Banking Beyond Borders: A Journey into Open Finance
Banks, insurers and asset managers must move quickly to protect their relationships with customers as pending Open Finance regulation in Europe, and elsewhere, will increase competition.
To succeed, they need to create a strategy to safeguard their direct customer relationships as new offers provide better service and more convenience to consumers and businesses alike. They should go on the offensive and strengthen ties with their customers by capitalizing on the new regulations and seizing some of the business opportunities they’re likely to create. Firms that try to stay as they are, and opt just to do their minimum to comply with the new Open Finance regulations, could become vulnerable and increasingly become mere product providers.
The biggest threat to financial services firms is that large data aggregators step in and take over the relationships those firms have built with their customers, said Christopher Schmitz, European Open Finance and Fintech lead at consulting firm EY Parthenon.
“If an aggregator can get access to data, either by being licensed or by using a licensed provider, and can then persuade customers to share their data with them, we could get a situation where financial services firms lose access to their clients.
“They face the risk of being marginalized and becoming just product providers.”
Schmitz said most of the banks and insurers he’s spoken with recently are looking to go on the offensive and aim to capitalize on the new sources of customer data available to them. The potential rewards are likely to be substantial.
“Data is going to become a tradable currency.”
Nicola Breyer, Managing Director, QwistOpen Finance revenues in the banking sector alone could reach US$124 billion by 2031, according to Nicola Breyer, managing director at German data services provider, Qwist.
“We are not talking about something that's small. We're talking about a big, big industry that's shaping and it's only going to get bigger. Data is going to become a tradable currency. The value of the data we're going to be able to access and the value of what we can do when we share that data is huge.”
“Most firms are in a state of shock and awe. It’s a very aggressive timeline.”
Christopher Schmitz, Partner I Strategy and Transactions, European Open Finance & FinTech Lead, EY Parthenon.Source: Qwist
Schmitz and Breyer were among key speakers at an online event hosted by Qorus’ Digital Reinvention community and EY. The event examined the potential impact of Open Finance across the financial services industry. Most of the business leaders polled at the event believe its biggest benefit would be to boost the customer experience and product personalization offered by financial services firms. Many pointed to the new products and services likely to emerge from the arrival of Open Finance. Data security and the integration of technology were identified as the main challenges financial services firms would encounter when adopting Open Finance.
Schmitz pointed out that lots of companies in the financial services industry were caught off guard by how quickly regulators want to implement the new Open Finance rules.
“Most firms are in a state of shock and awe. It’s a very aggressive timeline.”
Key Open Finance regulations in Europe, the framework for Financial Data Access (FiDA) and the extended Payment Service Directive (PSD3), could come into force as early as next year.
Financial services firms will have 30 months after FiDA becomes law to ensure that all the customer data they hold, except for health and privacy-protected information, is accessible to licensed data users. They’re likely to have about 18 months to comply with the new PSD3 payment rules.
Meeting the Open Finance requirements set by regulators will likely be complex and costly, said Schmitz.
“Our discussions with banks and insurers in Europe indicate that it will cost each company around €70 million to €80 million over the next two to three years just become compliant.”
And they’ll need spend much more if they embark on defensive or offensive Open Finance strategies.
The main challenges facing financial services firms when preparing for the arrival of Open Finance are likely to be transforming customer data into standard digital formats that can be accessed in real-time, integrating a wide range of processing and communications technologies, and ensuring high levels of data security.
Open Finance has been on the horizon for several years. Open Banking regulations, which forced banks to make customer data available to competitors, have been on the statutes in Europe since 2016 when the European Parliament adopted the revised Payment Services Directive (PSD2). However, the new Open Finance rules extend the obligation to share customer data beyond just banks to all participants in the financial services industry. A further critical change introduced by the new regulations is their provision for the monetizing of customer data and the creation of contracts between participants in an open data economy.
Schmitz envisages the emergence of a new economy, founded on the sharing of data, that stretches beyond merely financial services. It is likely to comprise data owners (individuals, institutions and companies), data holders (banks, insurers and asset managers that hold data on behalf of their clients), data users (licensed aggregators, marketers, service providers) and data guardians (regulators).
Source: EY
For the open data economy to thrive, collaboration among participants is vital. Initially, companies will need to work together to define the data access schemes required by the regulators to ensure easy access to customer data. Thereafter, firms will have to collaborate to secure the data they need to enhance their products and services, start new business ventures, and fuel revenue growth. A flourishing open data economy, built on the collaborative sharing of data, would also provide customers with better service, greater choice and lower costs.
Nicola Breyer, at Qwist, pointed out that companies should also work together to build and support the extensive infrastructure required to underpin the open data economy.
“A lot of people need to come together to build the Open Finance ecosystem. We just need to make sure that what we build is attractive to consumers.”
Breyer added that one of the reasons for the muted growth of Open Banking was the poor quality of data that banks made available to licensed users as well as the lack of attractive use cases, providing a great customer experience and adding noticeable value.
“The move into Open Banking has been rocky. Because banks couldn’t monetize what they were required to do, they gave us data that wasn’t good data. It wasn’t well structured. The APIs weren’t reliable. We need over 99% data accuracy and we need over 99% reliability to do our work and provide data that’s usable.”
“We expected a Tsunami and all we got was a light drizzle.”
Paolo Zaccardi, CEO, FabrickPaolo Zaccardi, CEO at embedded finance provider Fabrick, added that Open Banking was slow to take off because many banks adopted a defensive approach to the data sharing regulations.
“We expected a Tsunami and all we got was a light drizzle. We really overestimated what would happen in the near term but I think we are now underestimating what’s coming in the long term.”
Zaccardi said increasing Open Finance collaboration is creating opportunities to deliver new embedded financial products in industries such as insurance, automotives and energy.
“There’s been a clear shift from providing commodity, purely transactional, services to delivering services that can be the cornerstone of relationships with customers.”
May Lam, CIO at payments infrastructure provider Australian Payments Plus, pointed to the growing spending power Gen Z consumers as a future driver of innovation in Open Finance. “In business and as consumers, they’ll be increasingly influential.”
Looking at countries likely to excel in the application of Open Finance, Kees Kwakernaak, COO at Australian payments firm Fat Zebra, identified India as a strong candidate.
“India is very interesting. Once they start with something, they go extremely quickly and they’ve got massive tech resources. Like China they drive innovation top down. But in India they start top down and then industry jumps in. I think they can do really interesting things there.”
The arrival of Open Finance regulations in Europe and elsewhere will force financial institutions to quickly adapt to a very different business environment. Those that move swiftly will be able to protect their customer base and capitalize on the increasing availability of potentially lucrative customer data. Key to their success will be alliances with strategic partners across the emerging open data economy.
