Open finance’s data-driven approach is set to democratise credit access, offering previously underserved consumers and SMEs newfound financial opportunities, according to Centre for Finance, Innovation and Technology (CFIT). However, as its research reveals, several current limitations must be addressed to fully harness open finance’s potential.
CFIT’s first coalition of more than 50 organisations across financial services and fintech has been working to uncover the advantages of open finance, opportunities for data sharing possibilities, and confront ongoing challenges since Summer 2023. Six months later, a progress update addresses the key challenges and opportunities.
One of the primary findings from CFIT’s coalition is the profound impact of data sharing on financial outcomes, particularly for consumers and SMEs. Presently, credit decisions often rely on a limited set of datasets, leading to incomplete assessments of creditworthiness.
For consumers, credit decisions mainly hinge on just two datasets: credit rating agency data and bank transaction records. This approach leaves out millions of individuals, including young adults and gig economy workers, who may have limited banking histories, resulting in restricted access to lending solutions.
SMEs face a similar predicament with limited access to credit, as reported by the Federation of Small Businesses, where 53 per cent of small firms describe credit availability as poor.
Broadening data for enhanced access
CFIT’s coalition has made it evident that expanding the range of accessible datasets can significantly enhance consumers’ and SMEs’ access to tailored financial products. By sharing this vast array of data in a standardised format, financial institutions can make more informed lending decisions, potentially boosting lending volumes.
Endeavours in promoting open finance and improving access to financial products align with the government’s priority of supporting economic growth. This initiative also resonates with the Financial Conduct Authority’s (FCA) Consumer Duty, which underscores the importance of firms prioritising customer needs.
- Data sharing impact: Limited data sharing affects financial outcomes.
- Expand datasets: More datasets improve consumer and SME access to finance.
- Identify priority datasets: Numerous untapped datasets can reshape finance.
- Prioritise customer consent: Consent is vital in data sharing to reduce costs and friction.
- Proofs of concept: CFIT develops concepts for innovative open finance products.
- 2024 blueprint: CFIT plans to release a strategy for open finance adoption in early 2024.
The road ahead
In early 2024, CFIT plans to reveal its blueprint for implementing an open finance strategy in the UK. This comprehensive blueprint will outline a plan to achieve open finance by 2027, a staged approach to unlocking vital datasets, alignment with current regulatory priorities, opportunities for consumers, SMEs and the UK economy, and technical resources to facilitate the rollout of proofs of concept.
These outputs will empower both public and private sectors with the strategic guidance, execution plan, and technical resources required to accelerate the adoption of open finance, ushering in a future driven by smart data.