Call for input: Industry needs to engage as the FCA moves forward on its transformative vision for open finance.
By Stuart Davis and Brett Carr
Imagine a world in which you could access your bank accounts, credit cards, mortgage, pensions, savings accounts and ISAs, brokerage account, home and car insurance, life insurance, and other financial products on one user interface or app, even if each of those products is held with a different provider. Then, imagine that the app could provide innovative financial management services across all of those products, such as automated switching to the best products, holistic investment advice and budgeting, and sweeping of excess cash into products yielding a better return than today’s current accounts. This world may be closer than you think, and it will likely have profound impacts for incumbent and new financial services business.
Open banking: payments
Open banking (as we refer to it in the UK) came into force in September 2019 under the second EU payment services directive (PSD2). Open banking represents a fundamental shift in the payments landscape, by enabling customers holding a payment account at any EU bank, e-money issuer (e.g., a prepaid card provider), or payment institution (e.g., money transfer businesses) to require these account providers to share account data and payment functionality with licensed third-party service providers (TPPs). Account providers are together referred to as Account Servicing Payment Service Providers or ASPSP.
TPPs are often fintechs that want to build innovative applications off the back of the democratised data and payment functionality, but individual banks may also be providing TPP services. These applications and services might range from consolidated dashboards showing information across multiple accounts held with different ASPSPs, to fast and convenient ways to initiate and track payments, and even fresh insights and tools not offered by the ASPSP on their own customer interface.
The shift from ASPSPs owning customer data, to customers being in charge of their own data with the ability to share it with third parties, should bring down barriers to entry in the payments and money management space, altering a power imbalance that has long favoured the incumbent banks. Highly regulated and capitalised entities will still be required in order to hold customer funds and maintain payment accounts. However, open banking creates a new regulatory regime for TPPs accessing those accounts on behalf of the underlying customers, without some of the more onerous regulatory and capital requirements that apply to ASPSPs.
ASPSPs are required to provide an interface for TPPs to access the data and payment functionality of the client’s payment account. Regulators and industry bodies have been supportive of the use of open APIs, though many ASPSPs are instead providing a modified version of their current customer interface.
The FCA’s call for input for open finance (the CFI) in December 2019 takes stock of the developments in open banking, and assesses whether the same model could be implemented across the wider financial services landscape and beyond (e.g., utilities) to empower customers to take control of their finances. While the FCA is not pre-judging the outcome of the CFI, the FCA sees clear benefits in the concept of open finance and wants to be at the forefront of developments globally, in the same way that the UK championed open banking under PSD2.
Lessons from open banking
The full impact of open banking is not yet apparent, given that the requirements only came into force in September 2019. However, the FCA has already registered or authorised more than 135 new TPPs (including fintechs and incumbent ASPSPs) covering a range of services. The UK’s Open Banking Implementation Entity (the body responsible for developing open banking API standards) is reporting steady increases in the use of ASPSP’s APIs by TPPs:
Source: Open Banking Implementation Entity
The FCA notes that the development of APIs has been challenging and time-consuming, and that while some of the services envisaged under the open banking project have materialised (along with some that were not initially envisaged), others have been slow to develop. Services that have materialised include:
- Account aggregation (showing your combined balances across multiple accounts)
- Account data access to inform lending decisions (giving lenders the necessary income and spending information)
- Personal financial management
- SME financial management
- Account-to-account money transfer using payment initiation services
- Financial inclusion
- Protections for financially vulnerable people
- Legal aid and welfare support advice
- Retrospective Gift Aid claims
- API aggregation services (to support the integration by TPPs with one API provider, rather than bilaterally integrating with many)
Services that have not yet materialised include:
- Automatic product switching
- Balance transfer management (credit cards)
- High balance sweeping
- Cashflow optimisation
- Interest maximisation
- Merchant payments using payment initiation services
- Card issuers issuing cards when they do not control the underlying payment account
The FCA expects it will take several years to see open banking properly utilised, but notes promising levels of interest in open banking from technology firms, incumbents, and innovators in and outside the UK. Through this CFI, the FCA wants to explore what more it can do to help open banking achieve its full potential.
A move to open finance
According to the FCA, under open finance, a TPP could do two things:
- Collect a customer’s financial data to present it to them or to a third party (“read” access)
- Undertake or initiate transactions on the customer’s behalf, for example initiating payments, switching accounts, making an investment, applying for credit) and presenting the data back to customers (“write” access), as well as receiving any necessary permissions
While dedicated APIs are not necessary under PSD2, the FCA supports standardised API access for open finance because, in its view, standardised API access reduces barriers to entry (as third parties do not have to integrate on a firm-by-firm basis) and enhances security across the industry.
The FCA envisages the benefits from open finance to include:
- Personal financial management dashboards
- Automating switching and renewals encouraging shopping around in the interests of the consumer
- New advice and financial support services
- Digitalisation of data, giving firms new capabilities in terms of understanding and servicing their customers, and managing risk
- More accurate creditworthiness assessments and increasing access to credit, meaning:
- Access to cheaper finance
- Supporting credit options for consumers currently struggling to access credit
- Restricting access to those unable to afford credit finance
- Tailored and more readily available debt advice
What information could be accessed and shared?
The FCA notes some risks of open banking, including the potential for financial exclusion, misuse of data, poor customer outcomes, and competition and operational issues.
Open finance: some legal and regulatory issues
Will TPPs be regulated under open finance? The FCA notes that many of the activities of TPPs under open finance would be unregulated under the current regulatory regime. While the FCA notes that this is ultimately a question for government, the FCA suggests that similar regulation to that of TPPs under the PSD2 open banking regime would be beneficial in order to ensure that TPPs have in place adequate systems and security, and so that the FCA could act when things go wrong.
What would the requirements on incumbent financial institutions involve? PSD2 introduced significant requirements on ASPSPs relating to the provision of interfaces, the methods and standards of communication with TPPs, and consent and information security requirements (such as strong customer authentication). Similar requirements would likely be imposed on incumbent financial institutions under any open finance initiative.
Will open finance allow a commercial relationship between incumbent financial institutions and TPPs? Under open banking, ASPSPs are not permitted to require TPPs to contract with them in order to access payment accounts. This poses questions for ASPSPs as to what can be commercialised when they provide bolt-on services to TPPs on top of the basic provision of APIs or access to the modified customer interface.
Who will be responsible if things go wrong? Under PSD2, the ASPSP is primarily responsible to the customer for unauthorised payment transactions. By widening the scope of services, the risk profile widens. Unauthorised, fraudulent, or defective transactions could give rise to the risk of significant investment losses under open finance.
As a starting point, the FCA has published a draft set of open finance principles to support the development of open finance, which it will finalise in coordination with the government and following extensive industry consultation.
The FCA is aiming to address four key questions through the CFI:
- Incentives – Will open finance develop without intervention? Crucially, do the incentives exist for established firms to provide access?
- Feasibility and cost – Can all firms develop and offer the access needed to support open finance? What are the costs and barriers involved?
- Interoperability and cohesion – What common standards are required for open finance to develop?
- Underpinned by clear data rights – Is an adequate framework of data rights in place? If not, what would the framework look like, and how would it be provided?
The answers to these questions will be crucial in informing the FCA’s approach to open finance in the future, and industry engagement will be critical in developing the framework for open finance and the principles that underpin it.
The CFI is open for input until 17 March 2020, and the FCA will work closely with the government in taking this initiative forward. The FCA expects to publish a policy statement in summer 2020.
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