A Sophisticated Approach to Data Will Be Key to Open Finance’s Success

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By Tom Bull, UK FinTech Growth Leader, EY

Unlocking the value of open finance will ultimately come down to how newly accessible data is used; for many banks, this will require a whole new approach.

Open banking is transforming financial systems internationally. Allowing consumers and businesses to share their bank-account data securely with other institutions and authorise direct account-to-account payments opens up a broad array of new products and services that will increase competition. More than 70 countries are now on a path to open banking, including the United States, which has traditionally taken a market-led approach to customer-data sharing.

Consumers are taking notice. In the United Kingdom, for example, more than one million people paid their self-assessment tax bills using open banking in the year to January 2024, up from 140,000 the previous year.1

Today, open finance represents an expansion of open banking’s capabilities, broadening the potential datasets beyond bank accounts to include a wider range of financial products, such as investments, pensions and mortgages, all personalised and often cheaper.

Consumer demand for products based on these new capabilities is strong. Research conducted by EY (Ernst & Young) and The Investing and Saving Alliance (TISA) found that 90 percent of consumers would be likely to use open finance-based dashboard applications that provide a consolidated view of their finances.2 The innovation is also relevant to small and medium-sized enterprises (SMEs), providing support as they manage their cashflows and connect banking data to cloud accounting packages.

However, implementing and adapting to open banking and open finance is a huge task for banks. As customers gain greater control of their financial data and can share it more freely, banks need to ensure they continue to adhere to the same high security standards.

This is a profound shift for banks, which have traditionally built their systems solely to ensure customer data is protected without giving much consideration to interoperability. Maintaining high levels of protection while allowing data to be shared represents a major change in approach.

So, seizing the opportunities that open finance presents could be transformative for banks, and for those that can successfully navigate the risks, the upside is enormous. Inaction from banks will only serve to heighten competition from technology firms with presences in the financial-services space.

Building for the future

Taking advantage of open finance requires banks to fundamentally change their approaches to data. Today, operations across many banks are underpinned by legacy, closed-architecture systems that were never designed for easy integration with third parties.

Simply maintaining the status quo requires huge amounts of work. EY research indicates that financial institutions currently spend up to 65 percent3 of their information technology (IT) budgets on maintaining current systems rather than innovating and developing new propositions.

These legacy platforms and processes constrain agility, hindering banks’ ability to get products to market and stay ahead of evolving customer needs.

To set themselves up for success, banks need to invest in areas more typically associated with technology platforms. This includes prioritising areas that may be unfamiliar, such as:

Application programming interface (API) channels that are fast, secure and reliable, making it easy to connect with other companies and share customer data (with permission). Speed is crucial here, as fast response times are critical for smooth user experiences, especially for products that aggregate data from many sources in one place.
Great developer experience to encourage others to engage with the bank’s API. This requires building easy-to-use software development kits (SDKs), as well as providing documentation, tools and community support for developers.
A commercial model underpinning the bank’s open banking strategy that recognises the needs of both the bank itself and the companies that hope to partner with it. This should be driven by a strong sales organisation that can actively promote the bank’s API to potential partners and drive usage.

As open finance gains momentum, banks and other financial institutions will be required to handle a far greater volume of data than ever before. By taking the necessary steps to improve their data infrastructures, they will be better positioned to succeed in the future.

Looking at data in new ways

Open finance creates a novel situation for banks, enabling them to become consumers of datasets to which they have never had access before. This presents opportunities to launch new product offerings and engage with customers in new ways, as long as they are able to access, utilise and exploit the new data fully.

Many of these opportunities revolve around new ways to gain a better understanding of existing customers by using new data sources to build more complete views of their overall financial pictures.

An enhanced data picture can also make it possible to offer a wider range of products to existing customers. For example, an estimated five million people in the UK are currently considered “thin-file”, meaning they have little or no credit history.4 For people in this group, accessing loans can be prohibitively expensive or even impossible, even if they earn a good wage and are financially responsible.

Open finance allows banks to view a wider array of data sources to assess creditworthiness—for example, transaction data to understand spending patterns and budgeting. This has the potential to open up access to credit to a much broader population.

Adaptation will be a three-step process

The possibilities offered by open finance are expansive and can be overwhelming. Banks need to be selective about the use cases and customer segments they target. With this in mind, adapting should be approached as a three-step process.

The first step is screening. A bank should take the time to understand the new capabilities on offer, not just through access to new data sources but also regarding its ability to trigger payments from within a customer’s account, bypassing traditional payment gateways and networks.

These capabilities and the new data sources available should then be screened for commercial-opportunity size, operational complexity and the priorities of the business unit, as well as the costs and technical complexity of deployment.

Having built a shortlist, the next step is to begin building out business cases and testing the propositions with customers to test demand and refine the offering.

The challenge during this phase is striking the right balance between protecting existing business lines against cannibalisation while simultaneously testing potentially transformative products. Pay-by-bank payments, for example, have the potential to cannibalise revenues from card payments, but banks must be willing to disrupt their own business models before someone else does.

As new products are developed and brought to market, the third step, customer education, will be key. People will not use financial products if they do not understand the benefits, so banks must enable customers to understand how these new capabilities can improve their financial lives.

Open finance should be seen as an opportunity for banks to engage more deeply with their customers and serve them in better ways. Harnessing it will require an evolution in approach but could unlock incredible growth for the banks that embrace it.

References

1Open Banking: “Adoption Analysis: Open Banking Penetration,” March 2024, UK Open Banking Impact Report.

2 The Investing and Saving Alliance (TISA): “TISA-EY Open Finance Report 2022.”

3 The Paypers: Open Finance Report 2023: “The Open Revolution: From Open Banking to Open Finance,”November 2023.

4 Experian: “How additional data sources can help to reduce the invisibles population,” April 2023.