It’s a noble task to want to help users control, access and utilise their financial data better. The problem is, users aren’t convinced they want a third-party poking their nose into their data, or if it’s really of much use to them.
Consumer reticence has left regulators and fintechs stumped after years working to create ‘open banking’ rules, which force banks to safely share users’ account information with selected apps, with the goal of better money management.
“Open banking has been a bit of a damp squib,” James Daley, managing director of consumer group Fairer Finance, told the FT last year; 12 months to the day after the rules were first implemented.
As a result, the lofty goal of having 33m people signed up to open banking-driven services by next year is expected to fall short.
Still, that hasn’t stopped fintech apps like Yolt or Plum pushing ahead with open banking initiatives, and now hopes are pinned on an extended version of the scheme — ‘open finance’. Open finance enthusiasts want to see not just banks mandated to share users’ data, but also pensions funds, savings accounts, trading apps and other assets.
“[Open banking] only really covers your current accounts. And so the idea behind open finance is how do we extend that to the rest of someone’s financial life. If you want to manage your financial life properly, you need to have insight into all of your data,” said Plaid’s UK director Keith Grose, speaking at a panel organised by Sifted last week.
Companies like Plaid — which helps funnel users’ data between banks and apps — are now leading the push for regulators to implement open finance mechanisms. They make a revenue cut every time they help share data, hence wider regulation would directly benefit them.
However, broadening the remit of open banking doesn’t inherently solve the obstacles of consumer trust and interest. Open finance is therefore at risk of being just as anti-climactic as its sister, open banking, especially given their success is irrevocably linked to one another.
Nonetheless, Grose suggests that open finance will be able to “take lessons learned” from its older sister, as well as offering additional value to users, as seen already in Australia.
Grose was joined in his discussion with Sifted by panellists Roisin Levine — head of banks at Flux — and Simon Vans-Colina, cofounder of Fronted.
Here are their top four top takeaways about what it will take for open banking to take off, and why open finance is an important next step.
1) Success relies on building awareness
The panellists agreed that one key obstacle to open banking so far has been a trust-gap; fuelled by poor communication around user-benefits.
Roisin Levine referenced research that still shows “very, very low percentages” of people say they’re willing to share their data in exchange for “more personalised services.” She said these vague concepts are unhelpful and apps need to “explain this stuff…don’t use these big, high-level generic terms.”
She recommended products leveraging open banking get more specific about the benefits to boost awareness.
“[We should ask]; do you want to ensure that the cash you have is in a high-interest account? Do you want to compare pricing on your insurance or… purchasing your energy? Then all of this stuff seems really common sense, and suddenly that applies to everyone.”
She added that trust in open banking is slowly “moving forward” and that seeing a value exchange is key in this respect.
“It’s kind of early days, but they will begin to get more and more used to it as time goes on.”
Another goal is to make open banking services so helpful that users don’t just want to use it; they want to pay for them. In particular, that might come from analytics tools currently being developed to give users intelligent insights into their future cash flow, for instance.
“Now I can see all [my accounts], but then you can show me what my actual cash flow is looking like in the next six months. What kind of decisions then can that drive?” Levine said.
2) The data is yours — but expect leaks
Another dilemma around open banking is uncertainty about what fintechs do with the data shared with them; again feeding into the trust question.
On the bright side, there are protections in place and limitations; overseen by the regulator. Users completely own their data and can revoke the access they give to third-parties at any time.
There are also restrictions on companies’ ability to sell the data directly to third-parties.
Instead, companies holding the data can monetise it by recommending new pension providers and taking a commission fee, for instance, or charging consumers for the service (like Monzo has done).
“What’s going to make or break the success longer term is ‘do you feel confident that you know where this data is going?'” Grose noted, highlighting the need to educate users on their data rights and companies’ use of their data.
Nonetheless, Levine warned that some companies might be tempted to charge a so-called ‘privacy premium’, whereby consumers get a worse deal or product based on their financial data.
“It only takes one kind of major loss of trust or issue that we find ourselves in a place where actually the whole industry is hurt, and we may be going backwards,” Levine said.
Meanwhile, Vans-Colina added there’s a big risk that open banking and finance data will get hacked and leaked.
“I think that’s probably inevitable,” he warned. “But the regulatory framework in place is strong. And it means that only regulated companies are able to process and hold the data. And I think it’s a trade-off as a society we have to decide. Do we want to take this step?”
He also emphasised that open banking had big security perks overall, explaining that the amount of fraud and cybercrime will “go down massively because of open banking.”
3) A cross-generational project
Apps like Moneyhub — which aggregate users’ various bank accounts — have proven most popular with the over 55s.
Yet Grose is confident that open banking rules are already benefiting the younger audience too.
“I recently saw someone did a survey, and a lot of Gen Z would actually use a bank account inside of TikTok,” he said. “You’re going to see a lot of companies start to access and provide financial services using this type of [banking] data and they can meet different generations and different groups where they are already. I think that’s going to be incredibly valuable for people.”
Incidentally, Vans-Colina’s new startup, Fronted, will also use open banking tools to help young renters get cheaper deposit loans, by accessing their bank data and assessing their affordability.
However, the inter-generational benefits may be less applicable to open finance. The fundamental benefit that open finance adds is being able to aggregate a wide array of different accounts and assets, which arguably millennials — the main audience of fintech apps — have less use for, given they generally have a smaller financial portfolio.
Still, Levine argues that pensions are important regardless of age, as well as is having a grasp on your investments and savings.
“I think that open finance applies to all demographics, for sure,” she said.
Vans-Colina also emphasised the pension use-case: “Most people don’t know how much they’re paying in management fees for their pension. But that is one of the biggest things that’ll determine how much you have when you retire. So that’s a really important number that people should have access to.”
4) Practical use-cases: think big
If regulators are going to get on board with implementing open finance rules, they need to understand what additional benefits could come with it.
Grose says one key benefit will be for small and medium business (SMBs), which open banking has left somewhat to the wayside.
“[SMBs are] one example of where you’re going to see a lot of activity in the open finance world as we develop and I think access and standardisation is going to make that so much easier if you can really track your expenditures as a small business and get instant access to financing if you need it, instead of having to go through really onerous loan application processes,” he said.
Meanwhile, Vans-Colina pointed to the example set by Australia, showing “how much extra information creates consumer benefits” beyond just payment accounts.
He also argued there’s an environmental use-case for open finance; which could force a far wider range of companies to share data with consumers.
“I want to know as I go about my life, how much of an impact I’m having on climate change. And that’s one of the areas where open finance could really help…[Like] a regulatory framework that said every merchant had to make available information about what you bought, and the carbon footprint of that cup of coffee that you got from Costa Rica.”
He added: “This is information that’s relevant to consumers that lets them lead better, more fulfilling and less impactful lives — that currently we don’t have access to. So we can’t make good decisions because we don’t have access to data.”
Many thanks to Plaid for sponsoring this virtual event — and thank you very much to our panel.
We’d love to continue holding webinars like this in the future. If you’d like to partner with us and sponsor one of our virtual panels, get in touch with [email protected].