There’s no doubt that working together not only makes you less alone; it also makes you more successful.
The future lies in digital ecosystems, where several industries come together with their various offerings. Customers are right at the heart of this, having everything in view and controlling everything from there. This simple, one-stop experience is precisely what constitutes the perfect customer experience.
This is exactly what is already happening in the banking industry. Open Banking has fundamentally changed the financial sector. And this success should now be extended to more and more areas of finance. The next goal is Open Finance, followed by Open Data. And in the meantime, there’s also the topic of Open Insurance.
So, what exactly is Open Finance? How is it similar to Open Banking? What opportunities does the topic of digital insurance in ecosystems offer and what hurdles need to be overcome?
From the Banking Sector to the Financial World: Open Banking
Open Banking enables third-party providers to access and use the financial data of bank customers (with their consent) via banking APIs. Based on this data-driven knowledge, they can develop and offer innovative, user-friendly products and services.
Customers can manage accounts from different banks in a single app, for example, thanks to the range of Account Information Services. Lending is improved for both sides: end-to-end digitalised application processes are more convenient for customers, and a direct overview of their financial situation minimises the risk of default for lending institutions. Payment Initiation Services enable online shoppers to make payments by simply logging into their online banking, without having to use a credit card. Online retailers also reap the benefits of high conversion rates. In short, the advantages of Open Banking are considerable for consumers, businesses and banks alike.
It shouldn’t come as a surprise then that Open Banking has political support. The topic has been firmly pushed by the EU with the Payment Services Directive 2 (PSD2). With the apparent success of Open Banking, the attention of regulators has been drawn to the increased use of, and access to, banking data in ever new financial areas since 2018. Incidentally, banks and lending institutions that recognised and exploited the extensive opportunities of Open Banking and PSD2 early on are often in a better position today than ever before.
In its Digital Finance Strategy published in September 2020, the European Commission announced that it intends to create a framework for Open Finance by 2024 and will therefore present a legislative proposal by mid-2022. This marks a big step towards Open Finance.
The Big Picture: Open Finance
Open Finance is the logical next step and goes far beyond Open Banking. Open Finance refers to the idea of digital ecosystems that include all financial and finance-related areas. In concrete terms, this means topics such as savings, debt, pensions, investments and insurance.
The vision for this is as follows: consumers will not only be able to move money quickly between accounts; they’ll also be able to manage all their financial issues and more in one central interface. Wouldn’t that be the perfect customer experience? They could save time and effort with automated switching and renewal services, receive suitable, affordable financing offers tailored to their actual needs and get customised debt advice in real time.
In Europe, the term Open Finance is commonly used to refer to any Open Banking activity that goes beyond the regulatory scope of the account access rules defined in PSD2. In this context, Open Finance is not limited to banks, third-party providers (TPPs) or regulated companies.
The distinction between Open Banking and Open Finance isn’t a clear one. Instead, it’s probably best to imagine Open Banking as a puzzle piece within an Open Finance puzzle.
- API providers (ASPSPs): Open Finance APIs can be provided by other types of account holders, such as insurance providers, pension funds and asset managers
- API clients (TPPs): Open Finance APIs can address different clients, such as TPPs regulated by a national competent authority (NCA) pursuant to PSD2 or organisations not regulated by an NCA
- Security: Open Finance customer identification can use authorisation numbers issued by an NCA, eIDAS certificates and/or scheme lists
- Contracts: Open Finance APIs may require commercial contracts between the API provider and API client
Open Finance for Insurance: Open Insurance
Open Insurance can also be thought of as a piece of the puzzle that makes Open Finance possible. But this is by no means a small piece: the emergence of digital ecosystems for the entire insurance sector has the potential to fundamentally disrupt the industry. This could pose a threat to established companies in this segment, or it could represent a great opportunity. That is, if innovative insurance companies build their own ecosystems or join successful ones.
There is no still no standard definition of Open Insurance. However, one component will certainly be the mandatory disclosure of personal data, always assuming that the express consent of the consumer has been granted (keywords: PSD2 and data sovereignty).
This is also the definition of EIOPA, the European Insurance and Occupational Pensions Authority. It goes further to say that Open Insurance includes a broad exchange of information about personal and non-personal data via APIs between various players in the insurance market. This takes place in the back office, and is therefore not directly visible to consumers. For example, this could be the interaction between an insurer and intermediary or other outsourcing partners (including IoT providers).
What Are the Benefits of Open Insurance?
Open Insurance offers innovative insurers the opportunity to serve their customers in an even better and more tailored manner, to optimise their products and services and thus boost customer satisfaction and loyalty. At the same time, insurers can tap into many new revenue streams to increase their sales. Open Insurance facilitates efficiency, payment rates are high, new partners can be acquired and many more consumers can be reached.
Obstacles, Risks and Challenges of Open Insurance
Privacy and consumer protection concerns that may arise in connection with Open Insurance have not just been an issue since the Open Banking era. Regulators will be required to clarify who can access what data, how much detail can be seen, and the conditions for such access. Some are concerned that all this could hinder innovation in the sector.
Regardless of this, it’s highly likely that the players in the insurance industry that manage to establish a successful ecosystem will become the standard go-to marketplace for data and services. Open APIs will also allow others to dock here. As an infrastructure FinTech with a plug-and-play API solution, FTS is an enabler of ecosystems and Open Finance.
A prerequisite for the success of Open Insurance is a willingness to open up data resources and share them collectively. Insurance companies are sitting on a wealth of data that has been largely untapped to date. What they proactively do with it, or not, will be decided now.
The European Commission as a Driver of Open Finance
Recent EU policy initiatives such as the General Data Protection Regulation (GDPR), the revised Payment Services Directive (PSD2), the European Commission's Data Strategy and Digital Finance Strategy (DFS) all validate the importance of data-driven innovation. Data streams within the European Single Market should be allowed to flow more freely – not least in order to keep up with China and the USA and to prevent the EU from lagging behind Alibaba, GAFA and Co. when it comes to data.
The European Commission’s Open Finance framework will build on horizontal regulatory initiatives such as the European Data Strategy, the European Platform Regulation, and the upcoming revision of PSD2, which aim, among other things, to improve access to and the use of data in the EU.
Where All This May Lead
Here’s the vision: we’re heading towards a data-driven world in which all ecosystems (utilities, health information, telecommunications, banking, and more) are connected. And the stage is set now that Europe’s data strategy is also pursuing this goal. So those who start curating their ecosystem now will be able to enjoy rapid growth along with the others in the ecosystem.