Open Finance – (re)action from the Banks

For over a year, we at Dreamplan have been gauging the financial sector's stance on the impending Open Finance legislation from the EU and how they plan to act on it.

And so, it is perhaps an opportune time to create an overview - call it categorization - of the impact of the new legislation and how it will affect businesses within the financial sector. Over the coming weeks and months we will share insights, starting with article focused on the retail banking industry.

If you're wondering how "Open Finance” and the transparency of customer related banking data will influence your business and the industry, diving deeper into the legislation might be beneficial for you. However, it is a dauting 56-page document and therefore with this 5-minute read we at DreamPlan would like to give you our take on it.

Open Finance – what is it?

Think of Open Finance as the EU Parliament's quest to unbundle the entire financial sector within the EU. Its predecessor was PSD2, and you will recall it causing quite a bit of turmoil in the sector, to put it mildly, as it required EU-banks to expose transaction data on specific accounts for third parties acting on behalf of individuals. Spoiler alert: with Open Finance, we might be looking at turmoil that's many times magnified that of PSD2.

Who is exposed?

First, let's see who will be affected by the new legislation:

• Credit institutions (including mortgage institutions)
• Banks
• Payment and e-money institutions
• Investment firms
• Crypto service providers and stablecoin providers
• UCITS and AIF managers
• Insurance and reinsurance, as well as brokers
• Pension institutions
• Credit scoring agencies
• Crowdfunding service providers
• FISPs (financial information service providers)

There are whispers about fleet car leasing companies being on this list as well, but that's still uncertain at this point. Essentially, if you're a part of what we commonly refer to as the 'financial sector', this will affect you.

What does the upcoming legislation cover?

The regulation will encompass all customer data. More specifically, it means:

1. All data collected, stored, and processed about and on the customer.
2. All data from customer interaction with the financial institution (yes, that's correct; even the internal results of MIFID II are included).

For both 1 and 2, the rules must be applied to all processes that fall within the standard business operations.

Why is this happening now and what does it mean?

The data should be open! When data is termed 'open', it essentially means that it should be readily accessible upon request. Whether it's the customer or a third party acting on the customer's behalf, the data should be provided digitally, without any delay, and it must be continuously updated.

The legislation isn't fully finalized yet. Based on input from industry veterans our best guesstimate is that it will be fully rolled out by 2026 latest.

Now, you might be scratching your head, wondering: why is the EU giving the financial sector this lovely “gift”? The answer is straightforward. Better service, more flexibility, and better conditions for the customers. The EU needs to reintroduce natural market dynamics, especially in serving its customers. There's a genuine need for innovation competition in customer engagement, in particular from the large incumbent institutions. The focus is on providing the best customer experiences rather than just offering generic investment risk advice like "Choose the risk profile that fits your personality."

While there might be tweaks to the legislation, it's clear that uncharted waters lie ahead, and actions must be taken now.

What Are the Banks Responses?

Now we come to the heart of this article. Broadly speaking, we've heard three types of strategies from banks over the past year:

Strategy 1: Denial

Our affiliated organizations are actively lobbying to ensure things remain unchanged, allowing us to continue usual business operations.

Firstly, a hearing was held, allowing all industry organizations to let their voice be heard to the legislators. It hasn't changed much. At the moment, it seems like the best bet of minimizing the impact of the legislation comes from the competition authorities of the EU. They can influence how much of the internal data created by customer interaction needs to be exposed, as it in some cases will be seen as exposing crucial IP. But that is a bet is on a "partial rescue" by another EU body, which historically aims to increase competition in financial markets.

This strategy often originates from legal practitioners many of whom have decided to ignore the extensive history of the legislation. And the intention behind this legislation is clear:

?“This proposal aims to address these problems by enabling consumers and firms to better control access to their financial data. This would make it possible for consumers and firms to benefit from financial products and services that are tailored to their needs based on the data that is relevant to them, while avoiding the inherent risks.The general objective of this proposal is to improve economic outcomes for financial services customers (consumers and businesses) and financial sector firms by promoting digital transformation and speeding up the adoption of data-driven business models in the EU financial sector. Once achieved, consumers who want to do so would be able to access personalized, data-driven products and services that may better fit their specific needs. Firms, notably SMEs, would enjoy wider access to financial products and services. Financial institutions would be able to take full advantage of digital transformation trends, while third-party service providers would enjoy new business opportunities in data-driven innovation. Consumers and firms will be given access to their financial data to enable data users to provide tailored financial products and services that better suit customers' and firms' needs.”

Strategy 2: Bargaining

But they can't impose that expense on us without the opportunity to create a solid revenue stream on the technology side!

?In response: Indeed, but there's a caveat. This is set to be the IT undertaking of the century for the sector. Never mind PSD2 - that was just “early-stage training” for what is to come! It will be a massive IT cost, moreover, the potential returns from selling access to this data might not be as bountiful as one might hope.

Firstly, the data must be provided COMPLETELY FREE if it is the customer's direct demand. Secondly, for third parties who might request data on behalf of a client, especially those qualifying as SMEs in the EU (less than 250 employees), it must be provided at the actual cost of data transactions, excluding development.

Strategy 3: A Whole New Perspective!

Facing the looming expense of data exposure, we must re-align our operations in line with the legislation's intent. Only then do we have a chance to maintain the status quo on our balance sheet.

Based on our conversations with industry players, we see some optimism and associated opportunities with the new legislation. Certain banks in Denmark for example, have gone through a lengthy organizational awareness process, and are strategically ramping up resources in anticipation. They are now waiting for organizational trickle-down effects.

Many EU banks have over the years managed to cut costs by reducing immediate access to advisors (or simply reducing the number of advisors). However, paradoxically, with growing wealth and complex products, customers have increasingly needed these advisors.

This is the most sensible response to the upcoming Open Finance legislation we've seen. Of course, organizations and technology must be prepared for banks not being the sole distributors or advisers for their products. And here we're not just talking about embedded finance at e.g. the car dealership, but third-party companies taking up crucial parts of the banking business that has become too ineffective (e.g. advisory and distribution of banking products as a package).

I hope that with the above, it's clear to everyone that this marks a substantial shift in the sector - a turning point. The victors and the vanquished in this new era will be determined by their responses to Open Finance. It might be tempting to maintain the status quo for another few years, but by then, the ship might have sailed! There is a unique first mover advantage opportunity, yet for large incumbent banks this is not an easy legislation to adjust to. It requires a change in business and hence revenue model.

My point is not to scare anyone but to highlight the urgent need for innovation in distribution and partnership models in the financial ecosystem. This innovation journey is an inside job. So dear banking sector, "go innovate!" I'm as excited to see what you come up with. For your sake and your customers. And if you don’t, well…

At Dreamplan we have over the past 3 years built cutting edge cloud tech solutions?solving the Open Finance challenges. With the consumer in focus, our solution adds significant value to banks, pension funds and financial services providers.

Reach out if you want to learn more.

This piece is a co-authorship between yours truly & Simon Bentholm , co- founder of Dreamplan .