Regulatory changes coming to SA’s financial services sector offer opportunities for Open Finance

The financial sector is in the process of going through two major legislative reforms. The Financial Markets Act Review is currently underway. The purpose is to strengthen the respective roles of the Financial Sector Conduct Authority, the Prudential Authority and the Reserve Bank. It will, amongst other things, broaden the scope of coverage of financial markets legislation, be inclusive rather than exclusive and strengthen and increase the oversight responsibility of South Africa’s regulators of financial markets. It will play a critical part in shaping the responsibilities and approach of South Africa’s regulators overseeing financial markets in future.

It’s within this background and context that FSCA developed the Financial Services Conduct Authority (FSCA) Regulatory Plan (1 April 2022 – 31 March 2025) to support it in managing and navigating how it carries out the development of an updated regulatory framework in line with its strategic objectives over the course of the next three years.

In addition, the Conduct of Financial Institutions (COFI) Bill will reshape the future conduct regulatory framework by consolidating the conduct of financial sector laws into a single piece of conduct legislation and will also bring a broad scope of new activities within the conduct legislative framework. 

Part of this technical work relating to the COFI Bill involves formulating policy proposals regarding Open Finance. The FSCA, therefore, published a Consultation and Research Paper entitled “Regulating Open Finance” that covers Open Finance activities as they relate to financial activities defined in the COFI Bill. It includes a survey that reached out to 70+ companies ranging from upstart fintech firms to large incumbent financial service providers. The recommendations identified seek to enable Open Finance through the Cofi Bill. 

Defining Open Finance 

Open finance is a framework that allows 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/transaction data), Open Finance’s scope is much broader. Banks and neobanks, fintechs, telcos, big tech companies and insuretechs can use open finances in various scenarios, whether for payments, alternative lending, account aggregation and personal and business financial management. 

Open finance gets enabled by technologies such as Open APIs, Screen Scraping, Cloud Computing, Big Data and Artificial Intelligence.

A Growing Global Trend

There has been a global shift in how consumer financial data gets treated to expand the scope of financial services. National Treasury’s regulatory stance on open finance is “that customer financial data belongs to the customer who therefore have the right to give consent for that data to be shared with licensed third-party financial services providers”.

Open finance is growing as a trend because it enhances what financial services can do. Customers are increasingly willing to share their data for better financial offers. Similarly, customer financial data sharing is increasingly taking place across the globe. 

Studies show that 63% of customers are willing to share their financial data with a competitor to get a better deal. In addition, 75% of Financial Services Providers anticipate that open finance will lead to increased competition.

Open Finance use cases 

• In Payments, for example, consumers use third-party providers to access their bank accounts and make payments to merchant’s bank accounts, with consent and authentication. 

 Account Aggregation

• Customer data sourced from incumbent financial service providers (FSPs) is used by third-party providers to aggregate accounts into a single interface, making it easier for customers to manage their financial services. 

Open Finance in Financial Management

• Third-party providers use customer data sourced from incumbent FSPs to offer personal and business customers financial planning and analytical tools to assist customers in managing and tracking their finances. In insurance, customer data sourced from incumbent FSPs gets used by third-party providers to help customers identify personalised and best-priced insurtech products. 

Alternative lending

• Credit scoring, affordability analysis and lending products are offered to consumers from third-party providers by sourcing customer financial data from financial service providers.

Technologies that facilitate open finance 

Open APIs:

• Open APIs that external partners and developers use to build innovative apps and products. 
• Open API enables banks to exercise greater control over the type and extent of shared data and more secure access management and monitoring.
• In addition, open APIs provide advantages for third parties and customers, including potential improvements to efficiency, data standardisation, customer privacy, and data protection. 
• Challenges regarding open APIs include the time and cost to build and maintain APIs; 
• There is a lack of commonly accepted open API standards in some jurisdictions; and 
• The economic cost for smaller banks to develop and adopt open APIs is cited as another challenge.

Screen Scraping 

• Screen scraping is using automated scripts to collect displayed data elements from one application so that another can use the data. 
• Scraping from online platforms generally requires using customer credentials to log in and access the data as if the screen scraper was the customer. 
• Screen scraping can undermine a bank’s ability to identify fraudulent transactions, as banks cannot always distinguish between the customer, data aggregator, and an unauthorised third party logging in and extracting sensitive data. 
• Screen scraping doesn’t allow customers to control the scope and duration of access. 
• Screen scraping may violate the terms and conditions of customer accounts at financial institutions.
• However, screen scraping, when practised by responsible parties, is a viable mechanism for data access with reasonable control for security and operational risk

Recommendations on the way forward

The FSCA convened an Intergovernmental Working Group (IFWG) that included the Financial Intelligence Centre (FIC), the South African Reserve Bank (SARB), The South African Revenue Service (SARS), National Treasury and the National Credit Regulator. The IFWG produced several recommendations regarding the proposed regulatory framework for Open Finance, which included:  

• Before consumer financial data is shared, informed consent between the consumer, financial service provider and third-party provider needs to have been obtained. 
• Customers should know how their financial data is collected, shared and used.
• Open Application Programming interfaces (Open APIs) are proposed as the standard mechanism for data sharing in an Open Finance context.
• It is recommended that a liability framework gets introduced to hold financial service providers and third-party providers accountable.
• It is recommended that financial service providers share consumers’ financial data with third-party providers without charging a fee.

Conclusion

It is envisioned that third-party financial services providers will require a license to be able to retrieve customer financial data and develop products and services around it. 

This licensing will entail the following considerations: informed consent framework, dispute mechanisms, customer education and protection, commercial models, data transfer standards, data protection practices and data ethics frameworks. 

As the changes under open finance begin to take hold, the financial services landscape is changing, bringing substantial opportunities for economic growth and increasing and improving the scope of financial services.

Open finance will drive more change and choice for customers in the coming years than ever seen before. It will affect multiple industries and have wide-ranging customer implications, so regulators must get the regulatory framework right.