Data has already established itself as one of the major currencies of the 21st century, and the global financial services sector has taken notice. Around the world, open finance operating models are taking root, signalling a paradigm shift in how financial institutions interact with client data. Open finance goes beyond traditional data-sharing in banking, offering all financial service providers access to a broader range of client financial data. Rather than firms only having access to their customers’ data, in an open finance system all client financial data is available to all financial service providers – if clients have expressed that their data can be shared. This creates new opportunities for data-driven solutions that span banking, asset management, insurance, and payments. By breaking down industry silos, open finance is set to transform the financial ecosystem into a more fluid and integrated space.
Across the world the shift towards open finance is advancing sluggishly, however this may change soon in the EU. The EU’s financial data access regulation (FiDA) is a legislative proposal that has the potential to restructure the European financial services industry by making open finance practically mandatory overnight.
What are the mechanisms of FiDA, and how should financial institutions prepare for its implementation?
The shift towards open finance in the EU
FiDA is the crown jewel of the EU’s data sharing policy framework. While it is currently still in the proposal stage, it will likely come into law by 2027. Its scope is designed to be broad so that it will apply to the majority of financial services firms, from banks to asset managers, insurers, and financial intermediaries. These are its main pillars:
- Financial institutions must enter at least one financial data sharing scheme (FDSS) where they exchange their customer data with other institutions.
- Each FDSS must establish a data compensation scheme where data users pay for data providers’ financial information.
- All customer data sharing must be done with the customer’s consent and firms must provide their clients with a clear option to decline the sharing of their data.
These requirements have major implications for the European financial sector. FiDA will blur the lines between sub-industries in the EU financial sector, making them more integrated, increasing competition. Financial consumers will gain more choice and transparency when buying financial products as services become easier to compare. Furthermore, barriers to enter the financial services industry will be lowered. Firms will be able to offer more comprehensive services to their clients.
Democratisation of financial services
Once financial firms gain wider access to consumers’ financial data, they will be able to offer a larger range of financial services that were previously only offered by specialised financial actors. For example, asset managers will be able to leverage open financial data to offer insurance products on investment portfolios. Non-banks may be able to offer credit arrangements more seamlessly thanks to the availability of banking data. The examples are endless. Overall, FiDA is likely to make the financial sector less compartmentalised as it becomes easier for all financial service providers to offer a full gamut of financial products rather than just the ones their sub-industry specialises in.
This also means that it will become relatively easier to enter the financial sector, since financial start-ups and fintechs will be able to benefit from the already-existing financial data provided by larger institutional actors. This may help democratise financial services as competition will be based less on access to consumers and more on the quality of products.
Traditional intermediaries will become less prevalent
Widespread data sharing will shorten the distance between many financial firms and prospective clients. This means that firms that act as intermediaries may begin to wane in importance. In asset management, brokers and banks that have traditionally carried out product distribution may no longer be necessary for products to reach clients. This situation is already manifesting in the payments industry, where direct account-to-account (A2A) payment applications are overshadowing traditional payment methods, especially among younger generations.
Instead of traditional institutional intermediaries, technological intermediaries may become more common. The advent of FiDA may see an increase in business-to-business (B2B) intermediaries as financial service providers become more reliant on technological tools to access client data and create data-driven solutions. Fintech platforms that allow firms to embed their services onto others’ platforms or vice versa will likely become more widespread.
Embracing the winds of change
While these changes offer enormous potential, FiDA may be a double-edged sword given the tectonic shifts it will bring about across the financial sector. On the one hand, the advent of open finance means that financial firms will have more opportunities to innovate and find new ways to interact with their clients. On the other hand, firms run the risk of being left by the wayside if they fail to adapt quickly.
The extent to which EU financial firms embrace this change and adopt open finance principles in their products and operating models will determine how successful they are in a post-FiDA world. Players who opt to treat FiDA as a compliance exercise rather than the paradigm shift that it is may quickly find themselves outmanoeuvred by nimbler, newer fintechs, and are at risk of becoming obsolete.
In order to benefit from the brave new world FiDA is proposing, EU financial firms must embrace open finance and gain a first-mover advantage. FiDA only lays the groundwork for the EU’s future open finance system; it is up to the financial sector to define what it will look like, and the firms that act first will be able to assume a more favourable position in the post-FiDA financial ecosystem.
By Björn Ebert, Financial Services Leader at PwC Luxembourg
