How does open finance work?

Open finance epitomises the digital race to meet increasing customer expectations and deliver sustainable growth. ‘Open insurance’ is coming and quickly. We think within five years. Are you ready? 

What is open finance?

A. The context

The Financial Conduct Authority (FCA) refers to open finance as “the extension of open banking-like data sharing and third-party access to a wider range of financial sectors and products[1]". With a description like this, you may be forgiven for thinking you can leave it to the techies. But open finance, like open banking, is a far-reaching development at the intersection of data and consumer rights, Artificial Intelligence (AI) and ethics. Implementation in insurance goes to the heart of the ‘culture’ of insurance, as well as the way you do business.

The FCA’s vision for open finance is one in which:

• consumers and businesses: can grant access to their data to trusted third-party providers (TPPs) and in return gain access to a wider range of financial services/products; have greater control over their data; engage with their finances, and are empowered to make better financial decisions

• increased use of open finance services spurs greater innovation, benefiting consumers by providing a broader range products and services that better suits their needs

• widespread use of new services improves the financial health of consumers and businesses in the UK

Open finance is part of a wider zeitgeist of government and regulatory ambition to make the UK a world-leading data economy: this is the vision of the UK’s National Data Strategy[2]. Building on open banking, open finance develops the concept for other financial products. The Department for Business, Energy & Industrial Strategy’s (BEIS) work on Smart Data is the equivalent of open finance for other sectors including telecoms and energy[3]. The Competition & Markets Authority (CMA) has recommended that the new ‘Digital Markets Unit’ should have powers to give consumers of platforms like Facebook the right to share their social media data with third parties[4]. Making these data available gives impetus to data-driven, hyper-connected lives where mundane tasks – like shopping around for insurance – can be done by someone (or something) else.

Open banking was significantly nudged forward by the European Payment Services Directive 2 (PSD2) implemented in 2018. This required firms to allow consumers to share their data with regulated third parties of their choice. It also brought third parties into the scope of regulation and required new measures to improve security when accessing data (which was previously typically being done by consumers sharing their credentials with third parties and them screen-scraping the data).

In the UK a CMA investigation into the personal and business current account market required the nine largest UK banks (so-called ‘CMA9’) to create ‘API Standards’ to allow third parties to access data in a consistent way. The ‘Open Banking Standard[5]’ was born and has since been adopted by most UK banks and third parties. Importantly, it also means consumers can rely on broadly similar experiences when consenting to share data, which builds trust, familiarity and convenience.

The CMA also required the nine largest banks to publish ‘open data’ about their products and services via APIs too. This open data includes information about the location of bank branches, opening times etc as well as industry comparison data about their performance and customer satisfaction.

 

B. Data — Basic need-to-know

Getting to grips with open finance necessitates having a common language for classifying data. There is no perfect taxonomy but here we adapt that proposed by the Open Data Institute: they define data as ‘closed’, ‘shared’ or ‘open’[6].

1. ’Open data’ is data that can be used ‘by anyone for any purpose for free’[7]. This is most often product or service data. In an insurance context it might include customer satisfaction scores. It does not require explicit consumer consent.

Figure 1. The Data Spectrum by The ODI

2. ’Shared data’ is made available only under certain conditions[8] and includes ‘consumer and SME data’. Consumer and SME data drives the ‘Personal Data Economy’: also known as the Internet of Me, the API of Me, M2B, self-data, and more, which is a short-hand describing the process of individuals taking ownership of their information, making choices about which businesses to share with and on what terms. In open banking, shared data is that which a consumer or SME has created with the firm. It is only shared with a third party when a consumer gives their explicit consent, e.g. telematics data.

3. ’Closed data’ is data which a firm does not want to share or which it shares only under a contract with a third party and which may not require explicit consumer consent.

 

There are no fixed lines between some of these data and some may argue that certain types of closed data should be shared and vice versa.

In the UK, open banking gives consumers a right to share their financial data with regulated third parties of their choice in a standardised way. It also makes available key open product data that can be used by intermediaries, like price comparison websites. The Open Banking Standard provides the technology Standard (required by CMA9, optional for all others, but widely adopted).

Open banking in the UK does not require contracts between the firm providing the data and the third party accessing it. Firms and consumers are protected through the regulatory framework. An alternative approach would be via a scheme instead of or alongside a regulatory framework where members all agree to one contractual approach.

