If you look at the “open” initiatives being considered, investigated, researched, or implemented around the world, the most prominent and advanced are building on open banking under the banner of “open finance.”
Open finance and APIs
Open finance is often used as a catchall term for any offering related to financial services that can be exposed or offered via an API. This covers many areas including access to all accounts (not just payment), industrywide consent management, and the nebulous topic of “smart data.”
It naturally builds on open banking and the practices, standards, and technologies established during the first phase of its development that is considered fit for future initiatives.
This collateral has potential benefits for all sectors of financial services. None more so than initiatives that seek to improve the lives of citizens by giving them products and solutions that make managing their money easier.
Such providers include government and their representatives, with one such body in the UK being the Money and Pensions Service (MaPS).
UK MaPS and open banking
MaPS defines its mission as providing the means for citizens to “… Easily access the information they need to make the right financial decisions for them throughout their lives.”
This specifically focuses on how citizens use their money and what they do with their pensions. Besides setting a vision for how this will be accomplished through mechanisms like the UK Strategy for Financial Wellbeing, MaPS also sets out to deliver practical tools for citizens.
The headline project for MaPS is the Pensions Dashboard. The aim is to provide a consolidated means for UK citizens to view and understand the value of their pension pots including those who may have forgotten about or have no knowledge of them due to automatic enrollment.
In the words of the Department of Work and Pensions (DWP), one goal of the dashboard is:
“… putting individuals in control of their data, it will bring together their pensions information from multiple sources, which can then be accessed at a time of their choosing.”
The concept of how the Dashboard will work has already been widely publicized, as shown in this video. To be a success, such a tool should be easy to access with very few hoops for a citizen to jump through to access their pension data.
The solution should cater to all levels of technical acumen, with an experience tailored to use on any device. It will also need to deliver a digital identity for Dashboard users that all pension providers can trust with significant assurances against fraudulent use.
The approach must be feature-rich enough to ensure that all users (whether tech-savvy or not) — can enroll and assert their identity with an appropriate amount of positive friction.
Positive friction means ensuring that users who are nervous about providing personal details online are assured that they are doing something that they should be when signing up for the Dashboard, with enough “signals” to give them confidence. Such an approach is vital to achieving the critical mass of users vital to making the project a success.
By providing an easy-to-use solution, the Pensions Dashboard will help citizens become more aware of what they have and what they need to save to have a comfortable retirement.
Moreover, commentators in the industry are already hypothesizing there may be £19.4 billion in “lost” pension pots that are ripe for recovery and could make citizens’ lives easier in the post-COVID-19 era.
The Pensions Dashboard is therefore not only about providing an easy-to-use tool, but also about actively improving people’s lives. The Pensions Bill will help cast a regulatory net over pension providers compelling them to build Dashboard access interfaces. The bill is close to implementation, which will spur the market to provide the APIs required to make the Dashboard a reality.
Regardless of regulatory pressures, pension providers can reap huge benefits by buying into the opportunity to digitize their products, modernize their architecture, and provide an open platform for working with an ecosystem of new partners, ready for the world of “open everything.”
As the number of partners increases, the providers with open platforms and easily implementable APIs at the ready will seize the first-mover advantage in a new, API-based marketplace.
There is a significant opportunity for pension providers to create stickier relationships with their customers, especially with younger citizens who may unknowingly be auto-enrolled into pension schemes by their employer.
By making the question “What do I need to save for a comfortable retirement” much more pertinent for younger pension holders and delivering the tools to allow sweeping of funds into pension plans, providers can deliver a service that optimizes investment potential and maximizes customer returns.
However, such a solution obviously demands a well-designed and cohesive architecture that pension providers can readily implement. To that end, open banking offers several lessons — and the themes of open finance can help inform — to help make the Pensions Dashboard a success.
Learning from open banking
Open banking is an API-based model for banking services that have become synonymous with modernizing financial services.
The original model — proposed by the Open Bank Project over 10 years ago — is built on the provision of open APIs that provide secure access to accounts for third parties based on the explicit consent of the customer.
Such a model allows account-holding customers of a bank to share their data with companies — who most likely fall under the “fintech” banner — as they see fit.
