Open finance gives consumers control over their financial data and who sees it

A wave of change has descended on modern finance, and the tide has given rise to “open finance”.

Open banking, a subset of open finance, was first introduced through the second payment services directive (PSD2) in Europe in 2015, and later the Open Banking Order in the UK in 2018. This wave of regulatory change is making its way to SA, as seen by recent consultation papers from the Financial Services Conduct Authority (FSCA) and SA Reserve Bank.

If regulators can enable this environment, the move to open finance will benefit us all.

Unlike open banking, which was limited to transactional data and bank payments, open finance encapsulates all financial institutions. Open finance is a framework that empowers customers by giving them the right to choose who they can share their financial data with. It also enables safe and easy sharing through standardising technology that has existed for some time.

Application programming interfaces (APIs) — software that allows different services to talk to each other — will allow financial institutions to securely share our data, with consent, with approved third parties. Approved third parties such as fintechs can use this data to create customer value by developing innovative products and services.

Our financial data is largely inaccessible today, confined to our financial institutions for analysis and marketing. When your bank sends you a message encouraging you to take up a personal loan or up your credit limit, it is doing so after analysing your data. In the early 2010s some financial institutions argued that data on their platforms belonged to the institution.

Globally, regulators and courts (and more recently, an SA court case involving two insurers) have made it clear that this data belongs to the customer and only the customer can choose to share their data.

In Europe and the UK, the directives were designed primarily to help consumers by making data-sharing and payments safer, cheaper and more accessible. SA also stands to benefit from this progress. The promise of open finance is that if our financial data is freed in a safe and ethical manner, it could add significant value to our lives.

Imagine topping up your investment in real-time because your investment provider knows you have money in your bank account, comparing interest rates for a small business loan with no credit history, or applying for a cellphone contract without having to obtain stamped bank statements.

AISPs and PISPs

In an open finance world there are two new groups of companies, account information service providers (AISPs) and payment initiation service providers (PISPs). AISPs are companies such as 22seven which, with consent, access financial data from various financial institutions to enable a service, such as showing a customer a consolidated view of their finances or helping a consumer track their spending.

PISPS are companies such as Ozow or PayFast that allow consumers to make e-commerce payments without error-prone DIY EFTs or online-capable cards. They also make it cheaper for merchants to accept payments because these transactions avoid more expensive payments networks provided by the major card companies.

Incumbent financial institutions — due to the gravitational pull of historic revenue and lack of competition — are not incentivised to build these new services, but if they do, they typically don’t allocate the focus needed to develop something great. This presents an opportunity for collaboration whereby institutions allow safe and seamless data-sharing with these valu- adding AISPs and PISPs.

Before open finance can become a reality in SA, there is still some ground to cover:

• The industry standards must be defined. This includes, among other things, standards for the open APIs, customer consent and ongoing customer disclosures.
  
  
• The FSCA needs to develop approval and oversight processes to ensure the public is protected from ill-equipped companies and bad actors.
  
  
• Customers must be educated on the benefits of open finance and the dispute mechanisms available to them if things go wrong.
  
  
• The regulator needs to define the rules of engagement to ensure incumbents and fintechs collaborate, compete and contribute to the growth of the industry.

While we wait, the AISPs and PISPs mentioned above use screen-scraping to enable open finance outcomes. Screen-scraping — a technique whereby a third party logs into a customer’s banking profile as if it is the customer — has arisen out of the need to create an environment that open finance itself seeks to create. User growth by fintechs such as Mint (US), Curve (UK) and 22seven (SA) are evidence of real demand from consumers to transact in more innovative and convenient ways.

Screen-scraping was the available alternative given that financial institutions have typically not developed methods to share data in a secure and elegant manner. Some financial institutions have used their dominance to argue that screen-scraping provides third parties with uncontrolled access and that bad actors may commit fraud. These claims may be to obstruct competition, when, in practice, screen-scraping has been used by a minority of (if any) bad actors. No local examples of screen-scraping fraud have been documented or publicly shared.

In its recent consultation paper on open finance, the FSCA acknowledges that “screen-scraping, when practised by responsible parties, is a usable mechanism for data access with good control for security and operational risk”. The Reserve Bank also proposes facilitated screen-scraping “as a fallback mechanism when open APIs are inaccessible”.

Locally, 22seven and two major SA banks have partnered with one of the most reputable data aggregators in the world to collect financial data via screen-scraping. Since its inception in 2012, 22seven has not had a single reported instance of fraud.

In summary, open finance is an opportunity for our regulators to encourage the safe and ethical use of existing technology to create significant additional value for all South Africans. We could live better lives with more control of our own financial data.

Rather than a threat to traditional institutions, the transition to open finance could mean opportunity not only within incumbent financial institutions but also through collaboration with third-party fintechs. And because the main focus of open finance is the consumer, emphasis on the benefit this will have for all is required.

• Joseph is MD at budgeting and investing app 22seven.