of interrupting other customers.

Responsiv Cloud API-315 Pack is a set of Open Banking APIs that provide the core Open Banking UK APIs necessary to achieve conformance for most financial institutions.

Custom integration services are provided to prepare the service and integrate it to your core banking, security, and payment systems. Possible custom APIs include Dutch Tax Authority, Mortgage, Loans, Pensions, and Partner Integration.

Check out the Responsiv Cloud Open Finance Gateway

Conclusion

Open Finance has been discussed since the announcement of Open Banking and is generally considered to be a necessary and advantageous next step towards the desired industry outcomes. Organisations that are not retail banks but found themselves subject to PSD2/XS2 are eager to get benefit from their Open Banking investments.

Open Finance and its opening up of new products may be the answer to how Open Banking investments can finally begin to show value. Organisations that were obliged to comply with Open Banking despite current accounts and payments not being their primary business can now provide APIs for their specialty services thanks to the broadened scope. For these organisations, regulation check boxing will no longer be their concern, with a new opportunity to engage the market.

Finding a solution that can amplify this commercialisation and return on investment will be crucial to getting the anticipated results. This includes considering cost (software, implementation, hosting, support), scalability, and security, all whilst maintaining compliance.

Contact Responsiv to start your Open Finance journey

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    Zoe Whyte

    Zoe Whyte

    Zoe is the Marketing Manager at Responsiv. She has a first-class degree in History and completed the miniMBA in Marketing.