By Kathrine Gibson - Deputy Commissioner (FSCA)
In an era of rapid technological advancement, financial innovations such as Open Finance are reshaping the financial sector, introducing the potential to expand access, usage, affordability and choice of financial services, while also presenting new risks. To support safe and innovative market development, the Financial Sector Conduct Authority (FSCA) recently released its Draft Position Paper on Open Finance.
Open Finance acknowledges the powerful role that data plays in our society, ensuring that we have control of our own personal data to generate value. Consider for example the insights and value to be derived from data that keeps track of how you spend and where. That information can be used by AI to help you budget and help you save and invest for a rainy day or life goal.
Another use case is payment companies offering “instant EFTs” by using screen scraping techniques to initiate payments on a customer’s behalf.
Critical to Open Finance is the protected sharing of data to fintechs in order to derive increasingly personalised and diversified financial services. It builds on the global Open Banking phenomenon that was pioneered in the UK and EU. Countries around the world, including Nigeria, Mexico, Brazil and even the traditionally laissez faire United States, are exploring or have implemented Open Banking and Open Finance. Their approaches differ, but all these countries are working towards a similar goal, which is to use technology to unlock greater competition, efficiencies and financial inclusion.
While Open Finance may not yet have a defined market presence in South Africa, the scale of this innovation has grown exponentially, making its presence felt. This is a global trend, as computing power, data storage, data sources and data per customer have ballooned. This provides convenience but occurs in a regulatory vacuum, potentially compromising customers' data privacy and security.
The absence of a tailored regulatory framework for Open Finance therefore introduces risks for financial institutions and their customers, who may not realise that their data is being accessed or the risks involved. At the same time, valuable data remains concentrated within large financial groups, inhibiting broader benefit.
As the financial sector undergoes significant changes due to digitalisation and other technological advances, it is important to ensure that these advancements do not leave consumers behind.
Many South Africans still rely, as recent FSCA study of consumer sentiment showed, on cash as a means of payment and have limited experience with new technologies. This exacerbates the risk of exclusion, limited understanding of new offerings or, in the worst case, becoming a victim of unscrupulous operators and fraud. Therefore, the FSCA’s Draft Position Paper on Open Finance aims for sustainable, inclusive and trusted innovation by:
- Licensing and supervision of fintechs that provide financial products and financial services – a fintech that operates like a bank or insurer should be licensed as one.
- Oversight of fintechs providing Open Finance services in a way that protects consumers but is not overly onerous on the business – overly onerous regulation increases costs.
- Setting clear standards around consumer consent for data use that build on existing data privacy legislation to ensure consumers stay in control and are also informed of risks.
- Setting other requirements to protect consumers, relating to disclosure that is commensurate to levels of digital literacy and experience, cyber security, and complaints, providing recourse channels for consumers should things go wrong.
- Building consumer awareness of Open Finance risks, rights, and responsibilities.
These measures are important to ensure consumers have the knowledge and confidence to realise the potential of Open Finance.
The FSCA also recognises that Open Finance is a nascent financial innovation, so approaches it as an area which requires evolving regulation. This allows us to balance market conduct and consumer protection without overly stifling innovation.
Although the payments space is booming with local innovators aiming to expand financial access, challenges such as high data costs and uneven digital literacy may constrain mass adoption. However, regulated Open Finance could break open data monopolies and allow new entrants to compete with incumbents and tailor offerings to underserved groups, boosting inclusion. Such a disruption could compel large players to reconsider their business models as data sharing enables services that were previously unfeasible due to closed systems.
The FSCA’s proposals aim to create a safe and enabling environment, wherein Open Finance offers a chance to reinforce South Africa’s established reputation for world-leading banks and an expanding fintech ecosystem.
Regulators working together with the private sector alongside robust accountability mechanisms from industry, and consumer safeguards could position South Africa as a trailblazer in safe and ethical Open Finance.
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