Open banking in the UK grew out of a Competition and Markets Authority (CMA) report on the state of the country’s retail banking market in 2016. It found that incumbent banks did not have to compete hard enough for new clients, whereas newer banks found accessing the market and building their businesses much more difficult.
The CMA recommended ‘open banking’ in a bid to tackle this problem; however, take-up has not quite been what was initially expected.
According to the Open Banking Implementation Entity (OBIE), the government-backed initiative responsible for implementation, there were just three million active users in the UK in January 2021 — well behind the predictions of 33 million by 2022.
This lag may explain why the OBIE is now seeking to widen the initiative to include ‘open finance’, by adding access to all financial institutions in a bid for more uptake. It is worth asking at this point: what are the dangers and drawbacks of doing this?
Open finance vs open banking
Open finance is primarily intended to ease data sharing between financial services organisations by opening up customer data, allowing greater levels of personalisation and ease. However, sharing such data comes with its own privacy risks in accordance with the EU’s General Data Protection Regulation (GDPR).
From a bank’s perspective, access to open finance data is currently unregulated — unlike open banking — prompting additional questions about consumer protection. This is, however, is likely to change in the near future, as the UK Financial Conduct Authority (FCA) is currently pondering the matter.
So, what are the drawbacks of open finance? There will no doubt be huge financial, compliance and technological burdens on institutions, as well as maintaining systems to prevent breaches, on top of new regulatory requirements (which are yet to be announced) and the upfront costs of investing in compliance.
Additionally, for institutions who decide not to participate, their customers may not have access to the products promoted within the open finance market, which could hurt competition.
Open finance will create huge financial, compliance and technological burdens on institutions
Competition is intended to promote innovation and ensure customers have a choice. Open finance, however, could reduce competition and potentially put both the institutions and customers at a disadvantage. The advantages open banking offers individual customers may depend on the level of data access they give to the platforms.
Another concern for the financial sector is how banks can safeguard customer privacy with open data sharing. Banks will need to rely on technology companies to protect them against data breaches by updating their platforms and maintaining secure infrastructure, which represents yet another expense. This could include the need for strong and regular customer authentication. Banks in this position will need to update and strengthen their existing data protection policies to reduce the risk of a data breach. Respondents to the FCA’s recent call for input on open finance suggested that consumers would also like to see a common liability model that includes a standardised route for making complaints.
The FCA has expressed concerns that the use of big data in open banking could shift power from banks to the tech giants, but the same concerns do not seem to be expressed around open finance. This is likely because open finance focuses on recommending financial products and advice based on data, whereas open banking focuses on the movement and management of such data. The FCA believes that open finance has the potential to transform the way financial services work. Banks and fintech firms, therefore, will need to look at how they can maintain their competitiveness and ensure all their customers are offered the best services available to them.
Financial exclusion
The FCA has also warned, however, that open banking and open finance could lead to greater levels of financial exclusion. This outcome is plausible as any benefits will largely be accessible to those who actively consent to sharing their data, which may result in less favourable loans or deals for those who do not consent. In other words: if a customer allows only a limited level of access to their data, the deals and information available to them could be limited as a result. The FCA labels this a ‘privacy premium’.
It is important that banks reach out to their customers and aim for a high level of engagement to ensure open finance really does provide the best service possible. This will go back to ensuring they have clear and robust data protection policies to increase customer confidence in allowing their data to be shared — a task that can be easier said than done.
Customers today take their data privacy extremely seriously, so convincing them that sharing their data and partaking in an open world of exposed financial information remains a significant challenge. Banks will therefore have to work harder than ever to build customer trust in compliance with GDPR and domestic privacy laws.
Sarah Simpson is a senior associate at law firm Katten Muchin Rosenman.
