Michiel Bijlsma and Nicole Jonker of The Nederlandsche Bank lay out the three conditions that players need to take into consideration on the path to Open Finance success
New technology together with new regulation aiming at boosting competition and innovation has increased the importance of customers’ payment data in the financial sector. By making intelligent use of data, service providers will be able to develop new tailormade financial services, improve risk assessments, and much more.
In the EU, we’ve taken an important first step into open finance with the introduction of the revised payment services directive. PSD2 allows trusted third-party providers (TPP) to access a customer’s payment account. They can then offer that customer account information or payment initiation services. TPPs must of course first get explicit consent from customers to do so.
Open finance is a natural progression from PSD2. With open finance, TPPs would also be able to access individual customer’s other financial data. In turn, PSD2 and open finance are part of a broader development: open data. In the near future, consumers and companies may share a variety of private data with TPPs.
From experiences with PSD2 there are three important lessons for making open finance a success. The first lesson concerns the way data will be shared. The organisations which store the data will need to provide standardised access to TPPs to these data to avoid market fragmentation. In the context of PSD2 the tools that facilitate access, APIs, are not yet sufficiently standardised. This makes it difficult for TPPs to offer their services throughout Europe in a scalable way. There are market initiatives which work towards gradual API standardisation, while so-called ‘integrators’ may curb market fragmentation by acting as an intermediary between banks and TPPs. Nevertheless, standardised access to data is vital. This means that a rule-based approach for data sharing — as with Open Banking in the UK— may be preferable to the principle-based approach applied in PSD2.
It is also important to consider how the data originating companies can be incentivised to provide TPPs access to data and to keep their data sharing infrastructure secure and up to date. According to PSD2, banks may not ask TPPs for compensation for data-sharing of payment data. The question is whether this zero-access price is optimal, given the large investments banks and other data-storing organisations have to make to achieve this. Furthermore, compensation may be needed to cover the costs incurred each time customers grant or revoke TPP access to their data, and each time data is shared with a TPP.
The second lesson is that there are multiple public interests at stake. The legislator, regulators, and public authorities involved need to engage in dialogue with one another. In designing future-proof legislation and regulations for data-sharing, it is key to consider all public interests related to data sharing, as well as different international perspectives. This requires cooperation and coordination.
When it comes to access to data, there are multiple public interests involved. Financial stability, privacy, and concentration risks should all be well addressed. These different interests are sometimes at odds with each other, resulting in a trade-off between the different goals. Since the use of large amounts of personal data and data analytics are relatively new fields, there is yet limited case law on how to balance all interests concerned. To better balance them in future proof policy, the legislator, the regulators, and other public authorities who represent different public interests, should enter into dialogue with each other and coordinate their work. These include the central bank, the prudential supervisor, and the financial conduct authority in case of financial data sharing as well as the competition authority and the data privacy authority.
The third lesson is about trust. Consumers must trust the TPPs that want access to their data. If potential customers don’t trust TPPs offering new services, they will not consent to giving this data, nor will they use their services. This requires for firms to be able to credibly signal to consumers that they can be trusted.
A recent study by De Nederlandsche Bank shows that most Dutch aren’t willing to share their payments data. Half of them only want to share it with their own bank. However, less than 4% are open to data-sharing with non-banks.
The main reason the Dutch aren’t keen on sharing data with these newcomers to the payment market is lack of trust. With the evolution of PSD2 to open finance, TPPs are provided with access to an increasing amount of sensitive financial data, and the impact of misuse or abuse increases. Fraud risks need to be mitigated and adequate consumer protection is paramount. Otherwise, people will refuse to share their data.
Finally, it is also crucial that consumers know they are in control over their data. Not only that, but they also need to feel that they’re in control. That is why consumers should be able to easily gain insight into which parties have access to their data. Such insight could be provided at the source of their data, that is, their home bank, or at another data storing organisation. In addition, consumers should be able to easily and securely give a TPP explicit consent to access and use their data. Also, it should be equally easy for them to revoke this consent whenever they wish. This should preferably be done at the bank or at another organisation that stores their data.
If these three lessons are all taken into account, access to financial data in an intelligent and secure way may spur innovation and competition in a new financial ecosystem, to the benefit of both consumers and businesses.
Bijlsma, M.J., C.A.B. van der Cruijsen en N. Jonker (2020) Consumer propensity to adopt PSD2 services: trust for sale? DNB Working paper 671.
The editorial was originally published in Global Open Banking Report 2020, which follows the journey from Open Banking to Open Finance and Open Data Economy, and provides key insights about the benefits of Open Finance for different areas of financial service.
About Michiel Bijlsma
About Nicole Jonker
About The Nederlandsche Bank
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now