The Future of Finance is Open

Finance is in the midst of a true upheaval in the UK.

Open Banking has moved well past 1 million users and more than two years on from launch, the FCA have turned their attention to Open Finance. In a call for input dubbed by some as the “most important of the decade” we’re potentially witnessing a business model altering shift for an industry with a poor track record for innovation.

Or not? Open Banking took a long time to reach the 1 million milestone, and how many of those are repeat users, how many use cases have changed the game, how many consumers are getting more out of their finances thanks to open banking? We should avoid using statistics on API usage to measure the usefulness of something that is supposed to enable better consumer outcomes, and these have been light on the ground, at least to date.

But, the direction of travel is positive. We have the promise of improved payments journeys as PIS matures, FinTech VC is on the up (at least it was until COVID-19 appeared), the number and types of firms now using open banking APIs to share their data is increasing rapidly and more use cases are starting to appear, like those in Open banking for Good.

So with progress from Open Banking to Open Finance surely a certainty, what will financial services look like in the future?

How firms choose to engage with these trends and what they do over the next 12 months will define the composition of the future landscape for years to come.

But how is this going to shape up and who will benefit? Let’s paint a picture of finance in 5 years.

The promise of Open Finance

A little while ago I wrote a blog on how the open data ecosystem will evolve and… I got the name wrong. For Open Wealth, see instead Open Finance. This will enforce secure, common standard, API driven data sharing across the various sectors within UK financial services with the aim of increasing innovation and eventually improving the overall financial health of consumers and businesses alike.

Today, Open Banking applies to payment accounts, allowing users to more freely share their data across a limited range. Open Finance will broaden this spectrum, allowing data from accounts beyond banking like investments, pensions, credit and insurance.

The idea being that if a user can more freely ‘port’ their data from one organisation to another, this will inspire more competition. With more competition comes increased innovation. With increased innovation comes greater value for the end consumer.

Open Finance will therefore place far more importance on access to data rather than ownership of assets.

That’s quite a different way of thinking for the sectors who will likely be subjected to this: savings, investments, pensions, mortgages, insurance, credit. Within these sectors are organisations who are used to dealing with their own data about the assets held in their own locked box. Sharing is not common practice.

Consumers

For consumers, whats the benefit here? Well, imagine being in control of your data. Truly.

Open finance will empower consumers to grant third parties access to their financial data, wherever this is held, within a secure and trusted framework. An individual will be able to choose where they want their data to go, which firms can access it and how it can be used.

This will allow different financial service providers to work together in a better way, being able to rely on data in real time about an individual that they don’t have to capture themselves. This will all be governed by a secure and reliable trust framework, with clear liability and protection so the consumer is safe from bad actors and data misuse.

In the beginning, more activities will be automated, then we’ll see improved accuracy and personalisation. Finally, new services — with the boundaries between sectors broken down, we’ll see firms begin to build products and services not possible today with data that was previously locked up by incumbents.

Finance will work better for an individual. Outcomes will improve.

No more re-keying information to prove your identity and what you own — automated applications. No more calculating yourself what you can and cant afford — automated budgeting. No more hunting around for the best deals — autopilot switching. Need help saving more money? We’ll see nudges and reminders to help you keep on track, if you want them, when you want them.

Consumers will be empowered to manage their money holistically, with the help they need.

What will the financial ecosystem look like?

Open finance will create opportunities for firms too — opportunities to add more value for their customers (and potential customers) and therefore build deeper relationships.

With all that data being opened up, there will soon be the chance to build services on assets held outside of your own firm. To develop propositions that use broader data sets enabling more personalisation and relevance.

To facilitate this, we’ve seen a number of firms spring up looking to provide the API connecting layer for the emerging ecosystems. Plaid, Bud, TrueLayer, Yapily, Tink, the list goes on. This is a business model that is attracting a large amount of investment capital, validating the commercial model here.

