In the ‘2020 Digital Finance Strategy for the EU’ (DFS), the European Commission predicts a digital future for finance. By driving innovative products and services, digitalisation changes market structures, enhances competition and creates new challenges and risks. Accordingly, the European Commission provided a roadmap to reap the benefits of digital finance and mitigate the risks arising from an increasingly digitalised sector. Finalising an open finance framework is an essential step for fulfilling one of the top priorities set in the DFS: the creation of a European financial data space for promoting data-driven innovation and fostering data sharing among financial players. Such a space would, in turn, be a springboard for developing a larger European data space encompassing all the other vital sectors of the economy.
Open finance is the extension of the open banking system pioneered in Europe through the EU Payment Services Directive 2015/2366 (PSD2) and the UK Open Banking Standard. Open banking permits third parties (usually FinTech start-ups) to access bank customers’ account information to develop new products or initiate payments on their behalf (directly from the customers’ account). Such data sharing mechanisms require bank customers’ consent and adequate technology for streamlining communication between banks and third parties, namely application programming interfaces (APIs). Open finance is intended to broaden the scope of open banking by extending it beyond the area of payment accounts to mortgage, insurance, pension and investment services. In so doing, open finance is expected to further the goals of enhancing competition and improving access to a wide range of innovative financial products and services. In May 2022, the European Commission launched a consultation on the proposal for an open finance framework to be adopted by 2024, in coordination with a revision of the PSD2. The open finance idea has proliferated across jurisdictions where an open banking framework is already in place. The success of open banking should lay the foundation for building open finance. Whether open banking has reached sufficient maturity to evolve into open finance is highly debated even in those jurisdictions, like the EU, UK and Australia, that influenced open banking trends worldwide. It should be, therefore, discussed what needs to be improved in the open banking ecosystem before moving to the wider open finance. The current European Commission’s consultation is a great opportunity for exchanging some views.
As mentioned, the open banking process revolves around three main actors: (i) bank customers consenting to share their data, (ii) third parties requesting to access bank customer account information and (iii) banks opening their APIs to that end. In my view, the inter-relationship between these actors is the key to emphasising some ongoing ‘open banking’ issues to be considered while constructing open finance, particularly at the EU level.
The first issue concerns the verification of third parties. To enter the open banking world, third parties need to be licensed by competent authorities. Then, banks carry the duty to verify third-party identity when they receive a customer data access request. At the EU level, this mechanism has demonstrated some shortcomings. To facilitate identification duties, a register of approved third parties has been created on the European Banking Authority’s (EBA) website. However, the EBA register is all but a central register as it depends on information passed on by the national authorities licensing third parties. EBA claims that it does not have sufficient resources to maintain a centralised register of real-time information on third parties and declines any responsibility for the authenticity of its information. A related problem is that some national registers do not maintain a record of changes to third-party legal status, making it hard for financial institutions to verify the history of third parties asking to access customer data (Konsentus, 2020). Inevitably, these drawbacks make identification a cumbersome and risky process. Moreover, the number of third-party access requests continues to grow exponentially and is likely to increase when firms are connected through a larger open finance ecosystem. Accordingly, the open finance project is the opportunity for the EU regulators to revisit the robustness of the relationship between financial institutions and third parties and to explore the feasibility of a more centralised verification system for guaranteeing information veracity, a smoother identification process and a higher level of security within the data sharing process.
Another interesting issue is the lack of data sharing reciprocity, in other words, the claim that financial institutions are mandated to open customer data upon request but cannot ask the same of third-party customers. The EU and UK open banking frameworks do not provide for reciprocity. Lack of reciprocity is a matter of contention as financial institutions argue that it would create asymmetric competition. In this debate, some are in favour of introducing a ‘reciprocity clause’ in the PSD2 access to account rule, while others advocate for a more robust system in which a company’s raw data are accessible in all industries (with consumer consent) on similar terms. Contrastingly, consumer protection organisations express concerns that reciprocity could make open finance an ‘open bar for consumer data’ and thus heighten security risks. It is, therefore, crucial to clarify the quality and quantity of data to be reciprocated if reciprocity is deemed necessary while defining an open finance framework. Fostering more dialogue among all stakeholders would encourage more unity of purpose on this important issue.
Finally, more must be done to foster consumer education as to the new opportunities and benefits deriving from open finance. The DFS has already announced the European Commission’s intention to fund financial literacy programmes across Member States to help consumers understand the opportunities deriving from a digitalised financial sector. Thus far, experience with open banking has shown a generally low level of awareness among bank customers (Tuahene, 2021). Open finance will require more joint efforts at the industry and regulatory levels to enhance consumers’ understanding of the significance of the spirit underpinning this project: giving financial institution customers ownership and control over their data.
A solid open finance framework will be the test and gateway towards ‘open data’. To take all these steps and make open finance work, the financial industry and regulators need to adjust open banking first.
Francesco De Pascalis is a Senior Lecturer in Financial Law at Brunel Law School.