Protection of privacy paramount in open finance
Industry watchdog reiterates that customers' financial data is private and affirms the right of consent
Open finance is a framework that gives people the right to choose with whom they share their financial data. Done properly, it should enable secure and easy sharing of data, which in turn will allow companies to develop products related to insurance, alternative lending, digital banking, personal financial management, account aggregation and more. Open finance will also promote financial inclusion for all South Africans; it is something that we can all look forward to.
The Financial Services Conduct Authority (FSCA) is paving the way for the regulation of open finance in SA. In May there was a feedback session on its draft open finance consultation paper. Here is a summary of the main points affecting fintech companies and traditional financial institutions alike:
Some financial institutions prohibit customers from sharing data with third parties, in some cases arguing that the data belongs to the institution or that sharing credentials violates the institution’s terms and conditions. The FSCA reiterated its primary regulatory position that a customer’s financial data belongs to the customer, and the customer has the right to give consent for that data to be shared.
Industry players also appreciated the FSCA’s moves to establish a regulatory framework to govern relationships between financial institutions and third-party providers. Such a framework will democratise open finance and circumvent cumbersome business-to-business contracting. It will also help speed up the adoption of open finance in the industry, and prevent incumbents from cherry-picking partners for reasons that don’t benefit the customer.
An attempt was also made to distinguish between data that can be shared freely with third-party providers, and “value-added” data sets that would remain the property of the financial institution and shared under a commercial agreement. The current position is that only “primary” and “secondary” customer data will be able to be shared with consent via the Open finance framework, but there was no clarity on what exactly these terms mean. More work is certainly required in this area.
The success of open finance depends on the technology used to share personal financial data. Concerns include how the customer is protected, how the data is secured, how disputes are resolved and, importantly, how consent is given.
Globally, two main technologies are used to enable open finance: open APIs and screen-scraping. API, or application programming interface is software that allows different systems to communicate by translating inputs and outputs. Screen-scraping enables a system to login to a customer’s banking profile as if it were the customer to collect the relevant data.
There are pros and cons to both approaches. Open API technology is safe and enables institutions and customers to exert greater control over the data shared, but institutions typically don’t have these APIs because they have not had an incentive to build them; they are costly and time consuming to build and maintain. Screen-scraping is susceptible to error and should be used only via trusted third parties, but it is comparatively easy and inexpensive to implement.
In its feedback session the FSCA said both methods would be allowed for open finance, though APIs would be preferred. Interestingly, in the countries surveyed — the UK, Brazil and Australia — APIs are provided free. Doing the same in SA would remove a significant barrier to entry for smaller start-ups and fintechs looking to leverage open finance to increase financial inclusion.
There will be two further workshops, in July and September, and the FSCA’s position paper on open finance will hopefully be finalised and published in December. Realistically, however, we are at least 18 months from seeing open finance in action. In the meantime, all financial institutions can capitalise on the data they already have and build tools that give customers value. Alternatively, they can partner and collaborate with third-party fintechs to the same end.
The winners will ultimately be the companies that prepare for open finance, embrace the technology and put their customers first.
• Joseph is MD of budgeting and investing app 22seven.
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