Open Finance has the potential to revolutionise the way consumers and businesses manage their finances, allowing them to access cheaper credit, boost savings and create friction-free payment journeys. But unlike Open Banking, which is subject to a legal, regulatory framework, Open Finance is currently not subject to regulation, a worrying thought when you consider how much more data it unlocks. Regions world-wide seem to agree that centralised control will be required, but there is no standard approach. So, how is the world responding to calls for a regulated Open Finance model?
We know secure consumer data-sharing is a key objective of the UK Government's National Data Strategy, and the FCA has committed to working with the Government to deliver the Smart Data initiative by facilitating changes to the legislative and regulatory framework.Proposals for this framework will pave the way for a phased Open Finance implementation, expected later this year or early 2024.
Naturally, some Open Banking requirements will be transferable to any future Open Finance framework, but there will need to be some differences. For example, Open Banking requires a Third Party Provider’s access to payments accounts data be equivalent to that of a customer via online banking. This might work for savings or investment accounts, but probably won’t be suitable for insurance data.
In the EU, Open Banking came into law as part of the Revised Payment Services Directive (PSD2); the backbone of Europe’s Open Banking ecosystem. But its scope is limited to payment accounts. Savings, investments, mortgages and pensions all fall outside its remit. This might mean we need PSD3.
The European Commission will propose new Open Finance legislation in the second quarter of this year, with the aim of promoting data sharing in the financial sector beyond payment data access.
It means an Open Finance Framework should be in place by 2024. The UK and Europe are somewhat ahead of the curve when it comes to Open Banking, giving them a head start in the race to Open Finance. While the rest of the world is playing catch-up, it is making progress in regulating Open Banking.
At last year’s Money 20/20, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra laid out plans to finalise Open Banking rulemaking, bringing the US a step closer to developing an Open Banking ecosystem. All being well, the CFPB will issue a proposed rule this year and it will come into effect in 2024.This bodes well for the future of Open Finance in the US, but the sheer size of the US financial system will be a major challenge in creating an Open Finance framework.
There are more than 10,000 financial institutions actively serving consumers and small businesses across the US, so the execution of bilateral data access agreements between data aggregators and every financial institution is a logistical and practical nightmare.
Further North, the Canadian government has issued a report outlining a plan to introduce Open Banking to the nation’s financial system this year. Although many were hoping for the launch of the first phase of open banking in January, as initially promised in the final report of the advisory committee on open banking, progress continues to be made, with the first Open Banking phase still expected to launch this year.
Throughout Latin America the rollout of Open Banking is advancing at different speeds. For example, in Mexico a law to regulate financial technology institutions came into effect in 2018. It states that users’ individual transaction data can only be shared with express authorisation, and pays particular attention to security mechanisms.
Meanwhile in Brazil, a system of central bank supervision, regulation and authorisation of participating institutions is in place, and large and medium-sized banks are required to join the Open Finance initiative.However, demand in the country is low, with fewer than 4 million people having shared information through Open Banking out of 130 million people with bank accounts.
Across the Asia-Pacific region, Open Banking is being widely adopted, but as in LATAM, approaches vary across different countries. Some are market led, some regulator led, others a hybrid that blends aspects of both. In some jurisdictions, such as Australia, Open Banking is part of a wider Consumer Data Right regime that will be extended to other sectors such as energy and telecommunications. Hong Kong’s regulator, the Hong Kong Monetary Authority (HKMA), meanwhile, has not mandated Open Banking at all, instead operating a voluntary opt-in process and providing high-level guidance to help financial institutions agree on standards among themselves.
In contrast to Australia and Hong Kong, which are seen as being regulatory-led, Singapore is a market-led jurisdiction for Open Banking. However, while there is no mandatory requirement for banks to open up their data, systems, and services, the regulator, the Monetary Authority of Singapore (MAS), has taken a strong top-down approach to implement Open Banking. In December 2020, Singapore launched SGFInDex, a platform that leverages the country’s national identity system, SingPass, to let individuals collate their financial data for financial planning.
With APAC’s largest population of underbanked people, India is one of the region’s greatest Open Banking opportunities. Its government has invested heavily in building the infrastructure to make Open Banking easier, and India has launched an account aggregation framework, a financial data sharing system to ease the accessibility of financial data.
Another interesting market in APAC is Indonesia. Similar to India, Open Banking represents a massive opportunity which has led regulators to express support for Open Banking as part of Indonesia’s digital financial transformation reform. In 2019, Bank Indonesia (BI) put in place its ‘Indonesia Payment Systems Blueprint 2025,’ laying out five main key areas of focus: Open Banking; retail payment systems; financial market infrastructure; data; and regulatory, licensing, and supervision.
Open Banking has enjoyed a steady rise across the MENA region. Saudi Arabia, for example, has recently published its Open Banking Framework and the UAE is not far behind. Oman also recently launched an Open API strategy, and Bahrain has been something of a pioneer in the region, being the first to adopt an Open Banking framework. The Dubai Financial Services Authority (DFSA) has also introduced licences authorising the provision of AIS and PIS activities, and Saudi Arabia is putting its 2021-introduced Open Banking policy into practice as part of its "Vision 2030" plan, and the Saudi Central Bank (SAMA) now requires banks to open their APIs.
While jurisdictions worldwide vary massively in their approaches to regulating Open Banking, the advancement seen across all regions is surely a positive step in building confidence in Open Finance. Regardless of when and how Open Finance is regulated, the revolution is most definitely coming. Now is the time for merchants to learn how it will affect and benefit them.
Read more in our white paper: From Open Banking to Open Finance and beyond
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