Open Finance: The U.K.’s Next Open Banking Chapter

First, a quick recap of the Open Banking initiative. Under Open Banking, smaller financial services players – such as startups, challenger banks, and FinTechs – can more easily access consumer data and financial information from banking transactions previously held by traditional banking players. The goal was to encourage greater competition in the financial services market, boost product innovation, enable more informed financial decisions for customers, and encourage consumers to exercise greater control over how their data is managed.

What is Open Finance?

The original Open Banking initiative applies to retail banking products. Open Finance extends the Open Banking principle to investment-based financial products. These include savings accounts, mortgages, insurance, and pension accounts, to name just a few. Under Open Finance, customers can agree to share their financial data using trusted APIs to access broader services such as financial advice and wealth management.

Open Finance is designed to make it easier for FinTechs and smaller financial services players to access customer data in order to develop new products and services. But the initiative can also create new challenges. As smaller players seek to launch new products and offerings in new markets, they face threats from fraudsters seeking to take advantage of their potential inexperience in financial crime prevention.

More players entering the financial services market means customer data will be distributed across a wider array of players. As a result, it will be increasingly challenging for FIs to get a complete view of their customers’ activities. Additionally, open APIs could potentially provide fraudsters with new pathways to access banks and customer data.

That’s why it’s important to assess the risks that an Open Finance landscape presents.

6 Open Finance Tips for Banks and FinTechs

The U.K. market has both real-time payments and digital enablement at its centers. Like other financial initiatives that came before it, Open Finance has the potential to bring significant benefits as well as disruption to financial institutions and FinTechs across the U.K. 

Legislation to propose a new Open Finance Framework is expected by mid-2022. That’s why banks and FinTechs should address the key concerns that Open Finance will create as early as possible.

Know Your Weaknesses

Open Finance gives payment providers and FinTechs an opening to offer more financial products and services. This creates an opportunity to innovate deliveries of mortgages, pensions, wealth management, and insurance, to name a few. FinTechs don’t rely on legacy banking technologies – unlike traditional banks – and have greater flexibility to pursue innovations in these markets. 

But the reality of this development is new players can participate in these markets – even if they lack prior experience. This experience gap creates an opening for fraudsters to take advantage. Organizations that are just getting into new markets like pensions, retirement accounts, or savings accounts need to assess their vulnerabilities and prepare accordingly to anticipate and prevent fraud threats.

Do Your Research

Financial services providers taking on new endeavors under the Open Finance initiative have an obligation to their customers and stakeholders to understand the industry in which they want to operate. Before pursuing a new venture simply because Open Finance makes it easier to do so, consider consulting industry experts first. Understanding the risks of new ventures will better prepare FinTechs and other financial organizations to understand what fraud risks pose the greatest threat, why they exist, and how to prepare for them.

Don’t Wait for Threats to Become Issues

Developing an understanding of fraud threats is the first step to preparing for fraud attacks before they occur. Think of the fraud threat as a leaky water pipe in a ceiling. You’ll want to fix the leak quickly before it leads to a more serious issue, such as the pipe bursting, causing water damage. The same goes for fraud. If your FI is seeing a rise in APP, ATO, or money mule activity, you’ll need to address it immediately. Tackling potential fraud vulnerabilities before they can morph into larger issues will protect your FI from financial exposure and reputational risk down the road. 

Assess Your Product’s Risks

As banks, FIs, and FinTechs release new products, it’s important to evaluate emerging risks. Underestimating or downplaying potential risks can prove costly if the assumptions are proven wrong. That’s why it’s essential to both assess potential risks and potential fraud losses should those risks develop. Preparedness is the most effective defense against unknown threats. Update your product risk assessments to identify previously unknown vulnerabilities. 

Help Your Industry Improve

The Open Finance era should create new areas of competition for the financial services market. It’s more likely now that customers will consider switching or reducing their dependence on traditional banks. With new competitors active in the market, all players need to remain committed to building the industry’s collective intelligence. Newcomers to the financial services scene should consider joining trade organizations or industry non-profits like Cifas. Working with these organizations enables businesses to more easily share knowledge and insights that will ultimately help keep customers and sensitive data secure while increasing revenues.

Keep an Eye on Regulations

It’s also important to remember that Open Finance will not be the last move by regulators. Regulations like Open Banking and PSD2 are designed to create more competition in the industry and bolster innovations in financial technology that ultimately benefit consumers. However, the reality is these regulations often don’t play out as expected. Look at the anti-money laundering (AML) landscape. The latest community directive – AML6 (or 6AML) – went into effect this month. It is designed to make it harder for criminals to launder money or fund illegal operations. Even more AML regulations will likely come down the pipeline eventually. 

FIs and FinTechs need to understand that regulations change constantly and prepare to respond accordingly. As organizations build their defenses, they should anticipate that they will need to change in a few years. Make sure you don’t hard-code your fraud defenses as you build them. Adapt to new fraud and regulatory realities as they develop.

How can fraud teams make a compelling business case for their fraud prevention investments? In this on-demand webinar, Demonstrating the True Value of Fraud Prevention, risk leaders from MoneyLion, MissionLane, MRC, Sony, and Arkose Labs dive into how to illustrate the true ROI of fraud prevention.