Beyond banking’s four walls: the journey to open finance
In January 2024, there were over 9 million active users of open banking in the UK and nearly 14.5 million open banking payments, with adoption increasing year on year.
Regardless of whether open banking is propelled by regulatory mandates or market forces, the key to success lies in industry-wide cooperation
Despite open banking being a relatively immature market, its impact has forced the financial industry to look outside the four walls of their organisations with the understanding that there is much to be learnt from other industries in how they interconnect. Subsequently, the opportunity for growth and development is vast.
It might seem like we are getting ahead of ourselves, but looking beyond open banking to open finance is not unwise. The Centre for Finance, Innovation and Technology (CFIT) reported earlier this year that delivering open finance and personal data mobility could increase UK GDP by £30.5 billion per annum.
Building on open banking, open finance expands beyond banking networks to include other financial products and services. The interoperability that goes hand in hand with open finance enables a number of important societal factors such as financial accessibility, transparency and control, improved customer experience and increased competition.
With that said, an “Open Economy” beyond open banking and even finance is ultimately reliant on the parameters around the industry. First and foremost, regulation is paramount to protect customers, prevent fraud, increase trust and ensure the stability of open banking.
Creating an ecosystem with regulation and compliance
The introduction of customer-centric financial services via open banking presents a unique opportunity for consumers and businesses alike. However, giving consumers more control over their finances while also providing privacy and security is paramount.
Open banking expands access to personal financial details and as such, it is imperative that businesses cultivate trust by investing in compliance with open banking regulations. As such, regulatory compliance is a key area for businesses to navigate.
For example, PSD2, the EU’s revolutionary first payment derivative, has not only introduced API standardisation to further simplify the transference of data, but it also enhanced standardised security measures across data-sharing partners, demonstrating a dedication to unlocking open banking’s full potential.
Subsequently, the new proposed PSD3 introduces significant modifications to further boost open banking adoption, with the overarching goal of harmonising payment systems across the EU.
This regulatory framework creates consistency between traditional banks and fintech companies. It empowers technology providers by facilitating more secure and efficient data sharing, enhancing their ability to deliver customer services while also reducing infrastructure expenses for these businesses.
While Europe is taking proactive steps towards regulating open banking, other jurisdictions beyond the continent are also taking steps to create a trusted banking ecosystem through robust security measures and consent management systems.
Canada has recently lowered the barriers to open banking by creating a framework and promised regulations that will be managed by the Financial Consumer Agency of Canada (FCAC). This follows a three-year investigation into the concept and viability of open banking for Canadians. In the US, Section 1033 written by the Consumer Financial Protection Bureau (CFPB) is a new rule that aims to promote the growth of open banking in the country.
While Australia has been more open to embracing digital innovations, according to the Australian Banking Association (ABA), it is in the midst of revisiting its open banking regime – the Consumer Data Right (CDR), which came into play in 2020. The lack of uptake from customers means that the industry must review its approach to open banking if it is to encourage data-sharing and become a global player.
Internationally, open banking is moving at pace and in the same direction. However, independent regulation fosters a siloed approach rather than a global ecosystem of fintechs, providers and aggregators. To realise the next step to open finance, a cohesive and ubiquitous regulatory framework is essential.
The global stage
Statista forecasts that the number of open banking users worldwide will reach 132.2 million by 2024, a significant increase from the 24.4 million users in 2020. However, there is a clear need for collaboration to allow further development and innovation within open banking in 2024 and beyond.
Regulatory measures allow fintechs and banks to implement open banking more effectively and aim to give customers a seamless experience. While achieving truly global regulation is challenging due to differences in legal systems, economic priorities and cultural norms, efforts towards international coordination and standardisation in financial services continue to be important to encourage a level-playing field.
Regardless of whether open banking is propelled by regulatory mandates or market forces, the key to success lies in industry-wide cooperation. A collaborative approach will foster greater innovation across the board, allowing the financial sector to maximise the potential of open banking by embracing an open mindset and working together.
The transition from open banking to open finance
So how do we transition from a relatively immature global open banking market to open finance?
The UK government recently introduced the new Digital Information and Smart Data (DISD) Bill which builds on the previous Data Protection and Digital Information Bill (DPDI). The new bill aims to enable innovative data use, support research and enhance data sharing and standards in public services.
A core element of the DISD Bill is a framework to securely share customer data with third parties following authorisation. DISD essentially opens secure data-sharing beyond banking and other financial services to other sectors.
As a pioneer in open banking, this is a bold first step to creating a smart and open financial ecosystem that empowers and enables customers to better manage financial tools. It also sets the stage for global connectedness that seamlessly shares data across industries for an enhanced, unified and highly personalised user experience.
Regulatory compliance in open banking is an ongoing process that requires significant investment in technology, processes and expertise. It’s not just about meeting current standards, but also about building flexible systems that can adapt to future regulatory changes and customer needs. This compliance, while challenging, is crucial for maintaining trust in the open banking ecosystem and beyond in the journey towards a more open and flexible digital environment.
