Open finance: How do we place customers at the centre?

This blog post is based on an edited extract from our book, Customer-centric Innovation in Finance:  Leveraging Human Insights to Drive Product Innovation in the Digital Age, by Erin B. Taylor and Anette Broløs (2024, Kogan Page). 

It is my pleasure to have the opportunity to discuss open finance at both the Kinfos Open Banking and Customer Experience Leadership Forum and at Finovate Europe. Personally I am very happy that customer experience is part of the discussion.

Open finance and the customer perspective

Open banking has developed very much out of practitioner and regulator expertise, and so it is quite focused on supporting increased financial competition and innovation. While the end game is, of course, increased customer choice, the customers as part of the development are sometimes overlooked–or perhaps taken for granted.

In our book we argue that while innovation should definitely be inspired by technology and organizational potential, it should be driven by customer needs.

A recent article by Briones de Araluze and Cassinello Plaza, described open banking as an ecosystem bringing together customers (as data owners), financial institutions (as data custodians) and third parties (as data users). 

The article also finds that the customers’ perspectives are under-represented–or under-researched in relation to open banking, which is perhaps not surprising as the literature has been driven by practitioner strategy and regulatory issues.

Customer benefits are considered to stem from faster innovation and stronger competition between financial service providers, including the appearance of fintechs offering accessible services to previously underserved customers (whether consumers or businesses). The customer potential following open banking ecosystems is discussed in related areas such as embedded finance and financial inclusion, while the protection of customers against risk is discussed within security and data privacy. 

It is, however, not yet clear how open ecosystems change the financial services offerings to specific customer groups, how such solutions fit customer preferences, or how they are used by customers. In the following we dive a little further into the findings on data privacy, embedded finance and financial inclusion. 

Data privacy

A very important part of our digital society–not only in finance–is the right to own, share and correct data. The right to privacy regarding personal data as well as the right to have data corrected or deleted are main pillars in modern regulation. The European regulations for both payments (PSD2) and financial data more generally (FIDA) focus on allowing customers to share data securely on request.

As described in the article above, we still know little about what customers would like to share, when they would do it, and how. The flipside of this is the question of what data a customer actually owns and can share. The PSD2 requirement is fairly simple: it is based on access to transaction data and transaction initiation, but the draft FIDA regulation identifies a broad set of personal and financial data collected and processed by financial intermediaries. 

In his 2017 book, Andreas Weigend takes a positive view of extensive data sharing on the condition that sharing is the customers’ decision and that there is transparency in the use of data - derived data is included. But we still lack knowledge about customers' likelihood to trust the custodians of their data, including processed data.

Embedded finance

An immediate result of access to share customer data is the development of integrated financial solutions, or embedded finance.  

Fintechs and retailers, for example, are now providing customers with types of credit that compete with existing credit card solutions. These are the so-called Buy Now, Pay Later (BNPL) solutions. Their uptake is driven by changes in customer habits, including customers’ growing desire for seamless solutions in finance. The consequence for financial services is a downward pressure on the prices of particular services, such as payments and credit, as well as the integration of financial services in the total shopping experience. But diving deeper in our new book, we arrived at  contradictory findings.

In our 2022 study of BNPL services in the United States, we learned that these solutions were developed to create easy shopping experiences for younger cus­tomers, including a low-cost credit option that did not require users to have a credit card or a traditional credit score. We also noticed that BNPL services were often described as a win–win–win solution, bringing benefits to the customers (‘free’ credit), the provider (more lending business) and the merchant (higher sales and greater cus­tomer loyalty).

To understand how users see the benefits of BNPL, we carried out digital ethnography of several user groups of different kinds, some of which were started by the providers and some run entirely by users. One of the first things we observed was that the vast majority of the groups’ members were women. The groups provide mutual support for women who are trying to meet shopping goals and smooth con­sumption, or when self-indulging to buy a new dress or cosmetics. The women were of different ages, not only young people.

