Open finance
Open finance emerged as a response to the inherent limitations of traditional financial data management, where information was typically siloed within individual banks and institutions.
This fragmentation of data created significant challenges for consumers seeking to manage their finances holistically and access a wider range of financial products and services.
However, screen scraping proved to be unreliable and raised security concerns due to its reliance on parsing website data that was not designed for programmatic access.
This development laid the foundation for the broader concept of open finance, which seeks to extend these principles beyond banking to encompass a wider range of financial services, including insurance, investments, and pensions.
[16] Interoperability, which refers to the ability of different systems and platforms to communicate and exchange data seamlessly, is essential for the smooth functioning of the open finance ecosystem.
Examples include micro-loans, personalized financial management tools, and alternative credit scoring mechanisms that leverage a wider range of data sources.
The Japanese Bankers Association has designed a framework that sets broad principles for data exchange, allowing banks and third-party providers to negotiate and contract bilaterally.
It empowers consumers and small businesses by granting them greater control over their data and enabling them to securely share it with accredited third-party providers.
The HKMA's Open API Framework recommends minimum security standards and architecture, but banks have the flexibility to choose their implementation methods.
The country's fintech law, passed in 2018, laid the groundwork for open finance, and in 2020, the National Banking and Securities Commission published comprehensive rules for APIs.
Although the UK is no longer a member of the EU, both jurisdictions share a common origin in their approach to open finance, stemming from their initial adoption of the General Data Protection Regulation (GDPR) and the revised Payment Services Directive (PSD2).
In the EU, ongoing efforts aim to establish a comprehensive regulatory framework for open finance that extends beyond banking to encompass a wider range of financial services, including insurance, investments, and pensions.
The European Parliament broadly supports the proposal but has suggested modifications to strengthen customer trust, promote innovation, and enhance data protection.
[34] This bill will provide the legal basis for government and regulators to establish smart data schemes across various sectors, including financial services.
Key issues under consideration include commercial incentives for firms, ensuring compliance with Consumer Duty regulations, dispute resolution mechanisms, and the scope of data sharing.
[38] Brazil has emerged as a leader in open finance in the LAC region, with its central bank establishing a comprehensive regulatory framework and actively promoting its adoption.
In May 2022, the central bank introduced interoperability standards that enable seamless data sharing between financial institutions and SUSEP, the entity overseeing insurance and pension markets.
Brazil has adopted a phased implementation approach, starting with the sharing of public information and gradually progressing towards open data on insurance, pensions, and investments.
[42] This law empowers the regulator to authorize the use of APIs for secure consumer information exchange, a significant step towards full open finance implementation.
While formal open finance regulations are still pending, industry stakeholders like ABIF, BancoEstado, and FinteChile have proactively signed a voluntary framework agreement.
This agreement establishes security standards, responsibilities, and access protocols for sharing financial consumer data, demonstrating a collaborative approach towards advancing open finance in the country.
[43] Colombia joined the movement in July 2022, publishing Decree 1,297 outlining a voluntary framework for open finance and the development of standards for data sharing.
Several open finance platforms were already active in Colombia before the legal framework was established, thanks to existing laws that gave individuals control over their data sharing.
By providing lenders with a more complete picture of an SME's financial health, open finance can improve creditworthiness assessments and increase access to credit.
[50] Increased competition among lenders, driven by greater access to SME financial data, can lead to lower borrowing costs and better terms for SMEs.
Open finance can also foster collaboration and partnerships between traditional financial institutions and fintech companies, combining their strengths to deliver innovative solutions.
They must contend with the operational challenges of managing APIs, ensuring seamless interoperability between systems, and bolstering cybersecurity measures to protect against evolving threats.
Open finance also raises questions about fair competition, particularly if some institutions have greater access to data or face unequal costs in implementing the necessary systems.
[56] The potential for open finance to reshape the financial landscape by fragmenting value chains and fostering new platform models may require institutions to rethink their strategies and operations.
