Thu, 24 Oct 2024
In the ever-evolving landscape of financial services, data access has emerged as a pivotal factor driving innovation, competition, and enhanced customer experiences. The shift towards open banking, marked by the introduction of the Payment Services Directive 2 (PSD2), has already laid the groundwork for more data-driven services. However, with the upcoming Framework for Financial Data Access (FIDA) in Europe, the stage is set for an even more comprehensive transformation.
Last week , I had the honour to moderate a panel at the Open Banking Expo in London on exactly that topic with 4 true experts in the field:
I learned that the road to financial data access is a journey filled with opportunities and challenges where regulatory frameworks, technological advancements, and market forces converge. As I was the one asking the questions, I am happy I still have my blogs to not only summarise what was being discussed, but also to comment on it.
FIDA is a regulatory proposal by the European Commission to enhance access to financial data across various sectors, including banking, insurance, investments, pensions, and more. The goal is to create a more competitive and customer-centric financial ecosystem by promoting the adoption of data-driven business models. To me, it is a logical next step after PSD2 forced banks to establish the rails of payment data and payment initiation through API platforms.
As Marija Ivoninaite, Director at FDI Consulting, emphasised, “FIDA is trying to create more and better economic outcomes for financial data consumers, which includes both customers and businesses. It's about improving the adoption of data-driven models and boosting competitiveness across the European Union.”
This initiative represents a significant expansion from PSD2, which primarily focused on payment services. By involving various financial services providers, such as banks, insurance companies, investment firms, and even crypto asset service providers, FIDA aims to create a holistic financial data-sharing framework across the EU.
Marija highlighted this challenge: “The data available across member states varies significantly in quality and accessibility. The contract you signed last year for a mortgage might be very different from what your parents signed decades ago, and the ability of financial institutions to digitise and standardise this data will be key to making FIDA work.”
A challenging ambition? Absolutely! Banks may have started to understand the usage of APIs, but the newly included services can hardly benefit from them. They will have to start over from scratch, accepting change, as well as learning how to build the right rails and new services using these rails.
One of the key elements of FIDA is the establishment of industry-led data-sharing schemes. These schemes will define the standards, processes, and modalities of data sharing, ensuring that data access is secure, transparent, and aligned with regulatory requirements.
As Henk Van Hulle, CEO of Open Banking Limited, pointed out, “The success of FIDA will depend on having a well-defined scope and centralised monitoring of standards. It’s not just about what’s included, but also about who is accountable for delivering it and ensuring compliance.”
The UK's experience with open banking demonstrates the importance of clear standards. “In the UK, we saw the importance of having a recipe with the right ingredients,” Van Hulle said, drawing parallels to the European initiative. “We need to define the language, set minimum standards, and make sure there’s trust in the system—both from a data security standpoint and from a consumer adoption perspective.”
The key question is to what extent we can easily compare the UK situation, which is just one jurisdiction, with the whole EU, which is a set of 27 countries, habits and collaboration models.
While PSD2 primarily focused on payments, FIDA aims to go beyond banking and embrace open finance. This means opening up access to a broader range of financial data, including insurance, savings accounts, loans, investments, and pension products. Nicola Breyer emphasised the immense business opportunities that come with this broader scope: “This is about business opportunity. It’s about creating use cases and business models that incentivise people to share their data and, in return, offer superior products and services to them.”
Breyer acknowledged that with this expansion comes significant challenges, particularly when it comes to engaging financial institutions that may view data sharing as a regulatory burden. “If you just comply with regulation without seeing the business value in it, you’re missing the point,” Breyer argued. “We need to move from a ‘we must’ mentality to a ‘we could’ mindset, looking at how we can create value through data-driven innovation.”
“There’s a massive opportunity here if institutions see data sharing as a way to differentiate and innovate. It’s not just about meeting regulatory requirements—it’s about creating new products and services that actually benefit customers.”
I see that happening at a couple of fintech providers and some frontrunners in financial services, but all of them? I'm not so sure. Just like PSD2, many will see it as a compliance exercise first before accepting that there is also money to be made if implemented successfully. Of course, with every party benefiting from data sharing, there are other losses unless there is revenue to be made by sharing data.
Indeed, a significant challenge with PSD2 was the lack of a clear monetisation model for APIs. While open banking created the infrastructure for data sharing, it did not provide sufficient incentives for financial institutions to invest in premium APIs that could generate revenue. FIDA aims to address this issue by introducing a compensation model within each data-sharing scheme, allowing financial institutions to charge for premium APIs.
As Marija explained, “The introduction of premium APIs could unlock new revenue streams for banks, insurance companies, and other financial institutions. But the big question is, will the industry embrace this opportunity? It’s not just about building infrastructure—it’s about showing that there is real value in these premium services.”
My remark is: Is the opportunity worthwhile if the compensation merely covers the data-sharing costs?? It will be interesting to see how the setup of schemes will materialise into something that really makes a difference and not just additional complexity.
Innovation in financial services has often been driven by fintechs and startups, which bring fresh ideas and agility to the market. However, as one audience member on the panel noted, the complexity of complying with regulatory standards could stifle innovation, particularly for smaller players with limited resources.
Nicola Breyer addressed this concern, saying, “Not every player has to do everything themselves. There are people who build really good standardised APIs and data platforms that can help smaller fintechs meet regulatory requirements without overwhelming them. Collaboration within the ecosystem will be essential.”
She also noted that the investment cycles of venture capital funds may not always align with the longer timelines required to fully monetise FIDA opportunities. “Investors need to see a quick return on investment, but this is a long-term play. Fintechs need to focus on finding quick-win use cases that can generate revenue early on, while still playing the long game.”
The road to financial data access is a complex and multifaceted journey, but it holds tremendous potential for transforming the financial services industry. With FIDA, the European Union is taking a bold step towards creating a more competitive, data-driven financial ecosystem that benefits both businesses and consumers. By embracing the opportunities presented by data sharing, financial institutions, fintechs, and regulators alike can pave the way for a new era of innovation and growth.
As Joris Hensen, co-founder of Deutsche Bank’s API program, emphasised, “FIDA is not just about exposing APIs—it’s about transforming the way financial institutions operate internally. APIs help create modernised products and faster services, ultimately benefiting the end customer.”
With the right mix of regulation, collaboration, and innovation, FIDA has the potential to reshape the financial services landscape for years to come. But will we find the right mix in time? As Henk Van Hulle explained:
you need the mix, the ingredients, but also the right cook and recipe, as well as an audience to eat it!
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