The next thing we observed was that people would turn to the groups when running into pain points such as a lack of customer service. Members would ask each other for help, often successfully. Members’ posts almost invariably attracted several comments from other members, who would present solutions or alternatives.

Our analysis of these discussions made it clear that customers view BNPL services as being quite distinctive from each other, and combine multiple ones to achieve their shopping and financial goals. Rather than simply choosing a BNPL service based on whether a merchant offered it, their choice of BNPL providers is dictated by a wide range of push and pull factors. A customer might use one BNPL service over another because it gives them a higher credit limit, lets them buy a specific item like a gift card, or because they have technological issues with another BNPL service. 

From the consumer’s perspective, BNPL ser­vices are not at all homogenous; they form a varied and complex landscape. This indicates that consumers strive to get the most out of available offers. 

Our findings also indicate that consumers fear run­ning up debt and prefer inexpensive and transparent credit. We were particularly surprised by the clash between our findings and the de­scriptions from experts and providers of customer free credit and merchant loyalty. We had the opportunity to speak to one expert at a major credit card company who expected that customers would be loyal to one BNPL provider, rather than combining several of them.

This means that there is still much to be learned about customer advantages and preferences when it comes to the uses of open finance. The need to do customer studies will grow as more data is involved and as we move into new areas such as, for instance, retirement planning, health care, energy, agriculture in low income countries, and more.

Financial inclusion

Finally, a case has been made that open finance solutions will contribute to financial inclusion. The general argument is that highly innovative and competitive environments are likely to provide offers to unserved or underserved groups. More specifically, this could be the result of new providers offering low-cost payments, cheaper remittances and new types of credit to particular groups. Again, this is an area that is under-researched, although we see studies developing particularly in the Global South to understand how the distribution of integrated services can help the rural poor.

However, there is some evidence of the impact of financial inclusion, understood as access to financial services spanning from basic bank accounts or mobile payment solutions to credit, insurance and savings. We discuss some of these in our new book.

Financial inclusion can have many positive impacts on people with low incomes, but they are not always what might be expected. Contrary to popular belief, financial inclusion has little effect on poverty re­duction. In particular, access to credit–often touted as the most ben­eficial kind of financial inclusion–has mixed effects. 

An extensive review article by Duvendack and Mader (2020) explains that while mi­crocredit certainly provides benefits to some (such as allowing people to start a business or pay school fees), it rarely lifts people out of poverty, and indeed some people get trapped in debt cycles and end up poorer. Instead, decades of analysis reveal that microsavings (ac­counts designed for small deposits) provide the most consistently positive impact, since they provide benefits with few risks.

Access to financial services can also help increase people’s incomes, either through receiving remittances or simply by making it easier for peo­ple to pay each other.

Moreover, the World Bank finds evidence that the use of financial accounts (with a bank, MFI or mobile money provider) supports the development towards broader use of financial tools including saving, borrowing and insurance. This helps people to increase their financial resilience and counteract issues of not being able to manage aspects such as unemployment, medical bills or school fees.

We would also add that financial inclusion can substantially re­duce people’s stress and make their lives easier–two benefits whose importance cannot be understated. The benefits of financial inclusion for reducing ‘transaction costs’ (usually defined as the time a person spends completing a task) have been noted extensively by researchers working in many different countries. 

Our research participants in rural Brazil particularly appreciated the arrival of the payments plat­form Pix because it meant they did not have to travel to town to withdraw cash as frequently. Saving people time and effort can greatly reduce stress because people are often juggling many different activi­ties and struggle to complete them all. This is particularly evident among people who are very poor or lack basic infrastructure such as paved roads, reliable telecommunications and labour-saving devices at home.

 Conclusion

Together these insights clearly illustrate that whether we focus on open banking literature or dive into other areas that target customer inclusion, we know too little about the customer perspective of open finance. Listening to customer experiences in different contexts will help understand how new solutions can actually serve different people.