The FSCA has published for public comment a draft position paper setting out its policy proposals on Open Finance. The paper provides recommendations in respect of how to optimise the opportunities presented by Open Finance, while managing and mitigating the risks faced by consumers.
The FSCA is part of the inter-agency Open Finance Integration Working Group, workingy with National Treasury and other financial sector regulators to understand the Open Finance ecosystem in South Africa.
Open Finance expands the principles of open banking to encompass a broader range of financial services. It involves the use of open APIs (Application Programming Interfaces) and data sharing to enable third-party developers and fintech companies to access and integrate financial information and services from multiple sources.
In traditional finance, banks and financial institutions control customer data and services. With Open Finance, individuals and businesses can give permission to share their financial data with third-party providers.
The benefits of Open Finance include increased consumer choice, improved access to financial products and services, enhanced competition, and potentially lower costs for consumers. It can also provide individuals and businesses with greater control over their financial data and allow them to leverage it for personalised financial management, such as budgeting, investment advice, and automated financial planning.
At the same time, there are risks associated with Open Finance. The FSCA’s draft position paper says the potential risks to consumers relate to privacy and the protection of personal data, operations and cybersecurity, misconduct, and fraud.
The FSCA says the ability of consumers to use Open Finance platforms and technologies relies heavily on their financial and digital literacy, internet connectivity, and access to reliable devices. Shortcomings in any of these aspects presents barriers to consumers’ ability to access Open Finance opportunities, which may disproportionately affect marginalised communities.
In addition, Open Finance may open the door to anti-competitive effects if certain providers are excluded from the data-sharing regime, the Authority says.
The draft position paper says Open Finance can encourage financial innovation, support financial inclusion and the financial resilience of customers, and promote competition by enabling new market entrants to compete fairly with incumbents.
A common example of Open Finance in South Africa is account aggregation, where a customer’s bank accounts, credit and store cards, investments, and loans held at different financial institutions are linked, enabling the customer to view their money in one place.
Another example is instant electronic fund transfers, where third party automates consumers’ payment to e-commerce stores and provides immediate confirmation of payment to a store so it can dispatch the goods or services purchased.
Although customers share their data by providing their online login credentials to third-party providers (TPPs) to access financial services, most TPPs are not licensed as financial institutions, and therefore lie outside the FSCA’s regulatory framework, the position paper says.
In addition, there is no tailored regulatory framework for financial institutions already participating in the Open Finance and data-sharing ecosystem, which means that the risks specifically associated with data-sharing and data use have not been addressed.
“This brings considerable risks to customers, as providers are not compelled to operate within agreed governance and operational norms or pursue a customer-centric approach. Consumers have no right of recourse when things go wrong,” the position paper says.
The FSCA’s proposed regulatory framework seeks to address these challenges.
The Authority says it favours an incremental approach to the implementation of Open Finance, where prioritisation may focus on particular sectors and be shaped by aspects such as relative market size, stakeholder appetite, and the anticipated positive impact.
“The effective implementation of an Open Finance regime will require collaboration and co-ordination across the financial sector and other regulators, to ensure effective oversight, while limiting the regulatory burden on regulated persons,” the position paper says.
The FSCA has invited stakeholders to provide written comments on the policy proposals in the draft position paper. Comments must be sent to fintech@fsca.co.za by 15 August 2023.
Well with the level of criminality in SA this is perfect.