Of course, banks need to be complicit in this model. However, open banking has not been readily adopted by banks for a variety of reasons, such as safeguarding their relationship with the customer and prioritizing other investment opportunities.
Several regulations have sought to address this situation, most notably Payment Services Directive 2 (PSD2) across the European Union and the CMA Retail Banking Investigation Order (hereafter, the CMA Order) in the UK.
The CMA Order prompted the creation of the Open Banking Implemention Entity. The entity is operationally responsible for delivering a framework for open banking on behalf of the nine largest banks in the UK. The framework includes the delivery of PSD2, the requirements of which remain UK law following Brexit.
The Department of Work and Pensions noted back in their 2018 paper that OBIE offers a vehicle for delivering on the groundwork of meeting the requirements of PSD2 in the UK and extending their remit to cover the pension dashboard.
This makes sense from a few perspectives, for example, commonality of purpose, reuse of existing assets and experience, and the consolidation of initiatives with similar goals.
However, regardless of whoever takes responsibility for delivering the Pensions Dashboard, the pensions sector can learn — and potentially reuse — much of the open API-oriented approach that the OBIE espoused and implemented by the banking industry.
Of a particular note
- A focus on defining how access to account data and services can be provided to help open the market, namely through the implementation of open APIs based on a REST-style architecture.
- The need for a common identity scheme that governed both the third party and banking participants.
- The provision of API specifications that are backed by open standards provides the means for developers to create easily their clients and server software as required.
- The ability to attempt “matching” to reduce fraud through means such as Confirmation of Payee.
These features provide for an extensible, platform-orientated approach to getting an open banking ecosystem off the ground. Moreover, they provide the means to build towards the promise of open finance. The definition of which means something different depending on whom you solicit an opinion from.
For some it has already arrived, as initiatives such as the Australian Consumer Data Right and FDX in the USA that aim to include all “stores of value” i.e., all accounts rather than — like PSD2 and payment accounts — focusing on a subset.
Others see the future as being open finance, where existing open banking initiatives are extended to incorporate not just other stores of value, but different themes and approaches outside the Open Banking gambit of open API-based banking.
For example, the FCA in the UK in its Call for Input addresses many areas that few standards or initiatives address, such as mortgages and pensions and intertwines them with themes such as “Smart Data” and AI.
Picking up on one of those concepts, Smart Data has been discussed by several UK government sources, principally the Department for Business, Energy & Industrial Strategy (BEIS) which in turn was referenced by the FCA.
Smart Data in the context of the BEIS work is heavily influenced by the work already completed by the OBIE and CMA9 for open banking and PSD2 compliance.
In practice, this is customer consent management on steroids. For example, enabling the customer to share seamlessly and revoke access to their data at both coarse- and fine-grained levels.
This applies across different sectors with parties who are not their account-holding financial institution, be that with a commercial entity such as a third-party provider or with the government to provide their income or calculate their taxes.
This is critical for the future of open everything but is piqued in open finance. Having a model that transcends the stores of value across different sectors of API Consumers is crucial for those stores of value to be aggregated to meet the customer’s needs.
A practical example relevant in the Dashboard’s context, being able to “sweep” funds from payments accounts into pension funds by using the Variable Recurring Payments feature of open banking that’s under development — via a unified payment and pension consent would give consumers real power in how they manage their finance when coupled with tools built on account aggregation.
Such holistic views across open finance are vital to how initiatives such as the Pensions Dashboard can evolve in the future.
The Pensions Dashboard is already being built and some decisions around the architecture and standards have been taken. However, MaPS and the Pensions Dashboard can take advantage of what it has already delivered under the open banking banner in the UK. Many of the themes — such as consent-based data sharing — are established practices that can be reused and improved upon to deliver the Dashboard.
Axway believes that delivering pensions solutions through the reuse of open banking provides the best chance for organizations to create solutions that allow consumers to access seamlessly any of their sources of value — payments, pensions, savings, and so on. This also provides the greatest potential for open banking to develop into open finance. For In our next post, we will look at the mechanics of the approach for the Pensions Dashboard and show how open banking can improve or enhance the solution.
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