Open Finance: What’s next for the UK and Open Banking?

Andy Renshaw, SVP of product management at Feedzai, discusses what is in store for the future of UK Open Banking

Towards the end of last year, the UK’s Financial Conduct Authority (FCA) actioned a call for input to develop an Open Finance framework to become an extension of the earlier PSD2 Open Banking initiative. Like its predecessor, the Open Finance initiative will bring more significant changes to both the EU’s and UK’s financial services ecosystem.

To quickly recap on the Open Banking initiative, it means that smaller financial services players – such as start-ups, challenger banks, and fintechs – can more easily access consumer data and financial information from banking transactions previously held by traditional banking institutions. The goal was to encourage greater competition in the financial services market, boost product innovation, enable more informed financial decisions for customers, and encourage consumers to exercise greater control over how their data is managed.

Enter Open Finance.

Open Finance extends these principles to investment-based financial products. These include savings accounts, mortgages, insurance, and pension accounts – to name just a few. Under Open Finance, customers can agree to share their financial data using trusted APIs to access broader services, such as financial advice and wealth management.

Yet, as smaller players seek to launch new products and offerings in new markets, they face threats from fraudsters seeking to take advantage of their potential inexperience in financial crime prevention. More actors entering the financial services market means customer data will be distributed across a wider array of players. As a result, it will be increasingly challenging for FIs to get a complete view of their customers’ activities. Additionally, open APIs could potentially provide fraudsters with new pathways to access banks and customer data.

Though legislation to propose a new Open Finance Framework is expected by mid-2022, it’s crucial for banks and fintechs to address the key concerns that Open Finance landscape will create as early as possible.

Tips for banks and fintechs when it comes to Open Finance

Address weaknesses

Since Open Finance creates an opportunity to modernise deliveries of mortgages, pensions, wealth management, and insurance, fintechs who don’t rely on legacy banking technologies have greater flexibility to pursue innovations in these markets – even if they lack prior experience. This experience gap creates an opening for fraudsters to take advantage. Organisations that are just getting into new markets need to assess their vulnerabilities and prepare accordingly to anticipate and prevent fraud threats.

Research

Financial services providers taking on new endeavours under the Open Finance initiative have an obligation to their customers and stakeholders to understand the industry in which they want to operate. Before pursuing a new venture simply because Open Finance makes it easier to do so, consider consulting industry experts first. Understanding the risks of new ventures will better prepare fintechs and other financial organisations to understand what fraud risks pose the greatest threat.

Don’t wait for threats to become issues

Developing an understanding of fraud threats is the first step to preparing for fraud attacks before they occur. Think of the fraud threat as a leaky water pipe in a ceiling. Fix the leak quickly before it leads to a more serious issue, such as the pipe bursting, causing water damage. The same goes for fraud. If your FI is seeing a rise in APP, ATO, or money mule activity, address it immediately. Tackling potential fraud vulnerabilities before they can morph into larger issues will protect FIs from financial exposure and reputational risk down the road.

Assess risks

As banks, FIs, and fintechs release new products, it’s important to evaluate emerging risks. Underestimating or downplaying potential risks can prove costly if the assumptions are proven wrong. That’s why it’s essential to both assess potential risks and potential fraud losses should those risks develop. Preparedness is the most effective defence against unknown threats. Update your product risk assessments to identify previously unknown vulnerabilities.

Help improve the industry

The Open Finance era should create new areas of competition for the financial services market. It’s more likely now that customers will consider switching or reducing their dependence on traditional banks. With new competitors active in the market, all players need to remain committed to building the industry’s collective intelligence. Newcomers to the financial services scene should consider joining trade organisations or industry non-profits like Cifas. Working with these organisations enables businesses to more easily share knowledge and insights that will ultimately help keep customers and sensitive data secure while increasing revenues.

Keep an eye on regulations

Remember, Open Finance will not be the last move by regulators. Regulations like Open Banking and PSD2 are designed to create more competition in the industry and bolster innovations in financial technology that ultimately benefit consumers. However, the reality is these regulations often don’t play out as expected. FIs and fintechs need to understand that regulations change constantly and prepare to respond accordingly. As organisations build their defences, they should anticipate that they will need to change in a few years.

Ultimately, those FIs that adapt to new fraud and regulatory realities as they develop and continually assess their potential weaknesses, risks and threats will be the winners in the long run.