As a follow-up to the recent webinar Envestnet hosted with open banking experts around the world, we caught up with Lisa Novier, Head of Governance, Risk & Compliance at Envestnet Data and Analytics.
Envestnet claims it has been at the forefront of open banking adoption across multiple regions, including the US. In April, Envestnet D&A was recognized as a top open banking intermediary in Forrester’s “The Forrester Wave: Open Banking Intermediaries, Q1 2023” report.
As the Consumer Financial Protection Bureau (CFPB) finalizes its Dodd-Frank Section 1033 rulemaking, Lisa discussed progress in open banking globally.
She also contrasted open banking models used in different parts of the world. Additionally, she touched on key lessons learned on moving open banking forward and the upcoming open banking milestones.
Our conversation with Lisa Novier is shared below.
Crowdfund Insider: How has open banking adoption progressed in the US, and what role does regulation play in its future?
Lisa Novier: In the United States, the adoption of open banking has primarily been market-driven rather than regulatory-driven. The Financial Data Exchange (FDX) consortium has played a significant role in driving adoption by developing API specifications and promoting collaboration within the industry. Since its formation in 2018, the FDX consortium has experienced substantial growth, with 230 member organizations and more than 50 million active connected accounts. This makes the US one of the largest adopters of open banking globally.
Looking ahead, the direction of open banking in the US is focused on expanding adoption across more financial institutions. While many large banks have already embraced open banking and eliminated the use of credentials, the challenge lies in covering the vast number of consumer permissioned endpoints across the country’s numerous banks, credit card providers, lenders, investment firms, and insurance providers. Achieving full adoption throughout this diverse landscape will be a significant task.
Regulation, particularly the potential rulemaking on Dodd-Frank 1033 by the Consumer Financial Protection Bureau (CFPB), is expected to play a crucial role in the future of open banking in the US. If Dodd-Frank 1033 is implemented, we should see accelerated movement and adoption of open banking across a broader range of data providers, and timelines better defined for transitioning to open banking. While open banking is currently optional for data providers, regulatory requirements could provide the necessary impetus to move forward and standardize the provision of consumer data through APIs or open banking endpoints.
Crowdfund Insider: How has open banking adoption progressed in the UK, and what lessons have been learned from its implementation?
Lisa Novier: In the UK, the adoption of open banking has progressed since its introduction in 2018. The implementation of open banking began with a regulatory compulsion by the Competition and Markets Authority (CMA) and the legal and regulatory framework of the Payment Services Directive (PSD2) in Europe. The initial CMA order allowed third-party providers to access banking data, marking a significant shift from the previous practice of screen scraping to the use of APIs.
Over the years, the UK has been implementing various stages of open banking, with the final pieces still being finalized before transitioning to open finance. One critical milestone was the establishment of standardized approaches and a decentralized model, which facilitated connectivity and collaboration between financial institutions and third-party providers. This standardized approach made it easier for companies to enter the market and quickly build connections with the nine largest banks in the UK. In contrast, the lack of standardization in the European Union has posed challenges and made expansion more time-consuming and resource intensive.
Another important milestone was the regulatory-driven approach taken in the UK. The regulator provided detailed guidance and approval for firms to offer open banking services. This approach ensured a clear timeline and compelled banks to adopt open banking capabilities within a specific timeframe.
There have been a lot of lessons learned along the way, including the need for effective incentivization and the importance of creating a seamless user experience. Initially, the UK required reauthentication every 90 days, which created friction and led to drop-offs in customer engagement. However, with collaboration between industry stakeholders, including regulators and technology providers, a solution was found to reduce the burden of reauthentication. This resulted in a smoother user experience and increased customer engagement with open banking services.
Overall, the UK’s open banking initiative has experienced both positive developments and challenges. The standardized approach and regulatory compulsion have driven adoption and set clear expectations. Lessons have been learned regarding the importance of incentivization and user experience, which will inform the transition to open finance and future iterations of open banking.
Crowdfund Insider: How has open banking expanded into open finance in Australia, and what are the challenges and opportunities that lie ahead?
Lisa Novier: In Australia, the concept of open banking has expanded into the broader concept of open finance. The country started with open banking in July 2020, following the example set by the UK’s regulatory approach. However, Australia’s vision goes beyond banking and includes other sectors such as telecommunications and energy. The ultimate goal is to establish an economy-wide data-sharing regime that encompasses various industries, including non-bank lending, telecommunications, insurance, wealth management, and superannuation.
The adoption of open banking and the expansion into open finance in Australia has faced both challenges and opportunities. One challenge is finding the right balance between depth and breadth of adoption. The Australian government has recognized the importance of focusing on improvements in open banking before rapidly expanding into other sectors. This approach allows for a strong foundation to be established and provides an opportunity for learning and refinement, which is crucial for broader adoption across multiple industries.
Opportunities lie in streamlining the user experience and addressing privacy concerns. Australia has taken a conservative approach to consent and has implemented privacy safeguards to build trust and facilitate seamless data sharing across sectors. By maintaining consistency in the consent process and information security controls, Australia ensures that similar frameworks are applied across sectors, allowing for a smooth transition from open banking to open finance.
The scope of the Consumer Data Right (CDR) in Australia is ambitious, aiming to cover various industries and enable data sharing through APIs. The initial focus has been on data sharing in sectors like banking and energy, but plans are in place to expand into other sectors of the economy. The aim is to leverage the lessons learned from open banking and apply them to other sectors, reducing the need to reinvent the wheel and ensuring a consistent approach to policy, technology, and security profiles.
Australia’s journey from open banking to open finance involves expanding data sharing across multiple sectors. While challenges exist in achieving the right balance and addressing sector-specific risks, opportunities arise from a consistent approach to consent, privacy, and security. By building on the foundations established in open banking, Australia can extend the benefits of open finance to various industries and promote seamless data sharing within its economy-wide data sharing regime.