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Spring has very much sprung in Europe, but it is not just the flowers that are starting to bloom. The past few days have seen important developments in the open finance space, both at European and UK level. These changes look set to create a new wave of product development opportunities for the banking industry, as well as new compliance challenges and competitive risks. The key takeaway is that change is coming, and banks should ensure they have the plans in place to maximise the potential benefits.

Europe: FIDA moves closer to becoming the framework for open finance

The framework for Financial Data Access (FIDA), has moved closer to becoming law in the past week following a vote among MEPs. FIDA forms an important part of the EU’s proposals for the next stage of financial regulation in the region and sits alongside the third Payment Services Directive (PSD3) and a new Payment Services Regulation (PSR1). The driving aim behind FIDA is to create a harmonised framework to access to financial data, to speed up the adoption of data-driven business models across the region.

The intention is to build on the progress made with open banking by enabling access to a wider range of financial data. Assuming it ends up being implemented across Europe, it will have significant implications for thousands of financial institutions. In scope will be data fields including balances, conditions, coverage (where applicable), or transaction details relating to mortgages, loans, non-life insurance, pensions, crypto assets, and savings products. Also included the scope of FIDA are data which forms part of a creditworthiness assessment for small and medium sized businesses, with the explicit aim of improving access to credit for these companies. The requirements for payment accounts will continue to be covered by PSD3/PSR1 and are not covered under FIDA.

UK: Launch of the Smart Data Roadmap

The past week has also seen significant developments in the UK. First was the announcement by the government of the creation of an open finance task force to take forward some of the recommendations made by CFIT (the Centre for Finance, Innovation and Technology) in its Blueprint for Open Finance (published in February). This will include expanding the successful pilot of an SME lending dashboard run with HSBC, as well as work with the Citizens Advice Bureau to improve debt advice services for consumers.

A few days later the task force announcement, the UK government also published its much-anticipated Smart Data Roadmap. This outlines the plan to build on the progress of open banking to create data sharing frameworks in several other sectors, including retail, energy, transport, telecoms, and to enable enhancements to the homebuying process. Within the financial services industry, this will also include coverage of products including savings, investments, pensions, and insurance.

Recognition of the need for revenue

There is a lot of common ground between the proposals in both jurisdictions, and clear agreement over some of the most immediate potential use cases. Perhaps the most important message coming through these proposals is recognition of the need for data holders to be able to charge some kind of access fee to cover their costs.

As open banking has demonstrated, expecting one part of the ecosystem to shoulder the financial burden while others enjoy the benefits is not the best way to create a sustainable model in the long term. For banks, this should help make the business case for investment, as well as giving confidence in the quality and reliability of APIs from other value chain participants.

What does this all mean for banks?

FIDA and the UK’s Smart Data initiative will create new requirements for banks active in the affected markets, but they also create significant opportunities. There will be additional compliance costs for banks to extend data access to a broader set of products, but the lessons learned to date from PSD2 and UK open banking should help to contain the financial impact. Indeed, banks are in a particularly strong position when compared to other industries having already put in place many of the necessary building blocks.

The most important lesson to heed from the open banking experience is the importance of investing beyond compliance requirements to unlock the opportunities in using this additional data for product innovation and enhancement.

As a minimum, those planning investments in their personal financial engagement (PFE) capabilities will see the potential in aggregating data across a broader array of financial products. This should also support greatly enhanced service personalisation and product sales potential. For UK banks, there is the potential to consume data from other business areas. To pick one example, access to data from retailer loyalty schemes (if this ends up happening) would presumably include granular detail on the products a customer purchases. This could be used to significantly enhance transaction/spending insights currently available, as well as improving areas like budgeting tools and the accuracy of propositions such as carbon tracking.

The sale of loans, and particularly mortgages, will also potentially be transformed by FIDA and the UK’s Smart Data project. Stronger data access will enable real change to the way that consumers find and apply for products, as well as changing the expectations over the loan decisioning process. In the UK, this may be enhanced by the proposals to digitise other elements of the home buying process through access to data from government data sources (such as property registry information).

It's early to speculate on what this will mean for technology investments, but these changes will undoubtedly result in new spending in a range of areas over the next 3-5 years. Digital channel propositions are an obvious one, along with loan origination and decisioning systems. Beyond this, there will be impacts across many areas of risk (due to the potential for this to be a vector for financial crime) and product management functions, as well as important implications for the developer-facing portals and related services that banks will be required to offer.