The exponential growth of new digital technologies in the financial sector, like open banking and open finance, has stimulated competition and innovation, simultaneously improving consumer outcomes and amplifying risks. While consumers can benefit from their data, unscrupulous firms can exploit it. Lack of transparency, data misuse, fraud, and inadequate redress mechanisms could undermine the benefits to consumers of increased choice, convenience, access to credit, and cheaper payments.
CGAP’s Responsible Digital Finance Ecosystem provides a useful framework for industry and financial sector authorities to address the double-edged sword of digital finance. In many respects, the UK’s approach to open banking is a great expression of the concept of RDFE, which seeks to promote competition and innovation responsibly. The UK has been a pioneer in the open banking space – there are now over 12 million users of open banking in the UK, and adoption growth is steady year on year. The UK’s approach to open banking is built on four key components of the RDFE framework: commitment, collaboration, customer centricity, and capability.
The strong building blocks of consumer protection regulation and supervision baked into the UK’s approach were enhanced through industry collaboration around its Open Banking Standard, ensuring consumer security and safety while mitigating risks. The development of the Standard coincided with the implementation of the EU’s General Data Protection Regulation. At the same time, the UK’s Financial Conduct Authority (FCA) was drafting guidelines on how firms should treat consumers in vulnerable circumstances, while the Payment Systems Regulator (PSR) was designing an industry code for the reimbursement of scam victims (which has since been superceded by a regulation requiring the reimbursement of scam victims). Concurrently, the form of the FCA’s Consumer Duty was being negotiated.
Open banking in the UK was initially conceived as a competition remedy following a Competition and Markets Authority (CMA) investigation into the nation’s current account market, which concluded that it would promote competition in the interests of consumers, drive down costs, and increase the quality of provision.
Commitment from all key actors from the start
This emphasis on open banking as a solution to a bigger problem led to a strong commitment from the government, regulators, banks, and fintechs to keep the consumer front and center. If open banking – the remedy – failed, it would necessitate further action. Building on this commitment, an ambitious pace of delivery was set by the CMA to deliver the Open Banking Standard, further propelled by the European deadlines to deliver the Payment Services Directive 2 (PSD2).
Collaboration was in the DNA of the legislation and its implementation
At the time, open banking was new – there was little precedence for the UK to follow, and it was up against the clock to design a standard that the banks would implement and the fintechs would adopt.
Collaboration was a requirement of the CMA order. It formally appointed a trustee to ensure delivery of the order, which required the banks who had been the subject of the current account investigation to fund and create a steering group and implementation entity – now known as Open Banking Limited. The steering group had to include industry and other stakeholders to develop the Standard, with the trustee acting as arbiter when consensus could not be reached. The trustee was required to consult with consumer and SME representatives on the regulatory Order and fund these roles on the steering group. Fintech trade bodies were invited to the table – they were incentivized to attend, knowing that if they did not, they wouldn’t be able to influence the design of the Standard.
Collaboration also improved wider consumer protection regulation in the market: fintechs, banks, and the Financial Conduct Authority (FCA) worked together to persuade His Majesty’s Treasury of the need to update the FCA’s regulatory perimeter to ensure newly authorized fintechs using open banking would adhere to the same consumer protection rules as the banks who were giving up their data.
A strong focus on customer centricity
As part of their role, the consumer representative created their own discrete Consumer Forum to ensure the voices of wider civil society and consumer experts were incorporated into their submissions to the steering group. The Consumer Forum met regularly and gave the consumer representatives credibility to speak at the industry steering group, present persuasive arguments, and help keep the technical initiative on a more consumer-centric footing.
Consumer outcomes are an important part of the RDFE. In the UK, the Consumer Forum created a Manifesto for Open Banking, setting out what it should deliver for consumers to anchor the industry on a clear vision. A report by the consumer representative on Consumer Priorities for Open Banking identified the key benefits of open banking for different consumer cohorts and led to the publication of the Customer Impact Report. After negotiations with banks and fintechs, the End-User Risk Committee was established to identify the wider ecosystem risks open banking was creating, so these could be mitigated or escalated to the steering group or regulators.
Consumer representation at the steering group also led to the development of non-regulatory requirements for the trustee – for instance, the introduction of the Consent Dashboard, which allows consumers to revoke their consent as easily as they give it.
Fostering the capability of key actors proved essential
The Consumer Forum and steering group were vital in convening stakeholders and providing opportunities to learn together. These groups helped build the capability of all involved to engage and respond in debates about how the Standard should be designed and implemented. However, in practice, none of the consumer representation would have been possible without dedicated resourcing. Consumer and SME representatives were paid by the industry through Open Banking Limited and were given a dedicated secretariat to help with the fast-moving and often technical nature of the consultations and working groups.
Two notable industry-led initiatives that contributed to capability building were the Open Up Challenge 2020 delivered by NESTA and Nationwide’s Fintech For Good program. The banks provided GPB 1.5 million to accelerate fintechs helping people manage their money better through the Open Up Challenge. The ‘Fintech for Good’ program selected fintechs, provided funding, and matched them with a charity partner to help address key issues for people who had been identified as ‘financially squeezed’.
As financial and data protection authorities around the world develop their own open finance regimes, the learnings from the UK’s open banking experience are critical. The UK’s approach has demonstrated the importance of commitment from all stakeholders, collaboration across the industry, and building the capability of key actors. A strong focus on customer centricity was also pivotal in ensuring that consumer needs and protection were at the forefront of the initiative. By learning from this success story, other jurisdictions can stimulate innovation and competition while ensuring the responsible use of consumer data. It is imperative for key actors to work together to create a secure and transparent digital finance ecosystem that is responsible and benefits all stakeholders.