These companies help third parties connect into the institutions providing data — acting as the plumbing to facilitate data movement and providing some smart insight on top of it. We’ve seen companies like PayPal, Goldman, Tencent all invest in some of the new FinTechs in this space.

What these firms ultimately do is ease the friction for other organisations who want access to data from across the ecosystem — providing a simplified API entry point. The value here is in removing complexity for firms looking to build compelling user experiences on top of data beyond the boundaries of their own organisation. With Open Finance, this becomes increasingly important as data sources vary between sectors and use cases become more varied.

With regulation eventually rolled out across sectors and data opened up with connections being facilitated, firms can more readily go beyond their niche, and extend their reach across sectors.

We may see more banks showing pension accounts like Lloyds are doing. We might get more investment accounts plugging in to personal finance management apps like Yolt and Nutmeg are doing. We might see more wealth management platforms offering savings accounts like HL and Interactive Investor are doing — all through partnerships and sharing data.

In time, the potential for recombinant innovation also increases, allowing firms to use different data sets in novel ways that we haven’t even imagined yet.

This is pipes to platforms. This is the platformification of financial services.

Firms

First and foremost the opportunity is to empower consumers to take control over their data, allowing them to decide who has access, when and what for. The industry and regulators have roles to play in ensuring this is done securely, within defined constructs, but with the boundaries set in a way that fosters future innovations.

For a firm in the space, it is clear there is some disruption on the way, and its up to them what position they take up in the new ecosystem.

There’s a big difference in being a ‘net consumer’ or ‘aggregator’ of data, looking to own the relationship with end users and a ‘net supplier’ offering the administration and back end products, but happy to plug into other firms who provide the experience on top of this. Clearly, these will require different capabilities and strengths as a business.

The banks have taken time to come to terms with this, but they’ve had the advantage of a standing start with everyone else when PSD2 was first introduced. This wont be the case for other sectors — shame on them if they dont see this coming.

Open Finance could well open the fridge door for those who want to eat your lunch: GAFA.

Moves by Apple and Google have already shown these firms are more prepared to step into financial services. They’ve shown how they want to partner up with incumbents in a bid to avoid cumbersome regulation. They wont become fully fledged banks or financial providers themselves, but they will provide services through other firms in a smart way, leveraging the data available as they always do so well.

To capitalise on the emerging opportunities and mitigate the threats, how to incumbents position themselves?

Should a firm deepen its role in the sector and enhance relationships with customers as a specialist or broaden its proposition using data from across the industry? This is a question dependent on the company vision and strategy, but one they must answer.

Will consumers start to expect a wider range of services, with super apps like those we see in China (Ant Financial)? Will consumers still want to go to experts where they need specialist help and advice? Time will tell.

But these questions cant be ignored, and they are particularly relevant in the world of open data.

What will this do? It will accelerate the platformification of financial services.

So what?

As individuals, we can soon look forward to a world where financial services are more geared towards our interests. Regulators have a big role to play in all of this, but the blueprint has been proven through open banking.

In time, consumers will see real change, and there is the opportunity for firms to build better, deeper more meaningful relationships.

With that comes the threat to organisations who may well lose their place in the unfolding ecosystem. Being too wedded to a business model has damaged many successful firms in the past, but most will still wait for compelling evidence before changing. Digital transformations might be common place across financial services, putting in the foundations for success in the open economy must be an outcome these programmes deliver.

Incumbent organisations who have built their success on their own merits, doing everything themselves might struggle to form partnerships and facilitate data exchanges. Executing on an business model that is fundamentally about sharing and is more focused on delivering value for customers is very different.

What’s clear is that the game will change, but its not clear when. This gives laggards time — or skeptics an excuse.

Open data and a shift towards platforms mean that the winner in the long term will be those who provide the most value with the data. And this is at the heart of what the FCA want to achieve through Open Finance: shifting the balance of power away from those with the pure scale, to whomever can deliver the most benefit for consumers.

Better get platform ready.