Finance

Small steps taken on the journey to open finance in the UK

laptop showing data

The UK has played a fundamental role in the growth of open banking.

Although many countries have adopted policies, it was in the UK that they were adopted with full force, sparking a revolution of challenger banks and alternative payment options.

Since its inception, the UK open banking industry has grown from from strength to strength. The COVID-19 pandemic has accelerated already rapid growth and innovation has driven many developments.

The industry as we know it today was born out of the introduction of Payments and Services Directive 1 (PSD1). In 2009, this regulatory initiative was introduced by the European Union to stimulate competition in the financial services sector.

Its further development in Payment Services Directive 2 (PSD2) has been the catalyst for the evolution of the payments and banking industry towards a modern open banking system.

Although the legislation was aimed at the whole of the European Union, the UK went further. Regulatory assistance, simplification and cooperation between government, technology and financial markets have created a fertile environment for innovation.

More than five million British citizens and small businesses are active users of open banking products with 336 regulated providers (as of February 2022).

coordination between the Competition and Markets Authority (CMA) and industry Open Banking Implementation Entity (OBIE) played a fundamental role in the evolution and standardization of Open Banking in the UK.

Under the mandate of the CMA, the OBIE has carried out various activities involving the supervision and control of data, the generation of standards, the promotion of the ecosystem and the provision of services and infrastructures essential to the operation of open banking. .

UK development towards open finance

After the success in the Open Banking sector, there has long been a call to move to Open Finance.

In November 2019, Sheldon Mills, then director of competition at the FCA, gave a speech on the benefits of open finance.

In his keynote, he explained that Open Finance was part of a larger sharing initiative, with the potential to improve access to financial services and change the nature of competition. A proposed focus was placed on consent management, digital identity verification, and cross-industry consistency to enable consistency.

Open finance is seen as “empowering” consumers, giving them more control over their data and providing a market rich in competition and innovation to better meet their needs. It builds on the Open Banking model, allowing third-party providers (TPPs) to access more financial data on savings, mortgages, insurance, consumer credit and pensions.

Work on a pension dashboard began in 2019, shortly after the launch of Modern Open Banking initiatives. Still, a definitive solution has yet to be released, although recent plans have been released indicating that the programs will begin in stages. integration early 2023.

The slowness of the development of the dashboard testifies to the difficulties encountered by a sectoral approach to Open Finance.

“The question is do you continue to look sector by sector, for example an initiative around insurance. Or do you have a big bang approach where you say, ‘let’s open the data a full stop.'” commented Innovate Finance’s chief policy officer, Adam Jackson.

There are arguments that the sector-by-sector approach is too slow for some issues, such as solutions to climate change and financial exclusion.

“GDPR takes a broad view of data, but there aren’t really any legal provisions for easy sharing of data across the economy. What we don’t have is a requirement for companies to publish metadata,” Jackson continued.

“We have a cost of living crisis and financial exclusion issues where people are struggling to access affordable credit. The more we can open up our data to allow people to build credit files, the better. »

“There are arguments that this stuff can’t wait another seven years, so we have to look at ways to speed it up.”

Data transparency is key

The effective development of Open Finance is fundamentally based on data transparency. For many, to enable faster implementation, continued coordination with external initiatives and think tanks is essential.

In his introduction to the OBIE 2021 annual reportImran Gulamhuseinwala OBE, the Implementing Administrator of Open Banking, said in light of the government’s announcement of its vision for open data initiatives: “OBIE has built expertise and unique assets in these areas: it would be both wise and beneficial if these were used in these adjacent initiatives, ensuring that individuals and small businesses can access their data in the same safe and secure way, regardless of the product or industry.

Alex Lempka, CEO and Founder of Connect Earth, a company focused on data collection and data transparency, said, “The reason we exist is to take the friction out of getting data. It’s not just fintech…we collect data to help create APIs and products. At the moment, it is really difficult to get this data (and to manufacture these products). »

On November 24, 2021, the Department for Digital, Culture, Media and Sport (DCMS) released a guidance document titled National Data Strategy Mission 1 Strategic Framework: Unlocking the Value of Data Across the Economy.

Unleashing data value across economy infographics The Department of Culture, Media and Sport

The document was an extension of the National Data Strategypublished in December 2020, and proposed a framework to guide data unlocking interventions across the economy and identify priority areas for action.

It marked the first step towards access to data, a crucial development element in Open Finance.

The report identified various barriers to access at different levels, the most prevalent being concerns about legal risks and data protection, with 39% of companies saying this was the most important factor preventing data sharing. their data.

Other factors cited were lack of knowledge, high costs and lack of incentives.

The DCMS, with commissioned assistance from Frontier Economics, is currently exploring different levels of data availability along the open data spectrum, as well as levels of access.

The Data Spectrum image of the DCMS and Frontier Economics report
The Data Spectrum image from DCMS and Frontier Economics report.

Future activities focused on supporting sector trials, learning from their implementation, as well as research, monitoring and engagement with national stakeholders.

Problems with data consent

Although open finance is being touted as allowing for greater competition, concerns have arisen about customer discrimination over access to their data and the aforementioned data protection concerns.

Zopa Open Banking Awareness Data
Open Banking Awareness Data from Zopa.

In May 2021, Zopa conducted a study to analyze the reasoning behind consumer choices not to use Open Banking. The study showed that of the 37% who had heard of Open Banking, 30% said they were concerned about data privacy and vulnerability to fraud. 26% were unwilling to open financial records to companies.

The Financial Innovation Laboratory (FIL)a charity focused on developing the global financial sector, said “people will only benefit from the power of their financial data if they are supported to turn it into information they can act on in their best interests”.

“This is a fundamental challenge given that the financial sector (including banks, fintechs and other businesses) is driven primarily by seeking commercial gains.”

By consenting to the use of data, in many cases users are unaware of what specific data multiple entities will be able to access.

With the use of computing and AI, without proper regulation, companies could have access to enough data to “adjust prices to the highest customers they will accept, select the best customers (often the most rich) and target ads for inappropriate products. (like high-cost credit) to the most vulnerable,” as the WIRE warned.

Digital literacy issues also pose challenges for citizens, as a lack of understanding of the internet and computers limits access to tools such as the Pension Dashboard.

The Center for Data Ethics and Innovation (CDEI)a sub-sector of the DCMS, has focused its efforts on research issues around data use and trust.

Their work includes investigating the role of AI and privacy-enhancing technologies and whether to use data intermediaries to enable data sharing.

The survey established guidelines for ethical data processing. Edwina Dunn, Acting President of CDEI, said: “CDEI works in partnership with a range of organizations to help them overcome barriers, mitigate risks and put high-level ethical principles into practice, such as accountability and transparency.

“It’s hands-on work like this that will allow us to build public trust in how data and AI are used.”