By John Berrigan, Director-General in DG FISMA (Directorate-General for Financial Stability, Financial Services and Capital Markets Union), European Commission
It’s becoming a cliché to say that the future of finance is digital. But there is no doubt that the digital transformation of financial services that we have experienced over the last few years has been profound. Technological innovation in finance is far from new. But investment in new technologies has increased substantially in recent years, and the pace of innovation shows little sign of slowing. Customers now routinely interact with their banks using mobile technology, which would have been unthinkable even a few years ago. The COVID-19 pandemic has, of course, accelerated this trend. Technology has much more to offer consumers and businesses, and we should proactively embrace digital transformation while mitigating potential risks.
The future is digital
Two key initiatives in relation to digital finance are open banking and open finance. Open banking is the practice of enabling secure interoperability in the banking industry by allowing third-party payment service providers and other financial-services providers to access banking transactions and other data held by banks and financial institutions. The European Union (EU) has been one of the pioneers in the field of open banking, and the key initiative in driving our approach was the revised Payment Services Directive (PSD2). The PSD2 has been in force for several years and was one of the first regulatory initiatives in the world to open up bank-held account data securely and subject to customer consent.
Open finance builds on our experience of open banking under the PSD2 but significantly expands the frontier beyond banks’ current accounts. Open finance will enable data sharing and third-party access for a wide range of financial sectors and products, in line with data-protection and consumer-protection rules. To borrow the title of a recent article in Forbes, “Open finance is what open banking wants to be when it grows up”!
The primary objective of open finance is to empower users of financial services (consumers and nonfinancial companies) by putting them in charge of who can use their data. It will also foster innovation and ensure better products are available. We recently launched consultations on open finance and data sharing in the financial sector, as well as on the PSD2 review, to gather the views of a broad range of stakeholders. This reflects the Commission’s desire to listen to both users of financial services and the industry itself, and we will use what we learn to shape our approach to open finance.
A safe digital space for users, with a level playing field
Open finance is also part of the Commission’s wider digital strategy. By making rules safer and more digital-friendly for consumers, we aim to boost responsible innovation in the European Union’s (EU’s) financial sector, including for highly innovative digital start-ups, while mitigating potential risks related to investor protection, money laundering and cyber-crime. Data management is also at the heart of our strategy. In keeping with the Commission’s broader data strategy, the objective of our policies is to promote innovative products and services for the benefit of consumers and firms through greater data sharing and reuse. A key condition of the success of our policies is consumer trust: Users must have full control over how their data is shared, in line with the EU’s very high standards on privacy and data protection.
Key recent initiatives under this strategy include the Data Act, the Data Governance Act and the Digital Markets Act, which together form a single set of new rules that will be applicable across the whole EU to create a safer and more open digital space. The main goals of this new set of rules are: (1) to create horizontal principles for business-to-business data sharing in key economic sectors, including finance; (2) to introduce new rules on data governance, which will encourage the interoperability of common European data spaces—including the financial data space; and (3) to establish a level playing field to foster innovation, growth and competitiveness, both in the European Single Market and globally. An open-finance framework would complement this broader framework by establishing specific rules around data sharing and reuse for the financial sector.
The issue of the level playing field is critically important in the context of open finance. We intend to follow two key principles to achieve this objective. The first is that data sharing needs to be enabled in all directions—in this respect, open finance will be able to rely on the level-playing-field principles introduced in the Commission’s data strategy. The second is to ensure that, as far as possible, the prudential treatment of the same activity is equivalent. We are not seeking to protect incumbents or favour start-ups. Both should be able to compete effectively for the benefit of consumers and vibrant markets.
Nothing to fear but fear itself?
The move to open banking was sometimes seen as a zero-sum game, in which incumbent banks would lose out to challenger banks and fintech (financial technology) companies. The reality, however, has been quite a bit more nuanced, and the same will likely be true of open finance.
Incumbent banks still retain a critical role in the payments ecosystem. They are the gatekeepers of their customers’ transaction data, and survey evidence shows that banks typically enjoy high levels of trust from their customers. Initiatives like open banking and open finance may well mean that incumbent banks and other institutions will face greater competition. But it’s worth remembering that new kinds of challengers currently don’t enjoy anything like the level of trust that traditional financial institutions do.
In view of this, there are good grounds for thinking that banks that are proactive in this space can use open banking, and now open finance, to build on their own strengths, thus providing a richer customer experience, improving the services they offer to end-users and perhaps improving their bottom lines.
Open-banking and open-finance policies are often thought of as means of benefiting start-up firms and fintech companies by ensuring that these new players, which have not yet acquired significant customer bases, can obtain the data essential for the development and provision of their services. Fintech companies, we were told, would end up eating the banks’ lunch. But experience with open-banking policies to date shows that banks are among the principal beneficiaries of the push to make bank data more available.
Acquiring new customers or getting them to move their accounts from other providers is complex, time-consuming and expensive for banks, just as it is for customers. But in an open-banking ecosystem (and, eventually, in an open-finance ecosystem), banks no longer need to go through the expense and effort of getting customers to move their accounts to them. Instead, banks can provide services to customers whose accounts are held by other service providers. And customers benefit, too. They can keep their accounts with their existing service providers if they so wish while still being able to access services on those accounts from different service providers of their choosing. This is already happening under open banking. Banks and payment providers no longer provide only access or payment-initiation services on accounts they hold themselves for customers but also on accounts held by other competing service providers. Expanding this to other financial-services products through open finance is the logical next step. It will enhance competition and choice while safeguarding financial stability and investor protection.
Thus, we need to see open banking and open finance as the natural progression of where the digitalization of financial services is taking us. By embracing change, banks and other financial institutions can future-proof themselves, contribute to mutually beneficial financial innovation across the value chain and provide a richer customer experience.