Open Finance: Regulatory Challenges of the Evolution of Data Sharing Arrangements in the Financial Sector

Abstract

In recent years, open banking has emerged as a new form of financial intermediation consisting of allowing third-party developers to build applications and services around financial institutions. By using the financial institution’s data and infrastructures through open Application Programming Interfaces (APIs), a variety of actors – including fintech companies, big techs, and the traditional players in the financial system – can develop new products and services that can ultimately promote innovation, competition and financial inclusion while improving consumers’ experiences. The concept of open banking evolved to open finance to illustrate the possibilities when adding into the picture all types of data-driven financial products. Focusing on the opportunities potentially brought by open finance, regulators around the world have promoted the implementation of these data sharing schemes in different ways. This paper analyses the regulatory models adopted around the world to deal with open finance. Namely, the market-based approach, adopted in jurisdictions such as Hong Kong, Singapore and the United States; the compulsory approach, existing in the United Kingdom, the European Union, and Australia, and the cross-border promotional approach implemented by Singapore. The paper argues that the desirability of each model depends on a variety of country-specific factors. Therefore, none of these models can automatically be considered superior to others, even though the empirical evidence seems to suggest that the market-based approach seems to have been more successful in the development of the open finance. The paper then explains that the rise of open finance creates several risks and concerns that need to be addressed by regulators regardless of the regulatory model to promote open finance. The paper will conclude by suggesting several policy recommendations to design a regulatory framework for open finance that, considering a variety of country-specific factors, seek to provide regulators with some guidance to address the challenges of data openness in the financial sector.

Keywords: Open banking, Application Programming Interfaces, systemic risk, data protection, data privacy, artificial intelligence, data-driven finance, fintech, bigtech

JEL Classification: K2, G18, G28, G23