CETIF - Open Banking: it takes a strategy, not just legislation

In open banking, so far, the customer has been missing. A few years later, we can say that the "disruption" expectations we voiced, too, at the launch of PSD2 have not been realized.

As has been the case with other trends, however, banks and insurance companies do not live in watertight compartments, and the data-sharing paradigm, already a reality in the digital economy, is about to arrive in Finance.

The credit, or blame depending on one's point of view, is once again due to the regulatory push, primarily PSD3 and FIDA.

The third directive will close the gaps in PSD2

Let's start with the "failed revolution" of open banking.

Today we know that part of the responsibility lies with the objective shortcomings of PSD2, which will be remedied by the third Payment Systems Directive.

But hindsight also allows us to say that the financial industry has not been able, or willing, to put the end customer at the center of its offering model.

"PSD2 was born with some shortcomings regarding the specific issue of open banking," recalls Paolo Gatelli, Senior Researcher at Cetif, "and among the banks themselves there was no shortage of doubts about the actual feasibility of what the Directive envisioned.

It has weighed heavily, for example, on the failure to define a technical communication standard, which the market has since remedied by moving toward APIs.

From the compliance point of view, it must be said that Italy has worked very well, with a useful, timely and also cost-effective system design."

A strategic issue, not a technological one

PSD2 has been quite effective in a number of areas, most notable among them being the blow to fraud, which has been greatly reduced.

Instead, for phase two of open banking, we look to PSD3, but it is still a regulation: it can force interventions and technology standards. But not guide banking strategies.

"The customer is won over in several ways," Gatelli continues. Technical shortcomings have certainly caused, over the years, a less-than-stellar user experience and a high dropout rate, especially following repeated rejections by the banks holding the data.

But we also find customer disinterest in sharing their data for a service in which they perceive no added value. And this is a strategic issue, not a technological one."

How to create value in the open paradigm

So the issue is not how to make the open banking machine work properly, but in what direction to make it go.

"One must ask what the customer is interested in," says Gatelli. The aggregation of transactional accounts and data, by itself, is not a value. It becomes one if it enables a product, service or experience to be obtained more smoothly or effectively.

I'm thinking of smart lending, for example: telling the customer that they can finance a purchase online in seconds if they share their bank account information puts the emphasis on the target rather than the instrument."

The consumer consensus dashboard.

And this sharing needs to be conscious. PSD3 not surprisingly introduces some elements that give citizens more control over what data they are making available to which companies and how.

"Beyond some technical aspects to standardize the transmission of data," Gatelli notes, "an important innovation is the introduction of a requirement to set up an 'authorization dashboard' for customers, where they can provide information on which third parties have access to the current account, the purpose, the period of validity of access and so on.

This is a big step forward from an awareness perspective, in line with the European regulatory action of making users aware of what happens to their data.

BigTech, such as Google or Amazon, already offer similar dashboards that tell us what data we are sharing and why."

From transactions to investments: the open perimeter expands

Also contributing to putting the customer at the center, developing services capable of bringing him or her real added value, will be the enlargement of the entities obliged to grant access to customer data, at his or her request.

The perimeter of open banking, now increasingly open finance, is set to include SGRs, insurance companies, pension funds, "and all those entities that follow the financial life of the customer," Gatelli continues.

It is no longer just about transactions and credit, but also about investments, insurance coverage, assets owned. A true map of the customer, their propensity to save and invest, but also any protection gaps.

This opens up the possibility of structuring much more relevant advice for all client segments."

The potential of open data

The FIDA Financial Data Access Regulation thus opens up the possibility of creating novel services and experiences in which finance is pervasively embedded. 

"This open data model is already a reality in the digital economy," Gatelli notes, "where we could potentially also consider data from utilities, telcos, retail, and the smart city to create synergies that generate value for the citizen.

We could integrate financial services within many compartments. Think, for example, of an electricity supply contract for a second home: consumption data makes it possible to identify how much that home is used, at what times and how often, to perhaps package a tailored Home policy. And thus intercept a need of which the customer is, perhaps, not even aware."

Banking and insurance in the everyday life of consumers

Thus, countless opportunities to provide innovative services, in which the banking and insurance component is a link in the value chain, can emerge in the everyday life of every customer. And which, above all, bases its proposition on the perceived usefulness of the customer, "and not on messages that we know do not work, think of the difficulties in communicating the need to adopt forms of supplementary retirement provision," comments Gatelli.

A reversal of traditional supply and demand logics. In which we start with customer data, even in aggregated and anonymous form, to package a product.

Let's stick with the previous example of electricity consumption, but think about a main home: a possible Home Policy can offer customized conditions to the single professional who spends a good portion of time at work, as well as to a family of four."

The challenge is to use data like BigTech

The final landing is the quantum leap toward the behavioral analytics that is at the heart of the personalization now offered by digital giants such as Amazon, Spotify or Netflix. Something that the data banks have always held, such as transactional data, do not allow.

"From current account transactions I can see how much a family spends on electricity," Gatelli exemplifies, "but I know nothing about the characteristics of that consumption.

Frequency and timing of use, or whether there are peaks at certain times, and so on. Big digital brands already use this kind of information to suggest a product to buy, a movie to watch, a song to listen to, or content on social.

This approach, carried within banks and insurance companies, would allow a huge improvement in the level of personalization of product and service offerings to the exact needs of the user, even for the Retail segment."