Open Finance and What to Look Out For
From a financial services perspective, the financial industry that started off with physical branches to mobile/internet banking has embraced the PSD2 Open banking in the past couple of years, driven by a regulated approach ( UK(Open Banking UK),EU(Berlin specification), Australia (CDS) etc) or a market driven approach purely to provide better customer experience in a standard manner. The most recent evolution of financial services is called Open Finance.
The core concept behind open banking is to open up consumer data in a secure manner with consumer consent, to third party providers (Fintechs/banks ) in the form of standard APIs. This article is an attempt to discuss what open finance is and how the technology infrastructure should be aligned by any organization that plans to onboard open finance concepts.
Open Finance is the controlled, authorized process of sharing any financial information through the use of APIs. This is almost similar to what is covered in PSD2(Payment Services Directive) but with a much wider scope and reach. Following are some of the key characteristics of Open Finance.
1.Broader group of API providers and API consumers
With open banking the only participants were banks (as the API providers/ASPSP) and third party providers (TPPs) who were regulated by the national competent authority(NCA) of that respective country. However with Open Finance, there are other type of account holders who can act as API providers ranging from banks, insurance companies, wealth managers, pension funds,mortgage providers etc. Similarly, the API consumer range has also widened from fintechs, service providers and even organizations that are not regulated by an NCA.
2.Client TPP Identification and Security
Although open banking is a heavily regulated space, with Open Finance these regulations seem to be more relaxed and with more options. For example in the PSD2 space eIDAS certificates are required to be obtained by TPPs who would want to act as open banking service providers,from a qualified trusted service provider. These eIDAS certificate should have certain policy and content requirements satisfied. However aligning with Open Finance, Open Banking Europe has recently released a new version of their technical standard that meets the existing PSD2 requirements but also internationalizing the standard so that Open Finance users can also use it. (ex: QWAC or Qseal certificates can be used, certificate content adjusted to support other properties, possibility of using other methods such as direct access when required).
3.Wider Array of use-cases
Open banking mainly focused on Account Information and payment initiation related flows while Open Finance focus is to extend these flows as well as include a wider set of use-cases addressing other markets(especially e-commerce) and account to account (A2A) payments as well.For example,
Account Information Extended to include other type of accounts such as savings,loans and securities.
Payment extensions such as reservation of funds, deferred payments, pay by loan, request to pay etc.
Trade extensions such as Loan business, securities business(listing of stocks/certificates,insurance policy management etc) and administration and registration services.
4.Possible Regulatory Frameworks
Although Open Finance does not look quite stringent compared to PSD2, there are certain frameworks in the working to guide the relevant participants. For example Berlin group is in the process of setting up an Open Finance API Framework(https://www.berlin-group.org/open-finance) .
Benefits Of Open Finance
Following are some key benefits that Open Finance will bring to the financial industry.
- Improve user experience through customized products and services including wealth management,pension switches and on-demand insurance and more.
- Automate recurring tasks/renewals in the relevant fields such as insurance, loan processing, e-commerce by removing friction.
- Improve productivity and efficiency for organizations and various SMEs through collaboration of different services.
- Allow better financial management and financial decisions through the collective insights of different financial services.
The Technology Alignment for Open Finance
The main implementation constraints met when building an open finance solution are API based quality of services, security , legacy integration and interoperability . It is important to have a strong API Management solution with the ability to have multiple gateways providing the ability to expose different APIs internally and externally. Also it is crucial to have a good identity layer providing capabilities such as Strong Customer Authentication (two factor authentication methods such as TOTP, email, facial recognition etc) and adaptive authentication(ability to exempt based on the risk analysis of transactions etc) as required by PSD2.
The point to remember is that based on the organization you might need to expose PSD2 regulated APIs as well as non regulated APIs for the expanded user base.From a revenue perspective, the capability to create API products (consolidated set of APIs provided as a single API), internal and external marketplaces will play a major role in the long run. Additionally it is important to have a proper integration layer to perform various integration patterns (file uploads, bulk uploads, transformations etc) and the ability to connect to legacy systems (core banking and other financial applications).
Overall, considering the focus of Open Finance from a technology perspective, the key requirement is flexibility to facilitate the unique needs of different market participants. Therefore technology selection should no longer be strictly coupled with PSD2 technical standard, but rather having the extensibility to enhance the platform to support other marker players and their requirements as well. Therefore with Open Finance adoption you can no longer expect to buy a solution but rather build the solution that fits your API ecosystem.This suggests to start off with a single, loosely coupled infrastructure with many extension points that can be build up to support your specific financial services.