Open finance could replicate these approaches.

 

What is the promise of open finance?

In a report for DCMS, Ctrl Shift estimate the personal data economy could be worth a £27.8bn increase in GDP[9] benefiting individuals, business and wider society. Economic benefits are said to come about through higher productivity, innovation from combining data in new ways, increased competition and consumer empowerment.

A. Value proposition for consumers

Reynolds & Chidley[10] estimate that open banking could be conservatively estimated to put £12.6bn back into the pocket of consumers and SMEs in a year based on open banking enabled products.

Fig 2: Reynolds & Chidley[11]

Open banking facilitates diverse use-cases including brand new products and those that drive greater financial inclusion. New mechanisms to receive real-time payments for SMEs and charities are cutting the cost of cards[12]. Automated savings are helping people begin to save for the first time in their lives[13]. Personal financial management apps provide a single view of all finances in one place, offering alerts, nudges to action and convenient sales of add-ons or other products. For SMEs they improve visibility of cashflow and can reduce the time firms spend on doing the paperwork.

‘Challenges’ (a bit like long term ‘hackathons’) are helping to push the boundary of how ppen banking can be used to facilitate financial inclusion and relational finance[14]. For instance, apps that let carers and loved ones know when suspicious activity is detected on monitored bank accounts[15].

In the wake of COVID-19 payment freezes, open banking is re-shaping how firms think about assessing credit worthiness and affordability [16]. Even the not-for-profit sector is joining in, with at least 10% of credit unions[17] reported to be already using open banking to improve their services. The UK’s Money and Pensions Service is also piloting the use of open banking to increase efficiency and accuracy of debt advice[18].

But while it has sparked a variety of new products and services, there is limited evidence that open banking has made an impact on some of the regulatory objectives to increase switching or drive competitive overdraft alternatives. Simply opening up data doesn’t eradicate the other challenges of bringing new products to market.

B. Value proposition for providers

For financial firms, the lure is personalised, dynamic and historical insight. Combining diverse personal and product data can generate personalised recommendations or even pre-empt consumer needs with curated choices and app-enabled automation of regular tasks. 

The commercial appeal here is powerful: transactional and product data held within financial firms is described as a ‘perfect source of market intelligence and a monetizable commodity’[19], a veritable treasure trove, ‘hoarded by sleepy dragons’ and ready to be disrupted.

So far so good. But how do we put ‘meat’ on the value hypotheses for insurance? And how do we navigate the numerous corporate data risks, including the reputational risks of AI, inherent in making open insurance a reality? We’ll tackle these questions in our next blog. 

 

 

[1] https://www.fca.org.uk/publication/call-for-input/call-for-input-open-finance.pdf

[2] https://www.gov.uk/guidance/national-data-strategy

[3] https://www.gov.uk/government/consultations/smart-data-putting-consumers-in-control-of-their-data-and-enabling-innovation

[4] https://www.gov.uk/cma-cases/online-platforms-and-digital-advertising-market-study

[5] https://standards.openbanking.org.uk/

[6] https://theodi.org/about-the-odi/the-data-spectrum/

[7] https://icebreakerone.org/what-is-shared-data/

[8] https://icebreakerone.org/what-is-shared-data/ 

[9] https://www.ctrl-shift.co.uk/wp-content/uploads/2019/07/DCMS_Ctrl-Shift_Data_mobility_report_full.pdf

[10] https://www.openbanking.org.uk/wp-content/uploads/Consumer-Priorities-for-Open-Banking-report-June-2019.pdf

[11] Reynolds & Chidley, Consumer Priorities for Open Banking, 2019

[12] https://www.openbanking.org.uk/insights/open-banking-and-the-third-sector/

[13] https://blog.justgiving.com/introducing-pay-with-bank-transfer/

[14] https://openup.challenges.org/finalists/

[15] https://kalgera.com/

[16] https://www.openbankingexpo.com/news/transunion-launches-enhanced-open-banking-solution-as-covid-19-puts-affordability-in-the-spotlight/

[17] https://www.openbanking.org.uk/insights/open-banking-for-credit-unions/

[18] https://maps.org.uk/pace/

[19] https://blog.truelayer.com/customers-and-the-data-chain-aisps-and-tsps-e7343f93540