This year, open banking in the UK celebrated its sixth birthday and reached the milestone of 10 million customers. In today’s world of instant and cross-border payments, the era
of Open Finance has well and truly arrived.
Customer demands are changing, and data is becoming increasingly vital for financial institutions. Open Finance allows banks to address these trends by creating a thriving financial ecosystem, by widening the access to banking services and by putting the
consumer back at the centre of financial services.
The industry agrees; according to
Finastra research, 87% of 900+ senior banking executives surveyed believe that open finance is positively impacting the industry and making it more collaborative.
Finextra spoke to Finastra’s CEO, Simon Paris, to discuss the current state of Open Finance, the impact it has on customers and financial institutions, and what the future holds for organisations with an open approach.
The ecosystem of Open Finance
In order to understand the progress and impact of Open Finance, it’s first worthy to note the difference between open banking and Open Finance. While both concepts are built on data sharing models, open banking, as the name suggests, focuses primarily on
banking services. In the real-world, this means that technology (in this case APIs) that allow third-party access to banking data to streamline the customer journey. Apple Pay or Klarna are great examples of this.
Open Finance goes a step further and integrates the full financial ecosystem into this concept – think mortgages, savings, pensions, or consumer credit.
For example, if a customer is looking to buy a house, this means a plethora of steps and research for the buyer – from researching average house prices in the area and finding the right mortgage to moving house and researching utility providers. The idea
of Open Finance is to streamline this entire process for the customer – where their financial institution will not only be able to offer the customer the right mortgage (even if it’s not their own product) but also help them to optimise their utility bills
and support with other steps that involve financial services.
The ecosystem Open Finance fosters is one that puts the customer back at the heart of financial services. Paris highlights that the idea is for financial institutions to move away from solely manufacturing and offering their own products to also think about
distribution.
“As a bank, I might manufacture fantastic mortgages. However, it might not be the right one for my customer. But if I'm also a distribution channel, and because they’re my customer, I'm going to distribute another lender’s mortgage that's better for them
than mine. I still make money, but I'm distributing somebody else's product,” he explains.
“That’s the context of Open Finance. When we say finance is open, it is putting the business, the individual or the community back at the centre of the financial services and doing right by them with the product or service that most makes sense for them
and the journey that they are on.”
Benefits of Open Finance
According to Paris, Open Finance has the potential to make profound changes to the financial services landscape. The three main opportunities it offers are:
- Creating a whole new financial ecosystem
- Driving more sustainable decision-making
- Democratising financial services
As previously discussed, Open Finance holds the potential to create a whole new ecosystem that offers greater opportunities to the customers, businesses, and communities it serves. It’s about helping the customer to unlock their true potential by offering
them the right products and services at the right time.
However, it goes deeper than that. Open Finance also allows for greater democratisation of financial services.
“If you take a global perspective, you can think about the unbanked and the underbanked,” Paris explains. “A long time ago, I worked for a different company, and we provided bank accounts to the unbanked in South Africa. And to our surprise the product that
they bought, overwhelmingly, was life insurance. They didn't want the cost of their death to be passed as a burden to their survivors. They took out $100 life insurance, so nobody would have to cover the cost of their death. We didn't see that coming. They
bought it because it was available, it was affordable, and it was accessible. So those, for me, are the three key words to democratisation.”
With greater democratisation of financial services also comes more positive impact overall. While Open Finance can address algorithmic bias and ensure more money goes to the people that need it (think of removing high cross-border transaction fees, higher
interest rates for minority groups), it also can help drive more sustainability.
To illustrate, Paris gives the example of trade finance. “There's almost a $2 trillion trade finance gap. That means that the people who need trade finance, typically very small companies, can't access what they need. The reason for the gap is because large
banks can't currently validate whether the trader is a safe entity to deal with. For example, they’re too small and too far away.
