#Open Banking

Open banking, open finance & embedded finance

Aug 04, 2021 - 8 min read
Also Available in : Français
Bruno Cambounet, Head of Research at Sopra Banking Software

If the open banking regulations implemented in Europe and in many countries around the world have played a role in the banking sector’s digital transformation, the public health crisis has clearly demonstrated the new uses facilitated by them. Unified management of bank accounts, payments, credit eligibility and simplified subscription models are just a few of the recent changes.

Nevertheless, new terms such as “open finance” and “embedded finance” have also emerged, leaving us with a very important question to answer: Is all this just a marketing stunt or a real breakthrough?

Open banking: A regulatory driver in payments

The concept of open banking is not new. It was already being talked about 15 years ago before the term had even been coined. In Europe, it has been closely linked to the regulation of payments and associated with the overhaul of the Payment Service Providers Directive (PSD2). It is also tied in with many other initiatives in the European payments market, such as:

By imposing access to payment data and services to third parties, banking regulations have taken a first step toward leveraging technology to facilitate the use of certain financial services without necessarily going through one’s bank.

A second step is also going to be taken so that all stakeholders agree on a scheme to standardize access scenarios in Europe, both for the mandatory regulatory services (PSD2) and for the value-added services that banks can offer. To this end, on July 13, the ERPB working group published its report on the key requirements of the SEPA API Access Scheme.

However, as the name suggests, open banking is focused on banking services. Other financial services like investment products and insurance services are therefore not included. However, open finance is different.

Open finance: The natural evolution

In September 2020, the European Commission shared its vision of the digital finance strategy in Europe, describing open finance as one of its foundations. Like open banking for payments, access to data and financial services is promoted with several objectives:

  • Ensuring that consumers have access to and control over the use of their personal data
  • Enabling economic actors to use this data to personalize services to consumers in response to the problems they encounter
  • Fostering competition by allowing consumers to compare the prices of services from different actors

Open finance opens up a world of possibilities for third parties who want to contribute to improving the response to consumers’ real needs.

Among the current leaders in open finance is the Berlin Group, whose API framework has been adopted by over 75 percent of banks in Europe to implement PSD2. Since October 2020, the Berlin Group has been firmly committed to open finance standards, several of which were issued in the first six months of 2021.

However, despite encompassing all financial services and not only those offered by banks, open finance remains oriented toward the producers of financial services and not their consumers, who are now the key stakeholders.

Embedded finance: Open finance from the consumer’s point of view

As the health crisis has shown and as the digital finance strategy in Europe reminds us, personalization must be promoted in order to provide customers with tailor-made offers. The response must therefore be customer oriented! And so we go back to the basics. Financial institutions were created to support economic players by offering means of payment, accounts and associated management services, as well as providing credit adapted to situations and investment products.

By starting from the consumer’s point of view (individuals or companies), the resulting value chains will identify the various services that need to be bundled or coordinated, including those produced by financial players. This is what we call “Embedded Finance”.

For example, to improve customer focus in the standards, the Berlin Group was restructured at the end of 2019 to better connect consumers of financial services (Open Finance Advisory Group) with the producers of financial services (Open Finance Task Force). The former work on market demand to identify these value chains and the latter on standardizing the response of financial institutions.

Technology and the digital economy bring together all stakeholders around three areas:

  • Technological: This oft-discussed component acts as a catalyst for the digital economy
  • Business: The business models underpinning the value chains between customers and suppliers are no longer linear and relatively stable, but multi-part and evolving
  • Societal: The quality of the services offered are based on the personal information of individuals and companies. A balance must therefore be found and regularly adjusted between respect for privacy and the expectation of personalization of the services offered

Regulators around the world are particularly interested in the last two points when it comes to enforcing competition rules, protecting privacy and ensuring compliance with existing regulations.

The challenge today is to adopt a holistic approach, taking into account the complexity that this represents, given the large number of actors. Cooperation among them is therefore essential. This is the role that Finance Innovation, a global competitiveness center, has chosen to play, boosting innovation in France while promoting it internationally, and providing a natural forum for a combined and cooperative approach by all ecosystem stakeholders.