In the past month, the government has announced a new £360m plan to increase investment in innovation, attract talent to the UK and position the country as a science and technology superpower by 2030. A key driver of growth in technology is going to come through investment into fintech. This is a positive step in the right direction, but for the government to become a leader in digital innovation, more needs to be done.
While the government’s recent Spring Budget contained a number of developments that will benefit fintech, including increased research and development (R&D) tax credits and reliefs in new investment zones, it doesn’t adequately address some of the larger obstacles holding fintech innovation back. If the UK wants to become a tech superpower by 2030, it must take a closer look at accelerating fintech through open finance. The UK has long held the crown in open banking, but it is time to move into an open finance world to keep pace with innovation underway in financial services across the rest of the world.
Accelerating open banking: the next wave of growth
There’s no denying that open banking has had tremendous benefits, which is evident in the 7mn consumers now using open banking powered products and services. We’ve seen open banking open up access to current account data and how this can be leveraged by digitally native fintechs to drastically improve services and offerings. For example, we’ve seen a wave of neo-lenders leverage open banking to improve how they assess creditworthiness of borrowers. As a result, the industry is rethinking the full lending lifecycle, from underwriting to repayment, and new approaches to help people manage their money and build safety nets amid economic turmoil.
However, the scope of open banking still remains narrow, minimising the potential for innovation in the sector and limiting the benefits for consumers. For the next wave of growth in the sector to truly be unlocked we need to see an accelerated transition from open banking to open finance.
There are several strands to speed this transition. Firstly, we need to see the scope of regulation put in place around open banking expanded to encompass open finance. Secondly, we need a sense of urgency across industry stakeholders and government to avoid a wane in momentum. Finally, we need to build on learnings from the implementation of open banking as we implement the first two steps. This, for example, should include offering greater incentives for financial institutions to encourage uptake.
Pushing ahead with pro-innovation regulation
As part of the government’s plan to become a tech superpower by 2030, it wants to leverage post-Brexit freedoms to create world-leading pro-innovation regulation and influence global technical standards. It’s promising to see the government make such a statement. Given its ambitions to become a fintech powerhouse, the UK really can’t afford to delay open finance regulation any longer.
In the last month, Technology Secretary Michelle Donelan re-introduced the Data Protection and Digital Information Bill after it was paused in September 2022. The bill is currently going through parliament and the update reflects the progress of open finance in the UK, suggesting regulation for identity verification, smart data management of consumer information, and a UK GDPR. The bill is significant for personal data processing, automated decision making and international transfers of data which will be key for open finance to flourish, but we need to see it transition faster for the UK to retain its crown as a leader in the industry.
Currently, third party providers (TPPs) only have access to consumers’ payment accounts data. However, open finance will enable businesses and individual consumers to share their own financial data with authorised TPPs. This includes sources such as payroll, taxes, utilities, pensions, savings, and investments, among others. As the availability of data grows, so too does the potential to offer businesses and consumers more customised, personalised services such as cash flow-based lending, automated tax filing, micro-insurance, and a holistic overview of their finances – all of which can benefit them as they grapple with the cost-of-living crisis.
Enabling open finance faces certain challenges that need to be addressed, such as creating a cross-cutting consumer data right, creating a clear liability framework, broadening the licence scope for TPPs, and stimulating the market build open finance infrastructure. There has to be a fairer incentive distribution across key constituencies. Specifically, financial institutions should have more incentives to expand use cases, and share richer data sets. The regulation should not be a burden for them but rather an opportunity to evolve their products and drive innovation in the sector. If we can continue to evolve the regulation within the sector then the UK will be well positioned to not only keep its title as being “fintech-forward” but also to become a tech superpower by 2030.
