#Open Banking

How will open finance regulations foster innovation?

Dec 22, 2022 - 5 min read
Also Available in : Français
Bruno Cambounet, Head of Research at Sopra Banking Software

During this year’s Sopra Banking Summit, we discussed open finance regulations and their potential to transform the financial services industry. Below, we explore the topic in more detail.

To watch the full on-demand video, you can click here.

According to the EU Commission’s 2022 report “Call for Evidence for an Impact Assessment of the Open Finance Framework,” the biggest inhibitor to open finance isn’t technology, but the “Difficult access to and reuse of customer data and their low interoperability in the financial sector.” Progress is accelerating in that area, with European open finance regulations expected in 2023.

An enshrined framework will cultivate trust and give people and businesses greater control over data management. Furthermore, competition will increase, with financial services providers leveraging previously inaccessible data to offer more personalized products, improve the digital experience and empower customers.

As part of that, traditional banks will increasingly partner with third-party fintechs to advance their ecosystems and capabilities – a trend already in motion.

What is open finance?

Open finance is a data-sharing model that goes beyond open banking to include information on investments, mortgages, savings, pensions and consumer credit. With open finance, a customer’s entire financial footprint is accessible via trusted third-party APIs, if they consent.

While open banking is subject to a legal framework, open finance isn’t currently regulated, yet it has the potential to utilize more varied and detailed data across a broader range of services.

Although mechanisms aren’t fully in place to regulate open finance and unleash its full power, they’re well underway.  For example, the European Commission (EC) shared its Digital Finance Strategy back in 2020 – one of the main pillars promoting open finance.

Furthermore, the Open Finance Framework will benefit from the lessons learnt with PSD2. Earlier this year, the EC’s Department for Financial Stability and Capital Markets (DG FISMA) issued public and targeted consultations on the revised payment services Directive (PSD2), with conclusions from the EU Commission expected in Q1 2023.

Meanwhile, in June 2022, the not-for-profit association European Payments Council (EPC) launched a public consultation on the draft rulebook of its SEPA Payment Account Access (SPAA) Scheme.

SPAA encompasses the provision of value-added services beyond those enabled by PSD2. The scheme will evolve to nail down PSD2 implementation fragmentation and support wider premium functionalities in line with market demand. Indeed, it is seen as a “stepping stone towards open finance beyond payments and open data beyond finance”.

At the same time, the Berlin Group is developing an open finance application programming interface (API) standard that encapsulates its NextGen PSD2 API framework. It will allow financial institutions and third-party providers to offer enhanced services, products and information, improving the customer experience while paving the way to open finance.

Additionally, from an ecosystem-wide perspective, Sopra Banking Software launched a study with Finance Innovation working group on the specific business cases and benefits open finance may provide to individuals and enterprises. Cyril Armange, Deputy CEO of Finance Innovation says: “Our challenge is to adopt a holistic approach that takes into account the large number of actors – banks, fund managers, fintechs, insurers, regulators, financial services and corporates (such as merchants).

“Cooperation among them is essential. We want to encourage collaboration and create a global financial services sector that’s more transparent, sustainable and inclusive. In doing so, it will enable the promise of open finance to improve the lives of end customers.”

Combined, these organizations are tackling the same challenges and working toward a unified goal: improving services to consumers, protecting them, building trust via robust regulations, standards and APIs, and data-driven innovation.

"Our challenge is to adopt a holistic approach that takes into account the large number of actors - banks, fund managers, fintechs, insurers, regulators, financial services and corporates". Cyril Armange, Deputy CEO of Finance Innovation

Open finance and innovation

Innovation is already taking place in the open finance arena, with some arguing that it’s driving regulations. In turn, rules will level the playing field for existing and new entrants, increasing competition and further accelerating progress.

Moreover, by ensuring customers’ data – consumers and businesses – is protected and offering robust security safeguards, there’s greater appetite for innovation from end users.

But for open finance innovation to truly flourish, collaboration between traditional banks and fintechs is crucial. Historically, incumbents adopted a defensive approach, attempting to prevent new players from entering the market. Now, under sustained pressure to cope with fast-moving market dynamics and future-proof business models, their position is changing.

According to our 2022 Future Of Digital Banking study, 76% of banks acknowledge the opportunities collaborative business models offer, making them a foundational part of their digital transformation roadmaps and strategies. And 65% of banks prefer to partner with third-party high-tech vendors rather than build homegrown solutions to develop new revenue streams via embedded finance in order to:

  • Capitalize on non-financial distribution channels for their products and services
  • Incorporate pre-created fintech products into their digital platforms to cater for increasingly complex customer needs.

These approaches leverage the capabilities of open finance to embed services into the customer journey, covering anything from cryptocurrency and bill negotiation services to wealth transfer management and financial well-being.

65% of banks prefer to partner with third-party high-tech vendors rather than build homegrown solutions.

When trust is cemented via open finance regulations, individuals and businesses will be more inclined to fully embrace innovation. As a result, they’ll benefit from the following:

  • Better control over their personal data
  • Smarter and more streamlined digital journeys
  • Easier access to products that best fit investment preferences
  • Bespoke and more efficient funding and credit solutions
  • Ability to compare products and find the most cost-effective option
  • Automatic transfers between savings and investment accounts
  • Real-time centralized visibility of financial health.

Open finance and beyond

An open finance regulatory framework will protect customers and encourage competition, propelling innovation. Traditional banks are already capitalizing on the emergence of open finance, collaborating with fintechs to enhance their offering with embedded, personalized solutions. Secure open finance is on its way, paving the way for open data – the final stage of the data-sharing revolution. It goes hands in hands with the Digital Identity, no surprise then that the EU digital identity wallet pilots will start soon in 2023… Stay tuned!

Click here to watch the full session from the SBSummit 2022.