Following the Treasury’s recent launch of a new Open Finance taskforce, FStech news editor Alexandra Leonards speaks to HSBC’s director of Open Banking to explore why it could help to align the industry and how widespread adoption of Open Finance is possible in the next five years.
In April, the UK’s economic secretary announced a new Open Finance Taskforce to be chaired by the Centre for Finance, Innovation and Technology (CFIT). The move followed foundation work carried out by the Centre’s industry-wide coalition on Open Finance, which included a successful proof-of-concept (POC) led by HSBC.
The trial found that if the bank was given access to information from HMRC in particular – and to some extent Companies House data – it could reach a positive lending decision for SMEs in 25 per cent more cases (which would likely be rejected otherwise). Assuming all lenders were privy to the same financial data, these findings demonstrate how Open Finance could transform credit access for small businesses, lower prices, and provider greater flexibility for companies looking for finance.
The new taskforce promises to further unlock the opportunities unearthed by the POC by delivering recommendations to the UK government on how this financial data can be safely used and provides a potential gateway to tackling some of the ongoing barriers to the successful establishment of Open Finance.
Harmonising the industry
One major bank fuelling this drive is HSBC, which ultimately envisions a future in which consumers can access its services from outside of the bank. For example, it could provide a customer with the finance needed to complete a purchase via an aggregator price comparison site or in a car showroom.
The bank also aspires to create a frictionless customer experience where it doesn’t need to ask for information that has previously been provided by another company. HSBC would rather get permission straight from the consumer to access data from other sources, which could both reduce manual errors and the chance of its customers dropping out during a frustrating and repetitive data input process – one of the key benefits promised by Open Finance.
But there still exist a number of hurdles to realising this vision, Hetal Popat, director of Open Banking at HSBC tells FStech.
“The single biggest obstacle is coordination,” explains Popat, a banking veteran who has spent almost two decades working at three of the UK’s ‘Big Four’. “Open Finance only makes sense in many cases where multiple firms or organisations all choose to expose the same data at the same time so that the firms on the other side who may wish to consume that data and use it for their customer services have critical mass."
Popat adds that ultimately if HSBC is the only bank to expose mortgage or lending-related data, it won’t serve much purpose.
“You need everybody to move at the same time and in a world where everyone's got lots of things they could do – we could be investing in our online platforms, mobile banking or artificial intelligence – there's a long list of things we're all doing,” he says. “Lining everybody up at the start line at the same time is quite difficult sometimes.
“That’s why I think things like the government-sponsored taskforce are helpful because it helps firms align; first on agreeing what they're going to do, because that's important. We have to do the same thing in the same way, but it also helps us a lot in terms of deciding when we're going to do it – and that then drives real customer outcomes.”
Popat refutes any suggestion that other firms are dragging their feet when it comes to Open Finance but concedes that it might not be their most pressing matter : “I don’t think it’s fair for me to say others are trailing behind – there may well be some, but I think we might all, for good reason, want to prioritise different things.”
He continues: “Other firms might be choosing to prioritise consumer lending or mortgages, but I wouldn't criticise those choices. But if we all do different things, then it won't work. We have to find a way to collectively agree on priorities and a roadmap and then all move in the same direction.”
Despite the difficulty of aligning firms, Popat is hopeful that the new taskforce will help to support further successful work and ultimately identify what’s next for Open Finance.
Slow adoption
Popat says that some firms are already starting roll out Open Finance-adjacent services that mimic prompts used by existing apps, like healthcare platforms for example. Instead of nudging people about the number of steps they have taken that week, they let consumers know that they spent more on coffee in the current month than the previous.
While the capability is there, these services aren’t yet being adopted at great scale, with HSBC receiving feedback that in many cases consumers don’t find these nudges or prompts particularly exciting when it comes to financial services.
“It’s a relatively unhelpful data point for me as a customer,” he explains.
However, as these services become more targeted, HSBC thinks they will become a meaningful part of people’s overall financial lives. Popat predicts that their utility will vastly improve over the next two years, while in five years’ time everyone will be using Open Finance to some extent.
“I think that it’s a similar journey to physical health apps and prompts,” he continues. “When these nudges first appeared on Android and iOS devices five or six years ago, some people adopted it, others didn't, but now more and more of us are taking that for granted and the quality of information has got better because of wearables and other things that go with it.
“[Open Finance] is the same, as more information comes in and the algorithms are improved, it will become more useful to customers, and that's what we want.”
The role of AI
Financial services providers have already begun using machine learning to extract further value from data that could be poised to inform more useful applications of Open Finance, and Popat says that this is an area of focus for HSBC.
“The complexity here is that we are all different – this might be challenging because what’s relevant to one person isn’t relevant to another,” says Popat. “So, we need to understand more about the customer.
“This involves looking across a lot of different data sets; what are your borrowings? What are your asset holdings? What’s your cash flow? What’s your expected expenditure?”
He goes on to say that if a bank can access someone’s browsing history, for example, it can reveal what’s is going on in someone’s life, what they’re planning to do in the near future, or highlight worries that a bank may be able to help with.
“There are a lot of different pieces of information needed to really build that picture,” continues Popat. “And I think that's where I'm sure AI will have a role because when you have lots of data, trying to find patterns and anticipate is what the technology will start to do better, but it's going to take time to get there.”
There is likely to be some hesitancy or pushback from consumers who are protective of their privacy and don’t want to share this information with their lender. That’s where banks and other financial institutions need to understand everyone is different.
“I think you have to start with the customers who are likely to be early adopters so that you can test and learn and build,” explains Popat. “That's the only way you can make products and features that are useful as real customers use them.”
He adds: “But I think we have to recognise that there will be customers and perhaps those who are digitally vulnerable who just choose to opt out of these sort of services; those customers need service and support as well. As a firm and as a wider industry, we need to maintain existing channels of customer support, otherwise we're at risk of alienating people, which is never the right answer.”
Next steps
Following the launch of the new taskforce, Popat reveals that HSBC plans to build on its previous POC with the CFIT and play a role in the next phase of work by trying to further understand which data elements and sources are going to be relevant to improving access to credit for SMEs, whilst also exploring a commercial model for Open Finance.
“It isn’t realistic to think that institutions – whether they’re public sector or private sector – can do all of this for free,” he explains. “There needs to be a way to pay for the building and the running of all of this.
“As we’ve learned from Open Banking, running high quality APIs to deliver good quality customer outcomes does cost money and Open Banking regulations require that to be done for free.”
Popat warns that when it comes to Open Finance, this is unlikely to be a reasonable expectation in the wider UK market. He says that the industry needs to find a fair way of incentivising the sharing of information and ensuring there exists an economic basis for providing good quality services.
“We can't do everything at once, there isn't enough time in the day and then there isn’t the ability to coordinate us all doing everything together,” he explains. “But if [the taskforce is a] success, which I think it will be, then that creates the opportunity to say, right, what's next? And then in a phased process, we work through a whole bunch of areas that are really important to our customers.”
The CFIT-chaired Open Finance Taskforce is now looking at commercially viable approaches to Open Finance before considering the next steps towards rolling out agreed recommendations to the government.
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