Open Finance: the next step on the journey towards Open Economy

Open Finance was first mentioned in the Digital Finance Strategy published by the European Commission in 2020. Since then, it has been a “buzz word” in the financial industry, creating both curiosity and concern. But what do we actually know about Open Finance at the moment? In this special guest blog for Nordea, Karin Sancho, Partner & Head of Financial Services at KPMG, sheds some light on this hot topic.

What is Open Finance?
Open Finance is all about sharing financial customer data. Open Finance will give both personal customers and companies the right to authorize third-party providers (TPPs) to access their data and initiate financial transactions on their behalf. Open Finance is also a big extension of scope. While Open Banking only applies to payments, Open Finance will apply to most financial services, such as savings, investments, mortgages and insurances. Basically, the customers’ entire financial footprint could be subject to Open Finance.

Open Finance is expected to be a regulation, and the EU Commission has announced that they will present an Open Finance regulatory framework during 2022/2023. This framework may mandate Open Finance by law in the same way as PSD2 mandated Open banking. We can expect that Account Service Providers (data holders, such as banks) will likely be required to put in place and maintain secure and standardized APIs to share data with TPPs (data receivers) at the customer’s request.

The journey from traditional banking to open data
When trying to understand the transformation of the banking industry, it is common to divide the evolution into four phases, starting in an oligopolistic and enterprise-centric situation that over time evolves into a state of radical collaboration and customer-centricity.

• Closed banking/Traditional banking offers a front-to-back business model, where the financial institution originates and distributes the product, e.g. sells current accounts and settles payments.
• Open Banking, which went live in 2018, requires financial institutions to provide payment account information on customer request to third-party providers (TPPs), who can then use and act on this information, e.g. account aggregation and payment processing. Open Banking arose from PSD2 and is underpinned by a defined legal and regulatory framework.
• Open Finance will likely require financial institutions to provide access to all consumer financial data on customer request to third-party providers, who can then use and act on this information (e.g. credit quality assessments or adjusted insurance premiums). Currently, there is no legal or regulatory framework for Open Finance in the EU, but the Commission is expected to present a regulatory framework in 2022/2023.
• Open Economy is the digital connectivity that is an extension of Open Finance, which will integrate all consumer data on their request, provide this information to one or many third-party providers, who will then use or act on this information.

We see a clear direction towards a more integrated financial services ecosystem for customers, which will continue to disrupt traditional business models and challenge financial institutions.

What Open Finance potentially means for banks
For banks, Open Finance will most likely entail a similar situation as with Open Banking, but for even more financial products than bank accounts. Traditional banking products that Open Finance could disrupt are savings, investments, pensions, mortgages and insurance. This in turn means that banks should be prepared to invest in and maintain real-time connectivity to data through APIs, just as for PSD2 — but for a much larger scope. Banks could face margin pressure on highly profitable core products and increased competition from third-party providers in terms of developed customer experience, for example regarding interfaces, personalisation and insights.

What Open Finance potentially means for consumers
Open Finance enables and opens up for “Finance-as-a-Lifestyle”, which means being present in people’s lives at the time they need and want, with the products and services they desire. It pushes financial institutions to transform and enables all interested players to prioritize development for their customers’ financial welfare as the primary objective at all times. Some of the possible Open Finance consumer services are shown in the image below:

What Open Finance potentially means for businesses
When looking at SME’s, Open Finance/”Finance-as-a-Lifestyle” means proactively helping them with their core objectives of driving business growth, increasing effectiveness, achieving employee wellness and driving customer engagement. It also entails automating the non-core objectives, such as bookkeeping, and enabling access to low-cost options through data-driven credit assessments or adjusted insurance. Some of the possible Open Finance corporate services are shown in the image below:

Our view on the outcome of Open Finance and Open Economy
A clear benefit of Open Finance is the financial inclusion that it will bring. The many new alternative sources of non-bank financial information will give companies a wider view of people’s actual financial activity and needs, thereby strengthening their ability to develop relevant and tailored services.

Customers will share their financial data — no matter where it comes from — with third parties through APIs and get access to new value-adding products and services tailored to their specific needs. The customers will have the possibility to take active ownership of their data, and freedom to decide how and when they want to access and manage that data, which could be in their mobile banking app or in any other tool they use in their daily lives.

Lastly, Open Finance creates an opportunity to build truly innovative financial services, as it offers the possibility to create completely new business models that leverage previously unexplored sources of data.

About Karin Sancho
Karin Sancho is Partner & Head of Financial Services at KPMG Sweden. Karin has almost 30 years of experience with transformation projects in financial services. She has a long track record of supporting primarily banks to improve their process efficiency as well as its compliance. Karin has deep understanding of corporate banking and has led several engagements to develop new products and offerings to the corporate clients of multiple Nordic banks.

About KPMG
KPMG employs more than 230,000 people in 144 countries and territories. KPMG’s experts within advisory, audit, tax, and technology serve the needs of businesses, governments, public sector organizations, not-for-profits, and the capital markets. KPMG is committed to quality and service excellence in all that we do, bringing our best to clients and earning the public’s trust through our actions and behaviours both professionally and personally.