“But what if we could address that? What if we could say the SME’s invoices are government-backed? What if we can make sure that their Legal Entity Identifier (LEI) actually confirms they are that sole proprietor? What if we can confirm that the goods you're
shipping are indeed on the boat? So, we can use technology to reduce the barrier or the risk of people coming into trade finance. That gets tens of millions of people out of poverty, stops some immigration flows because people can trade from where they are,
as opposed to having to move for a better life.”
The opportunities of embracing regulation
Another crucial aspect that factors into the Open Finance revolution is regulation. The financial services industry is facing a tidal wave of regulation at the moment, yet the key to success lies in seeing the opportunities in regulation rather than just
viewing it as mandatory checkboxes.
On one hand, regulation often addresses areas that organisations don’t want to touch – but need to. Take technology. Some financial institutions are using software that’s 30 or 40 years old and cannot be patched, which means it’s not as secure as modern
software. This is where regulatory authorities play a vital role in ensuring security – and the price tag for companies will not be that high if they price in the risk of continuing with outdated software.
On the other hand, regulation also gives voice to the consumer and offers opportunities to financial institutions. Paris states: “That's the power of the consumer, that regulators can push to say: actually, it's about choice. Choice is a wonderful thing.
It drives efficiency. It focuses the mind on the customer. So, regulations can be a real powerhouse for driving change.”
One example of this could be KYC processes. Currently, if a consumer wants to switch between banking providers, they have to go through the same processes over and over again.
One in four customers consider onboarding processes to be too difficult, and a staggering 63% of customers have previously abandoned an application because of this.
Now we can picture similar regulation coming in as it has in the telecommunications space. Number portability allows customers to take their phone number with them when they move providers, for example. Could something similar be applied to KYC processes?
Regulation has the potential to create more seamless services, and organisations that embrace these opportunities will fare better than the ones that don’t.
Looking to the future: How to enable a truly open ecosystem
While technology is crucial to enable Open Finance, it’s often the mindsets that are the true barrier to enabling modern, open services.
“The evolution has to be at the operating level and the organisational level within institutions to say: If the customer is truly at the centre, why am I not distributing products that are better for that customer?” Paris explains. “The execution is a challenge,
because you've got to break a mindset, which is: I only sell my products to my customers, and if they need something else, we wish them well. Maybe they won't find it, and they come back. This is not a great service.”
In real-world terms, that means organisations need to look both outside-in as well as inside-out in order to successfully implement Open Finance. The outside-in refers to concentrating on the customer. What is the journey an institution is trying to solve?
How are they originating, processing, servicing, distributing, reselling, and overall handling their services to address that journey? How do other departments – ALM, KYC, risk, operators – factor into these decisions?
“People will say that it’s cutting into their margin, and it’s true,” Paris comments. “But it’s also massively increasing their volume. It’s also more automated and there is less human involvement, so productivity goes up. Everyone wins. Change is not easy.
I think it was Isaac Newton who said that for every action, there's equal and opposite reaction, which is why change management is a physical activity. You need to apply more energy to the change than the resistance that the change causes.”
Once the outside-in is clarified, institutions can focus on matching the inside-out. If an institution knows there are firms out there who are better suited to certain solutions or services, why not work with them and focus on those services they themselves
excel in?
When speaking on what the future of Open Finance holds, Paris uses the analogy of a car. “Take a Fiat 500 and break it down into all its components. Which ones did Fiat manufacture themselves? They made the engine and the chassis, everything else are components
delivered to them and assembled into the Fiat 500. Yet if the GPS doesn’t work, I don’t go to the GPS manufacturer. I go to Fiat. The same will eventually happen in financial services. On the tech side, it’s about creating that solution mentality, where the
solution is created with the best in mind for the customer and being accountable for the solution delivery and the solution performance – just like buying a car.”
Finance is wide open
While this concept might currently still be a futuristic scenario, the stepping stones for it are laid out today. Consumers and institutions alike are embracing open banking and Open Finance, it’s just about braving the jump towards true consumer centricity.
Financial institutions need to decide today what steps to take in order to embrace a more open approach, so that they can not only remain relevant in a rapidly changing financial landscape – but thrive in the era of Open Finance.