Banks should embrace Open Finance to boost revenues
Stefanie Lambeens and Hans Croon
Connective Payments, June 2024
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Open Finance means big challenges, but also big opportunities for banks
While Open Banking on the European mainland is still not functioning as smoothly as the European Commission had envisioned at the start of PSD2 in 2015, the next phase in the financial data unlocking project is already underway. Open Finance will lead to banks sharing (much) more financial data from their customers with authorised third parties. In addition to PSD3 and PSR to further improve and strengthen access to payment data, the European Commission published a legal framework for financial data access, in short FIDA, a year ago.
There are many reasons for European banks to embrace Open Finance as a nascent market and work more vigorously with Open Finance than they have done with Open Banking to date. Perhaps one of the most important reasons is that households and businesses purchase financial services from (many) more financial service providers than just the bank with which they have a current account. Which means the potential gain from Open Finance is much bigger, for all participants.
The Connective Payments Open Banking file
- PSD2: Three years after the introduction, financial innovations are still scarce
- PSD2: Where are the innovations?
- Is the PSD2 glass half empty or half full?
- Where are the Dutch statistics on PSD2
- The review of PSD2
- Open Banking beyond PSD2
- SPAA takes open banking to the next level
- Banks should embrace open finance to boost revenues
What prevents banks from taking on the role of data broker (TPP) themselves and collecting data from their competitors about mortgages, savings transactions, asset products, insurance, etc. – for which they only need the permission of their customer? After all, with the help of this data, they can gain an analytical insight into the complete financial situation of their customers, including their risk profile, financial behavior and hence, the need for additional services. In other words: Open Finance should open up a much greater potential for banks than Open Banking.
PSD3, PSR and FIDA
Since 2018, banks have been reluctantly giving access to their customers’ data with Third Party Providers (TPPs) under the Payment Services Directive 2 (PSD2). In June 2023, the European Commission introduced changes to replace PSD2 with two new laws: PSR (Payment Services Regulation) and PSD3 and proposed a new framework for Financial Data Access (FIDA).
- PSD3 aims to enhance APIs and improve standardisation. The Directive shares the same objectives as PSD2, i.e. increasing competition in the payments landscape and enhancing consumer protection. PSD3 includes several key improvements:
- Enhanced Strong Customer Authentication (SCA)
- Clear guidelines on API performance to achieve higher standardisation, reducing the need for developers to integrate multiple different APIs
- Establishing a legal basis for exchanging fraud data between banks and PSPs, and mandating customer education on fraud
- Extending IBAN verification to all credit transfers
- Creating dashboards to help users manage their open banking access permissions, including withdrawal functionality
- Replacing the directive with directly applicable regulation (PSR) to clarify PSD2’s ambiguous aspects.
- PSR: The Payment Services Regulation (PSR) is directly applicable in the member states, ensuring greater harmonisation and uniform application throughout the EU. Regulations on strong customer authentication, fraud prevention, and data protection related to the processing of personal data are transferred to the PSR.
- FIDA: The new EU Financial Data Access framework (FIDA) expands data sharing beyond payment and account information to include other financial data, paving the way for Open Finance. The framework is opening up data across financial services, meaning nearly all financial services data will be within its scope, including information related to mortgages, loans, savings, investments, crypto-assets, and pensions (almost all customer data held by financial institutions). The aim of FIDA is that it will lead to more innovative financial products and services for users and will stimulate competition in the financial sector.
What Open Finance means for banks – threats and opportunities
By further opening up, sharing, and standardising the data they hold for their customers, banks face both threats and new opportunities.
The threats are well known. In fact, they have led to the somewhat cautious attitude of banks towards Open Banking in recent years: mainly the entry of new competitors (in the future competing for higher margin products than just payments) and the risk of losing the primary relationship with the customer to new innovative providers.
But Open Finance also opens up new windows of opportunity for traditional banks. While households, organisations and companies are generally loyal to one bank for their daily banking matters, their other financial products are often spread across multiple financial institutions. Imagine a wealthy individual who has his checking account with bank A and has his asset management done by bank B. If bank A could gain regulated access to the asset management data that bank B holds, this would constitute a very valuable lead for bank A to turn its basic customer into a high-net-worth private banking customer.
Furthermore, because of its relationship of trust with the customer, leading to daily customer contacts, bank A has a big advantage over non-bank TPPs aiming for the same data. By requesting access to their customer’s data held by other financial institutions via the upcoming Open Finance APIs, they can build a 360-degree view of the customer’s entire financial situation. The prospect that data on mortgages, insurance, savings and investment balances, etc. will be added in the future represents an enormous revenue opportunity.
How banks can prepare
Banks can prepare for this shift by constructing an end-to-end customer experience and focus effort on:
- Strategy update – Moving from an ecosystem participant to an orchestrator role and ensuring the data broker role is integrated in new strategy development.
- Redesign of the customer experience – Transitioning away from product-centric business models and transforming to services for the customer that provide deep financial insights. For example, banks can create a customer dashboard that provides a comprehensive view of their finances, including account balances, transactions, and financial health insights from multiple financial institutions.
- Data analytics and automation capabilities build-up – Building up digital expertise across the organisation upgrading data science and analytics and automation capabilities. In one Asian bank example, 3,000 staff were trained in the fundamentals of AI/machine learning, proving that innovation isn’t just for technologists.
- New architectural design principles – Opening up their architecture to ensure easy integration with third-party providers and other banks and adapting architectural principles. For example, interoperability and modular design are important principles impacted by Open Banking.
SPAA
As we previously described in an Insights article, the EPC has already taken the necessary initiatives to respond to the new regulatory horizon outlined by the European Commission with PSD, PSD3 and FIDA. One of these is the SEPA Payment Account Access (SPAA) scheme. SPAA aims to drive ‘open payments’ in the EU and includes a commercial model for ‘premium’ payment services beyond PSD2, allowing banks to capture value by charging a default fee for API access and the assets themselves. SPAA enables banks to commercialize their data and transaction assets, rather than solely sharing them with Third Party Providers (TPPs), ensuring a fair distribution of value and risk. A call for interest to participate in a pilot was launched in May 2024, and several TPPs have already signed up (Tink, Token, Yapily and Truelayer).
The time is now
It is time that banks put their customer intelligence experts, processes and IT systems to work to embrace Open Banking and Open Finance instead of, as we sometimes hear, still regarding it as a compliance issue. And to accelerate the standardisation of the required APIs through European bodies such as the EPC.
How Connective Payments can help: Executing banking strategy
The bank organisation must be aligned with the new strategy which triggers a need to review underpinning capabilities. Connective Payments can help to understand the impacts on the bank’s operating model and capabilities and the implementation:
- Future state blueprint: make an at a glance overview of how the new business model would work (strategy, principles, accountabilities, key processes).
- Customer experience assumptions: design customer experience principles and map these to the future state.
- Prepare Operating Model framework: Derive the people, process and technology capabilities that directly enable this future state and operationalise customer experience assumptions through the capabilities.
- Operating Model analysis: undertake analysis to develop key recommendations.
- Recommendations and Plan for implementation: develop roadmap and plan to close the gaps and implement future state.
Do not hesitate to contact our Connective Payments consultants to discuss the impact of the Open Banking and Open Finance opportunities on your strategy and business model.
Connective Payments is here to help you
If you want to know more about how we can effectively help you with the complexity of adapting to Open Finance, please contact Stefanie Lambeens or Ronald te Velde.
Stefanie Lambeens
Connective Payments
Senior Consultant
+ 31 6 34476884
stefanie.lambeens@connectivepayments.com