Discussion on Open Finance: From Regulatory Diffusion to Industry Transformation

If ‘open banking’ is anything to go by, creating interoperability in fintech markets leads to the emergence of a few big winners, a number of compliance failures, and dozens if not hundreds of ambitious but generally limited tech firms serving niche areas of the financial sector. The policy is also extremely expensive for banks to comply with.

However, it also creates something very important and valuable – the encouragement and public sector blessing to spark innovation and excitement in the industry, which can lead to the development of breakthrough applications that improve individuals’ wellbeing.

In essence, open banking forces banks to communicate data with other firms, with the customer controlling the interaction. The term ‘open’ links to other liberalising initiatives such as ‘open source’ software or ‘open access’ journals. It is a high-priority policy area for the European Union (EU), which has recently made 1.7 million datasets available via its ‘open data’ portal to strengthen its digital markets more broadly. Indeed, the open data paradigm the EU policy-makers are trying to build aims to promote a consumer-centered approach based on data ownership.

The benefits of these policies are presumed but generally unproven – few regulators are ready to sing the praises of these reforms publicly, and there is not enough conclusive data to undertake high-quality empirical analysis on their effectiveness.

However, financial regulators around the world appear to be generally positive about the idea and copy the EU’s and other’s policies in a process referred to as ‘regulatory diffusion’. Between 50 and 70 countries have adopted an ‘open banking’ policy that is similar to the EU’s original policy applied via the uninspiringly named PSD2 Directive (OECD, 2023; IMF, 2023).

If ‘open finance’, or the extension of open banking to new policy areas, such as insurance and investments, is to be effective, open banking implementation has revealed many things to watch out for. The size of the challenge should not be underestimated, nor should the costs – sunk and ongoing- for both the public and the private sector. The question of where to draw the line in opening up data systems must also be addressed. Banks are lobbying for ‘big tech’ firms also to be required to open up their datasets so that banks can use this information to improve their algorithms.

These challenges leave many unanswered questions regarding open data. In the EU, the interaction between the revision of the current open banking frameworks and the implementation of the open finance frameworks is still under discussion (e.g., the revision of PSD3 with financial data access and payments package – FIDA).

Regardless of all this activity, the elephant in the room is the United States, which has had effective market mechanisms for the purchase, sale, and integration of banking data pipelines for many years with next to no regulation. On the other hand, China, Russia, and India have centralised systems, which can also be effective with all the governance and democratic challenges that they bring. Whichever direction to open finance is chosen by the EU, many other countries will probably follow suit, so it is crucial to get it right.

However, this regulatory diffusion of EU regulation principles should also consider the adopting country’s specific characteristics. While the policy objectives of open banking adoption may differ, the market competition mechanism remains the same. Differences in enforcement policy and incentives are mainly seen in how the regulatory frameworks are implemented, reflecting varying market maturity and government IT infrastructure. In conclusion, the approach to open finance regulation should be tailored to the socio-economic context in order to establish a data-centric consumer framework.

Figure. Difference between Open Banking, Open Finance and Open Data. (Source World Bank, 2024)

References

Open Finance: the Korean Experience & Opportunities and Challenges for the East Asia and Pacific Region, World Bank Group Finance, Competitiveness and Innovation Global Practice.

OECD (2023), Open finance policy considerations, OECD Business and Finance Policy Papers, OECD Publishing, Paris, https://doi.org/10.1787/19ef3608-en.

Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on a framework for Financial Data Access and amending Regulations (EU) No 1093/2010, (EU) No 1094/2010, (EU) No 1095/2010 and (EU) 2022/2554

The Rise and Impact of Fintech in Latin America, International Monetary Fund, Fintech Notes, Note/2023/003 https://www.elibrary.imf.org/downloadpdf/journals/063/2023/003/063.2023.issue-003-en.xml

Open Banking: How to Design for Financial Inclusion, World Bank, Report 161316, 2020 https://documents.worldbank.org/en/publication/documents-reports/documentdetail/351881625136775280/open-banking-how-to-design-for-financial-inclusion

This blogpost has been produced in the framework of the EU Supervisory Digital Finance Academy (EU-SDFA).

The EU Supervisory Digital Finance Academy (EU-SDFA) is a TSI flagship initiative aimed at supporting financial supervisory authorities in coping with the risks and opportunities associated to the use of advanced technologies in the financial sector. The European Commission – DG Reform has established the Academy in cooperation with the three European Supervisory Authorities (EBA – ESMA – EIOPA) and the Florence School of Banking and Finance part of the Robert Schuman Centre of the European University Institute (FBF-EUI).