The financial sector is on the cusp of a disruptive, data-driven revolution: Open Finance promises to bring competition and innovation to financial services through the voluntary sharing of customers’ financial data. We caught up with Sorcha Lorimer, Founder of Trace, and Gavin Littlejohn, Chairman of FDATA, to talk about how the Global Open Finance Centre of Excellence (GOFCoE) aims to ‘safely unlock the potential of customer data as a force to improve lives.’
Would you prefer a year of Amazon Prime or a Railcard? Due to minimal competition in banking it is often questions like this that determine who British teenagers bank with for the rest of their lives. In the UK, five banks control more than 80% of the current account market and an Accenture report from an international sample found that only 7% of respondents had changed bank accounts in the past year.
Building on the EU-wide Second Payments Services Directive (PSD2), which gives customers the right to share their payments data with regulated third parties of their choice, in 2016 the UK Competition and Markets Authority (CMA) set up the Open Banking Implementation Entity as part of their wider suite of remedies to encourage competition and innovation in UK retail and SME Banking. This measure required the UK’s top eight banks and one building society to fund and participate in a programme of measures that included technology standardisation.
Open Finance expands this principle of consent-driven data sharing to include other types of financial data such as loans, mortgages, investments, pensions, and insurance. Ideally, this will add variety to the market in the form of fintechs offering personalised products, encourage incumbent financial institutions to better serve their customers’ needs, and ultimately empower consumers to actively choose the best value products rather than passively taking what they can get.
Although collecting more data comes with risk, the rewards can be great. The most obvious benefit is convenience. For instance, apps like FreeAgent, Intuit, Xero and Sage take much of the pain and time out of accounting for SMEs and personal finance apps allow users to see in one place how much money they have in various banks and how they spend it. Users can also use these tools to make smarter investments based on their personal spending habits and goals.
Beyond convenience, open financial data can help drive inclusive growth in the financial sector. Firstly, open banking allows credit agencies to build profiles for people based on their spending habits even if they have a thin credit file, therefore opening access to financial services.
Collaborators, winners, and losers
There are various systemic barriers and risks to the safe and efficient delivery of a market environment in which customers can be empowered in this way. The challenge is that these system-level problems cannot be solved by any one actor or sector, be they banks, fund managers, fintechs, insurers, governments, regulators, financial services trade associations, consumer support organisations or academia. The Global Open Finance Centre of Excellence (GOFCoE) has been established to encourage and orchestrate effective collaboration between actors and overcome systemic issues. In doing so, it will enable the promise of Open Finance to improve the lives of end customers, be they consumers or businesses.
In early 2018, Gavin Littlejohn, Executive Chairman of the Financial Data and Technology Association (FDATA), which operates in Europe, North America, South America, Asia and Australasia, wrote a paper suggesting that such a centre be created and identified collaboration partners (the University of Edinburgh and Fintech Scotland) to bring the idea to life. Orchestrated by the University’s Data Driven Innovation team, GOFCoE worked on a bid for funding from the UK government’s Strength in Places Fund and were successfully awarded a £23 million grant in June 2020. So GOFCoE, at its heart, both in intent and by design, is a collaboration, as Gavin Littlejohn says: “This collaboration has many winners: whilst GOFCoE will engage across the international landscape of the financial services industry, customer groups, policy makers and regulators, its ethos is to align with the interests of customers.”
Some incumbent financial services firms have historically been reluctant collaborators, in that they were unlikely to voluntarily make it easy for their customers to share their data. Littlejohn argues that the only losers here are those who choose to be: “The large institutions that are going to struggle with this are those whose mindset is to put up the maximum levels of customer friction to prevent the customers from easily moving to a better product, rather than focusing their efforts on giving their customer maximum value for their custom. There is a huge opportunity for all firms to get to know the needs of their customer better, and make more accurate, timely and valuable interventions.”
This collaboration has the potential to be a win-win situation and in order to ensure this outcome GOFCoE has been created with risks and rewards carefully balanced.
Risks and rewards
GOFCoE has, as one of its key projects, an economic observatory, which is a longitudinal study of how humankind earns, spends and saves, through the lens of both consumers and businesses. These insights are critical to the development of public policy, particularly in an economic crisis such as the one that has followed the COVID-19 health pandemic.
Sorcha Lorimer, operating as GOFCoE’s Data Governance Lead, intends to build trust by embedding privacy in GOFCoE’s infrastructure and defining a clear ethical stance for the centre. She views GOFCoE’s actions in this area as a key selling point: “If you are doing all the right things, you should shout about it.”
Above and beyond covering the minimal regulatory and legal requirements, which GOFCoE does robustly through a multidisciplinary framework of GDPR, contract law and intellectual property law, the principles of privacy as a human right and Privacy by Design have been deliberately woven into the partnership’s foundations. To Sorcha, ethical intentions are key: “We are thinking about that end user, human experience right from the start of the lifecycle of the data: from when that data comes in, to when we process it, analyse it and then share insights with key stakeholders. This is really important because the current work of the GOFCoE economic observatory is a government and public interest project, so it is vital to get the balance right between the interests of stakeholders. I think the key point is that we are taking all necessary steps from a data governance perspective and consulting with stakeholders as we go.”
Beyond the economic observatory, Gavin also discussed the creation of an “algorithmic bias test laboratory” to “enable banks, fund managers, insurers and fintechs to test that their algorithms are not illegally discriminating against people based on certain characteristics like their name, race, gender or other things.”
The Future for Edinburgh, Scotland, and the World
Edinburgh as the home of GOFCoE received the backing of the UK Government in July 2020 because it is already home to world-class data scientists and supercomputing facilities. It is hoped that the centre will also play a role in bringing more jobs and international investment to central Scotland, further enhancing its cluster of financial technologies.
The Scottish Advisory Group on Economic Recovery released a report in June 2020 entitled “Towards a Robust, Resilient Wellbeing Economy for Scotland” outlining proposals for Scotland’s economic recovery from Covid-19. This report will shape the future of Scotland’s economy for several years and makes many suggestions where Open Finance can play a major role. The report advocates economic recovery led by investment in innovative sectors, a category that Open Finance would surely fall into, while also stating that the approach should be regional and provide strategic support for existing businesses.
Scotland is only a microcosm of the potential benefits that Open Finance could bring globally. The creators of the Global Open Finance Centre of Excellence aim to provide the collaboration environment to support this opportunity. GOFCoE is in its infancy, but is designed to be a market neutral environment, supporting the ecosystem, building trust and ethical engagement as its ethos.
The collaboration will build from a UK initial focus to facilitate collaboration on a global scale. The potential benefits for consumers are immense and the capabilities to make smart economic policies in a globalised world will be greatly enhanced.