Is ‘open’ finance enough?
At the end of last year, regulators opened up a conversation about ‘open finance’ – a major new programme of the data revolution underway in finance. Here Marloes Nicholls, our Head of Programmes, shares her insights about what it will take for people to benefit from greater access to their financial data.
‘Open banking’ (the predecessor of ‘open finance’) was introduced by UK policymakers in 2018 to try and tackle the power of the banks. It requires the biggest banks and building societies to make it possible – for the first time – for people and small businesses to share payments information (from online banking) with third parties. Regulators hoped that by giving people access to their financial data, opportunities would be created for new services to challenge the power banks hold over the market and their customers. With open banking, apps could automatically move money across different accounts to help you avoid any nasty overdraft charges and – if it doesn’t look like you’re getting the best deal – quickly switch you to another service.
It is still early days, but there are already hundreds of businesses regulated to provide open banking-enabled services, and over a million customers have consented to share their data in order to use them. Through our incubation programme, Lab Fellowship, we’ve supported initiatives that demonstrate the potential for open banking to help create a more responsible, democratic and fair financial system. For example, NestEgg.ai works with credit unions to improve their loan approval processes and increase member engagement, so that more people who need to can access affordable credit. The CoGo app helps people to spend in line with their values; their new carbon calculator aims to monitor the carbon footprint of your spending in real time, and help you to identify ways to reduce your impact on the environment.
Open finance aims to open up more data about people’s finances, including insurance, mortgages, pensions and investments – not just payments. The hope is that this would extend the opportunities of open banking – giving people greater oversight and understanding of their money and helping them to identify the best services (and automate their use) – to all of our finances. Examples of applications under development include: support for staff to choose the most relevant options from complex employee benefit schemes; assistance for landlords to manage the finances associated with their properties (such as rent, mortgage payments, expenses and tax) in one place; and tools for younger people to understand how the financial actions they take today will impact their pension in the future.
Opening up risks
Despite creating opportunities for potentially useful new services, granting people greater access to their financial data is not sufficient to improve lives. Instead, enabling people to share their valuable data could turbocharge the exclusion and exploitation currently built-in to the finance sector – for all of us, but especially those in greatest need. (Not to mention the digital exclusion challenges.)
Knowledge is a form of power, and people will only benefit from the power of their financial data if they are supported to turn it into insights that they can act on in their best interests. This is a fundamental challenge given that the finance sector (including banks, fintechs and other firms) is primarily motivated to pursue commercial gains, increasing the likelihood that a more open use of our data will be used against us in the interests of profit. Businesses offering to enlighten people about their finances using open finance-enabled data aggregation and analysis will likely use the information for themselves too. Combined with market-wide insights, alternative forms of data (such as your social media data), and powerful computing and AI, these businesses could – and let’s be honest, most likely will – use the data to fine tune prices to the highest customers will accept, cherry pick the best customers (often the wealthiest), and target adverts for inappropriate products (such as high cost credit) to people at their most vulnerable.
It’s not enough for the future of finance to be ‘open’. Drawing on our innovation experience, three factors need to be brought to the fore if open banking and open finance are to contribute to building a financial system that supports a resilient, caring, just and green economy.
1. Social and environmental purpose: For what purpose is our financial data being opened up? That is the fundamental question – and the purpose of open finance (and indeed finance) has got to be to enable us to achieve our goals – as individuals, as communities, and as a society. Finance, and innovation, are not ends in themselves. Policymakers need to take responsibility for the power they have to shape this purpose through the law, regulations, and other market interventions (such as the provision of social investment to resource purpose-driven business models, or challenge prizes to incentivise the development of services for underserved groups).
2. Third sector participation: Open finance will only contribute to positive change if consumer groups, civil society organisations and responsible finance providers are meaningfully included, and supported to participate, in its development. Done well, working in collaboration with the third sector and the public deepens understanding of innovation’s opportunities and risks (as our work on Open Banking and Financial Health did), and makes it possible to identify the most pressing use cases for new technologies (like our ideation events did). It is also necessary to build awareness, understanding and – potentially – trust amongst the public.
3. Evidence and learning: We have never before seen technology used on this scale to rebalance power in the market. At the same time, finance is a complex and evolving system, and the consequences and impacts of introducing open finance are uncertain. Could data sharing become required in order to access financial services? What role might it play in the development of social scoring? What systemic risks could it contribute to? Since what’s at stake is so important – including our privacy, the life opportunities available to us, and the stability of the whole financial system – open finance should be developed with precaution and in a way that pro-actively anticipates its risks. Policymakers should undertake, learn from, and act on ongoing evaluation of the types of services and businesses it gives rise to and, crucially, the impacts of those on people and society.
- Sign up to attend our webinar, co-hosted by StepChange Debt Charity, on 24 June – Open Finance, Open X – What’s the use?
- Share your views and questions about Open Finance via this short survey.
- Find out more about the Financial Conduct Authority’s (FCA) Open Finance Call for Input (deadline: October 2020).
- Read our initial response to the FCA’s Open Finance Call for Input.
- Read our introductory guide to open banking for credit unions, commissioned by the Centre for Community Finance Europe.
To find out more about our work on open finance and digital finance, and get involved; email the Lab’s Head of Programmes, Marloes Nicholls.