July 13, 2022
Exploring open finance use cases in the EU
The European Union has been at the forefront of open banking since the adoption of the Revised Payments Services Directive (PSD2) in 2016. In May 2022, the European Commission launched its Targeted Consultation on Open Finance Framework and Data Sharing in the Financial Sector, which aims to understand the potential for further developing an open finance ecosystem in the European Union.
Open finance will enhance business and individual consumers’ ability to share their own financial data with authorised third party providers (TPPs). Currently, TPPs only have access to consumers’ payment accounts data under the PSD2 framework. Consumers must provide explicit consent to share their data under PSD2, as well as the provider having a lawful basis for any processing activities as required by the General Data Protection Regulation (GDPR). We expect the same principle of explicit consent and/or lawful basis will continue to apply in open finance.
Open finance has the power to help consumers and businesses to fully understand their financial situation, identify products and services that meet their needs, as well as benefit from increased competition between providers. However, we need the Commission to take four actions, including: creating a cross-cutting consumer data right, creating a clear liability framework, broadening the licence scope for TPPs, and letting the market build open finance infrastructure.
What does open finance encompass?
In our view, the Commission should adopt a broad scope of data sources under open finance - going beyond those listed in the consultation document - and include sources such as payroll, taxes, utilities, pensions, savings, investments, among others. As the availability of data grows, so too does the potential to offer more customised, personalised services such as cash flow-based lending, automated tax filing, micro insurance, and service switching among others.
There should be opportunities to combine the scope of open finance with the proposed Data Act, which will enable consumers to share their data generated by their connected devices, such as connected cars, wearables, and smart TVs. We explore the financial implications of one of these use cases below.
Financial use cases
We explore two financial use cases below: holistic personal and business financial management and improving mortgage brokerage. We also explore a non-financial use case suggested by the Commission: sharing in-vehicle data from connected cars, which could be enabled by the Data Act if consumers explicitly consent to sharing the data generated by their car.
Personal and business financial management (PFM + BFM)
PFM and BFM tools are currently using payment accounts data to enable consumers and businesses to better manage their finances. Through holistic financial management dashboards offered by PFM and BFM tools, open finance could enable consumers and businesses to:
Maximise their financial resilience and capacity. This could include identifying saving opportunities or by creating a tailored plan to repay debts.
Select bespoke deals and products based on their goals, lifestyle, and financial habits.
Compare financial products and services based on their specific needs, focusing on features that matter most to the customer (e.g., flexibility, level of risk, etc.).
Buying a house is one of the most important - and stressful - experiences of many peoples’ lives, involving the single largest purchase many people will ever make. Much of the process is still paper-based, which often causes lengthy delays. There are additional challenges for individuals with thin credit files, such as higher interest rate repayments or being deemed ineligible for a mortgage. Open finance could streamline the process of buying a house by:
Facilitating data sharing between the different parties.
Automating the eligibility assessment and application processes, while also ensuring that these processes are GDPR-compliant.
Incorporating alternative sources of data in the credit scoring process (e.g., regular rent repayments, etc.) that will benefit those with thin credit files.
Enabling consumers to correct any information that may be adversely affecting their credit score or their capacity to purchase a house.
Our research with Accenture estimates that embedded finance could unlock €220 billion globally in additional revenue for financial service providers by 2025. New financial technologies and collaborative business models have the potential to transform any company into a financial services firm through embedded finance. One such example is the use case on sharing in-vehicle data, which we explore further below.
Sharing in-vehicle data
The Commission proposed two non-financial use cases as part of its open finance framework consultation. One of these use cases is the potential to share in-vehicle data from connected cars, such as data on the car’s performance, which could be used to monitor wear and tear on the car’s component parts.
According to McKinsey & Company, data-sharing in the automotive industry could generate between $250 billion and $400 million in value globally by 2030. Ninety-five percent of all cars sold in 2030 are expected to have some level of connectivity, up from 50 percent today. However, many consumers are not fully benefiting from opportunities to share their data. Open finance could offer benefits such as:
Enabling consumers to benefit from greater predictive maintenance on their vehicles, which could reduce their spending on vehicle-related costs as well as reduce their insurance premiums.
Providing customers the opportunity to access and benefit from personalised mobility insurance, based on their specific circumstances.
Improving financial investments into infrastructure through better planning, optimisation, and investment based on transportation flows.
What action needs to be taken to deliver open finance?
Building the open finance ecosystem will require a number of policies to ensure a level playing field for access to consumer data, while also ensuring consumers’ data is protected and secure. These include:
Creating a cross-cutting consumer data right: We advocate for guaranteeing consumers and businesses the right to all of their data directly or through a third party, regardless of whether the data was generated by connected devices.
Creating a clear liability framework: The liability framework for open finance should be proportionate to the services being provided, while also ensuring consumers are protected through adequate redress mechanisms and outlining clear liabilities within the ecosystem.
Broadening the licence scope for third party providers: The scope of account information service provider (AISP) licences put in place under PSD2 should be extended to cover all cross-sectoral data that is included in the General Data Right under the proposed Data Act. This will enable TPPs to provide new products and services that support consumers’ right to share their data and meet their needs.
Letting the market build open finance infrastructure: It is unlikely that the diverse financial verticals - and potentially broader sectors - within open finance could coalesce around a particular technology and governance standard in the same way as PSD2 for open banking. As a result, TPPs and other intermediaries will need to play a part in developing the API infrastructure and standards for open finance.
The Commission also wants to understand what digital tools can strengthen a customer’s ability to grant, track and withdraw consent. We advocate in favour of:
Creating consumer-facing dashboards, similar to Plaid portal, that enables consumers to manage which third party providers (TPPs) have their explicit consent use their data;
Integrating Identity Verification (IDV) into the consumer-facing dashboards to create added security safeguards that protect consumers’ data.
There is immense potential for open finance to tackle some of the biggest challenges facing consumers and businesses.