How open finance will transform savings, investments and pension services
The review of Payment Services Directive II (PSD2) and open banking is underway and many changes are expected for financial products, writes Rolands Mesters, CEO and co-founder of Nordigen.
PSD2 is the current framework under which EU consumers provide explicit consent for third party providers (TPPs) to access their payment accounts in order to receive personalised financial products and valuable insights based on transaction data. PSD2 brought with it a reformation of financial services, one that can partially be attributed to open banking.
However, PSD2 has been largely seen as the first stepping stone to a truly 'open' ecosystem for financial services.
The growth of open banking has been limited within the scope of PSD2, so transitioning to open finance would be a welcome change. Open finance is likely to transform financial services by allowing TPPs to access more than transaction data, better serving savings, investments and pensions services.
The current state of services under PSD2
Countless new use cases were unlocked with the introduction of PSD2. A recent AltFi article outlined how current fintech solutions under PSD2 can aid consumers amid the cost of living crisis, which include alternative lenders, digital mortgage financing tools, saving solutions and pension management applications.
Personal finance management (PFMs) apps, investment tools and online pension solutions have all benefited from the ease of access to open banking data.
Open banking data allows PFMs to automatically track and categorise transactions, and provide visual representations of financial movements with accurate and valuable insights on spending habits, helping consumers identify wasteful spending and budget more effectively.
Open banking has enabled autonomous investments based on users' investment profiles, improved onboarding processes, and more accurate identity verification and KYC.
Despite open banking unlocking many interesting solutions under PSD2, pensions is an area that has been left somewhat untouched. For a large number of people, pension savings are their biggest asset, therefore it is vital that they understand their contributions and how to access their funds. Without this, workers are unable to plan for their future, grow their assets or ensure that they do not lose any of their pension savings.
According to Insurance Europe, almost half of Europeans are not saving for retirement and those that do prefer to receive information digitally rather than on paper. To borrow a statistic from the UK, around 80 per cent of employees leave their pensions behind when they change their place of work, and only about half of all employees know their exact pension amounts, according to data by PensionBee. Additionally, compared to 81 per cent of those with pension pots over £250,000 only 62 per cent of those with pots up to £100,000 felt they had access to all the information they needed to make critical retirement decisions. The availability of data is currently a limitation for further growth of this sector, but open finance could be the missing piece of the puzzle for fintechs to create better solutions in the future.
Transitioning from PSD2 to open finance
In May this year, the EU Commission launched two targeted consultations, on the review of the revised payment services directive (PSD2) and the open finance framework and data sharing in the financial sector.
As they are still in early stages, it is not known if the result will be an updated version of PSD2, the creation of new legislation (PSD3) or what the open finance framework will entail. Nevertheless, based on the targeted consultations and fintech industry trends, predictions can be made on how these frameworks will transform data in different sectors.
Although open banking currently falls under PSD2, in the future open finance could be getting its own framework, allowing third party providers to access more than just payment accounts. Open finance could enable alternative data and insights from utility companies, tax authorities, insurance companies and pension providers, unlocking new use-cases and transforming industries currently underserved by PSD2.
With additional data points, PFMs could offer more accurate predictions, personalised advice and better tailored financial offerings. By flagging unnecessary costs such as utility bills or insurance policies that have increased in price, and suggesting alternative service providers with lower interest rates or overdraft fees to lower monthly spending, fintechs would provide better value for their customers. PFMs could also provide enhanced financial monitoring, and asset and liability management, enabling consumers to stay on top of their savings, spending and budgets.
The investment sector is likely to benefit from open finance by being able to generate more in-depth analytics of investments and returns from the additional data points. This would result in even greater control being given to consumers, who could track the performance of their investments more effectively and make better informed decisions.
As pensions are incredibly underserved by financial services, the transition to open finance could significantly benefit this sector by introducing solutions such as real-time pension tracking tools and dashboards that would enable consumers to connect and view all their data in one place and allow employees to consolidate old pensions across borders.
Open finance is likely to provide building blocks for the next transition to open pensions, which is for now a futuristic concept.
The new era of open finance would enable fintechs to build better products for their customers, discover new use cases and contribute towards building a financially literate society in Europe in line with Europe's Financial competence framework.
With an increasingly ageing population, there is no better time to develop digital financial services and tools for personal finance and pension management. From open finance, we can expect significant developments within the sectors of savings, investments and pensions in the near future, and this makes it worth the wait.
The views and opinions expressed are not necessarily those of AltFi.