By Jason O’Shaughnessy, Head of International Business, Envestnet® | Yodlee®
In recent years, South Africa has moved towards implementing regulations that will introduce open finance. The benefits are clear as similar structures have been adopted globally; the implementation of open finance in South Africa would significantly benefit the country’s consumers, innovative financial ecosystem and society more broadly.
For consumers, the implementation of open finance will provide better choice, protection and personalised service aligned with their financial needs. Furthermore, if done in the right way, consumers will enjoy smoother experiences when accessing their financial information in one place, leading to better customer service and improved financial wellness by endowing them with more ability to understand and adjust their financial behaviours.
For the innovative financial ecosystem, every stakeholder in the value chain is expected to gain from the implementation of open finance. The use of open finance will provide financial institutions and innovative fintech (financial technology) businesses better access to consumer-permission financial data to power their applications. Data enables all organisations to understand their customers’ positions better and improve their services to meet specific consumer demands. For fintech companies creating new service models, this means they can strengthen their value propositions and offer more sophisticated services that challenge existing models. Similarly, it can change the way incumbent banks deliver their own services. By fostering new relationships with fintechs, banks can find solutions without adapting their legacy systems.
The advantages of introducing open finance to the wider society are also clear. It provides a more stable and safe financial system that leads to less fraud and money laundering. A greater overview of data can also improve public policy, as analyses of financial-transaction data can flag issues and provide access to different financial services for the unbanked and alert policymakers to the true scale of underfunded retirement options.
Despite these clear benefits, the specifics of the implementation of open finance in South Africa, such as how the industry would introduce it, have yet to materialise fully. However, much debate is taking place within the Financial Sector Conduct Authority (FSCA) and the wider industry.
A step in the right direction towards regulation
In 2020, the FSCA released a report1 identifying routes to regulation and a consultation paper examining the opportunities surrounding open finance. The report revealed an openness to data-led innovations that a regulated open-finance framework would enable. The report showed that many of those surveyed understood the advantages of increased data sharing and the benefits it can deliver, such as greater financial inclusion, competition and innovation. Risks were also identified, such as fears over data privacy and costs of implementing the required technology.
As different versions of open-finance and open-banking initiatives are rolled out and begin to mature internationally, South Africa’s financial regulators can take away these developments and learn from the resulting experiences to create an innovative ecosystem.
The FSCA report recognised that several industry initiatives have already been introduced to encourage the implementation of open finance in the South African market. Nedbank, for example, has been a leading light in bringing open-banking solutions to market for its customers. In 2019, it first introduced an API (application programming interface) platform that applies the Open Banking Standard (of the United Kingdom’s Open Banking Working Group [OBWG]). The marketplace grants select businesses access to Nedbank’s banking features, allowing partners to utilize certain services and customer data that are supplementary to their own applications.
Other initiatives such as Comcorp, trusted by South Africa’s major banks and credit providers, offer consumers the ability to process credit applications in real-time by reliably sourcing credit-related customer data directly from the source. And, of course, open-finance-like solutions have been available to consumers for decades but more commonly in the form of screen scraping. Businesses such as Envestnet® | Yodlee® have enabled consumers to aggregate their financial data securely into financial applications that allow them to manage their financial lives better. It is clear that for open finance to truly succeed, a better framework is needed to gain the trust of the whole industry.
Regulatory support and industry standards are required for open finance to benefit South African consumers across the whole spectrum—saving, spending, borrowing, planning and protecting. Without regulation, there is a risk that open finance will help only incumbent data providers.
With a well-connected framework of regulations, standards, implementation, enforcement and evolution, similar to that created by the United Kingdom with its Open Banking Standard, South Africa can go beyond those systems already in place and reap the full advantages of open finance in its entirety. This will not only avoid risk but also encourage greater innovation across the board. However, there are significant opportunities for South Africa to not only learn from international implementations of open-finance initiatives but improve on them, too.
What approach has the UK taken?
The UK, with one of the most mature open-banking systems globally, branched out more than five years ago to implement its own initiative. The UK’s Competition and Markets Authority (CMA) formed a new entity to define and deliver customers’ rights to access, control and share their customer, transaction and value-added financial data. It was also designed to disrupt incumbent banks and increase competition.
Overall, the mandate has been largely successful, with consumer participation increasing significantly. The number of consumers leveraging open banking is nearing four million people in the UK.2 While this number may seem large, it could be much larger considering the system’s maturity. But a few roadblocks have hampered greater uptake.
One of the legislation’s key requirements was that every 90 days, providers must reauthenticate users’ permissions to remain connected to third-party applications. While this may sound simple, it presented a serious hurdle for consumers to overcome. Only recently has the UK’s Financial Conduct Authority (FCA) made changes that will unlock this issue.
Where is Australia in its journey towards open finance?
Under Australia’s open-banking regime, the Consumer Data Right (CDR), consumers may opt in to share their data with select organisations that have been accredited by the Australian Competition and Consumer Commission (ACCC). At any time, consumers can withdraw their consent for data sharing and have their data deleted or deidentified by third-party organisations. Unlike the UK, Australia has gone one step further and allowed its citizens to benefit from other types of financial data than banking transactions alone. Australian users now have the option to share their data from home loans, bank accounts, personal loans and offset accounts with accredited organisations.
While Australia continues to expand its data availability, range of banking-data providers and accreditation of third-party organisations participating in open banking, the transformation of Australian banks and fintechs remains not fully realized. The reliability of data feeds needs improvement, so traditional forms of gathering data will still be widely used until those reliability issues are ironed out.
What is next for South Africa?
As stated by South Africa’s own regulator, its vision is to deliver an open-finance framework that supports third-party financial-services providers in retrieving customer financial data and developing products and services around it. Clearly, it is already on a journey to further develop an informed-consent framework that will include dispute mechanisms, customer-education and -protection measures, commercial models, data-transfer standards, data-protection practices and data-ethics frameworks.
The question is not if but when and what lessons can be learned from other international rollouts.
1Financial Sector Conduct Authority (FSCA): “Regulating Open Finance Consultation & Research Paper,” Kagiso Mothibi, Dino Lazaridis and Awelani Rahulani.
2Open Banking: “Three years since PSD2 marked the start of Open Banking, the UK has built a world-leading ecosystem.”