The Financial Sector Conduct Authority (FSCA) recently conducted presentations and released a draft position paper on open finance, inviting input from the financial services industry and the public. It spells out the benefits, but also the dangers, to consumers of broadening data-sharing networks among financial services providers and related operators.

The authority defines “open finance” as “a framework to allow consumers and enterprises to access and share their financial data with third-party providers who can then use that data to develop innovative products and services with consent. Unlike open banking, which is concerned with current accounts and transaction data, open finance’s scope is much wider, affecting home loan providers, consumer credit providers, investment and pension funds, as well as general insurers and intermediaries.”

Global trend

Worldwide, open finance is a rapidly-developing trend, with consumers mostly happy to share their financial data with third-party operators in order to get better deals. Existing financial services companies have understandable concerns about increased competition from start-ups. Open finance also poses challenges to existing payment systems and credit card networks.

In its presentation, the FSCA gave examples of this global trend. In East Africa insurers are using mobile phone usage data to develop new underwriting models. And in China there have emerged new digital finance ecosystems based on data-sharing capabilities, such as WeChat and AllPay.

The FSCA lists the top six usage instances for open finance as:

Payments. Third-party providers use transaction data to offer alternative and value-added payment systems.
Account aggregation. Your various accounts are aggregated into a single interface, making it easier to manage your finances.
Alternative lending. Third-party providers aggregate your data for credit scoring, affordability analysis and providing alternative credit products and value-added services.
Financial management. Your data is aggregated in financial planning and analytical tools to help you manage and track your finances.
Insurtech. Consumer data is used to make insurance products more personalised and cost-efficient.
Digital/neo banks. New digital banks use customer data from third-party providers to offer you a broader range of services.

Regulation

In a recent article, Gabi Richards-Smith, Lerato Lamola-Oguntoye and Analisa Ndebele of law firm Webber Wentzel, said the FSCA’s draft position paper, published last week, came in the wake of its consultation and research paper on regulating open finance published in 2020.

“Open finance meets one of the FSCA's strategic objectives, as it offers an opportunity to advance financial inclusion initiatives and drive competition in the financial sector. The new market participants and enhanced range of products and services introduced by open finance will benefit competition and overall customer value.

“Many open finance offerings leverage customer data to provide innovative and personalised financial services and products, including account integration, financial management, payment initiation, alternative lending and insurance.

“Although open finance has not resulted in any notable scandals, it still poses significant risks, especially to consumers. Some of the risks include privacy and data breaches, misconduct and fraud arising from data exposure, as well as operational and cybersecurity concerns,” they said.

Consumer protection

In the paper, the FSCA makes the following recommendations regarding consumer protection and consent:

Customers have the right to give third-party providers permission to collect their data from incumbent institutions.
Informed consent: providers must visibly display their policies as well as all terms and conditions to enable consumers to make an informed decision in granting access to their data.
Ability to revoke consent: customers should be able to request that data about them no longer be used by a third party (the right to be forgotten).
Informed disclosure framework: providers should have a framework in place that outlines the various disclosure mechanisms they will use to keep consumers informed, taking into account digital literacy levels.
Transparency: customers should be able to view or know the data collected about them and how it is used.
Challenges: customers should have the right to correct incorrect or incomplete data about them held by a provider. (This is the case with the credit bureaus that collect credit-related data on you and calculate your credit score.)
Accessibility: providers should allow customers to download data about themselves.
Consumer education: providers will have to take responsibility for regularly educating consumers on how their data will be used to shape the extent of products and services they receive.

Other proposals concern regulatory oversight over providers, protection against data breaches and cyberattacks, specifications for data-sharing standards, and the provision of complaints and dispute resolution mechanisms.

Comments on the paper must be submitted to fintech@fsca.co.za by August 15. The FSCA will consider these before publishing the final position paper. Once the paper is finalised, the FSCA will implement its regulatory proposals in a phased manner. A copy of the paper is available at www.fsca.co.za under the regulatory frameworks section.

* Hesse is the former editor of Personal Finance

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