There’s a significant distinction between open and closed systems. Closed systems are isolated, while open systems can interact freely with the outside environment. That distinction is starting to play out in finance, as innovations in technology, regulations and business models are beginning to emerge as open finance. What is open finance? Building on open banking, open finance is about simplifying sharing of more layers of data to enable new financial applications. Allowing people to connect information from various services provides opportunities for more holistic and personalized offerings. Is open finance the same as open banking? While open banking specifically deals with banking information, open finance considers multiple other data sources such as insurance, investments, consumer credit and mortgages. Open finance can also integrate data from non-financial organizations that embed financial services features into their products and offerings. Open finance can potentially integrate data from all of a person’s digital economic activities. How does open finance work? Open finance is still in its infancy. The concept is that all a person’s financial information is collected in one place under the control and permission of that person. They decide what information they want to share and own the resulting data. The technology will be similar to how open banking uses APIs to simplify the integration with all the various data and services. But the exact legal frameworks, contractual arrangements, technical specifications and sharing agreements are a work in progress. Open finance as a way to transform financial services The Financial Conduct Authority (FCA) in the UK requested input on the topic and published an Open finance Feedback Statement in March 2021. It suggests: Re-use of this data by other providers would take place in a safe and ethical environment with informed consumer consent. This would timean that a financial services customer who consents to a third party accessing their financial data, could be offered tailored products and services as a result. Access would be provided by that customer’s current financial services provider under a clear framework of consent. The fantastic growth of the fintech sector demonstrates that API technology is advancing and quite capable. The global expansion of open banking initiatives points to regulators’ and lawmakers’ willingness to develop the necessary legal structures. But will people accept and participate in open finance? The Feedback points to the lessons of open banking that the “biggest single barrier to customer uptake was consumer sentiment and awareness.” Why is open finance important? If people better understand the benefits, perhaps the adoption of open finance will accelerate. Some of the promises of open finance include: Managing all financial activities from one dashboard Automating onboarding to new services Streamlining high-friction processes Accessing more financial services tailored to personalized needs Decreasing switching costs associated with moving to more appropriate or affordable services Simplifying complex financial information into more understandable views Speeding access to financial information to improve personal management or professional insights Access to reams of financial data will help power robo-advisors, advanced software that uses algorithms to provide automated investment portfolio management advice with little or no human intervention. From filing taxes to buying a house, open finance can improve financial decisions, simplify lives and help create more wealth. Open finance promises similar benefits to businesses. As the paperwork and processes of business financial management are more complex than for a person, the benefits are potentially multiplied. Beyond improving financial activities, open finance can lead to the development of new competitive services and gains in productivity. Delivering financial services with less friction and better analysis can lead to quicker and easier sign-ups, lower costs and better targeting. With significant cost efficiencies, global distribution and new regulatory outlooks that reward innovation, open finance solutions can help open up access to financial tools and information for the masses. Perhaps one day everyone in the world will be able to access services that help them create financial stability, growth and prosperity. Financial consent and trust frameworks For all the allure of next-gen fintech and new ways to create and manage wealth, the success of open finance comes down to trust: will people trust the technology in these new services? After all, financial information is some of the most valuable and sensitive data that people have, so will they willingly share it with little hesitation? The frameworks for handling financial data will need careful consideration and operationalization: What are the legal and technical standards? What are the certification, audit and enforcement practices? Who has a liability, and how is the liability shared amongst parties? What cross-border data transfers are allowable? What financial regulators are in charge of which areas, and how is there regulatory cohesion? On the customer experience side, how will the ability to access massive amounts of data be balanced with the desire to simplify financial choices? Without standardization and education, the immensity of opportunities might be overwhelming rather than enlightening: How can approval processes be transparent and fair? How can all the legal arrangements be clarified and managed appropriately? How can agents act on one’s behalf, considering all the intertwined possibilities? How can comparisons between different vendors be fairly displayed? One key driver for open finance success is digital identity. As all providers in the space operate under financial laws and regulations, fulfilling Know Your Customer (KYC) requirements are necessary. Effective identity measures built into open finance can help facilitate quick, seamless, secure and compliant KYC. One potential model for handling identity is using KYC utilities, central repositories that store KYC data and documents. While potentially offering advantages in terms of better coverage, data consistency and dissipated costs, careful consideration of the issues around sharing personally identifiable information (PII) and competitive information is necessary. Also, each financial organization has different compliance procedures and risk appetites, thus requiring a level of trust that all of the KYC utility members are performing proper due diligence. In the end, compliance is the organization’s responsibility, which is nontransferable. An open finance future Creating a workable open finance system will require significant efforts. But the opportunity is substantial, both in terms of economic growth and effect on how people use financial services. With better identity frameworks and secure ways to share financial information freely, open finance offers a path forward for continuing fintech expansion. Enabling access to financial intelligence for more people will result in more growth in personal wealth, more comprehensive economic benefits and better growth opportunities for those that embrace the model. Having the proper balance between risk and speed is vital, especially in the fast-moving world of fintech and banking. Getting accounts opened and doing business are crucial, but ensuring effective compliance and fraud prevention measures are fundamental to ongoing operations. One rapidly developing example is the opening and management of For Benefit Of (FBO) accounts. In general, an FBO account is an account held in the name of a beneficiary. For example, a trust might have an account that names a child as the beneficiary providing a legal way to hold money until they become of age. Or, multiple accounts can be set up where each account is below deposit insurance limits but are all for the benefit of one person. These types of accounts can also simplify various financial transfers such as donations and retirement planning. FBO accounts and fintech Innovative use of FBO accounts enables fintech companies to quickly offer banking-like services without the complexities and costs of getting a banking license. The fintech company has a master account with a financial institution that already has the necessary licenses, and then virtual accounts are set up for each client of the fintech. As each virtual account is for the benefit of a specific client, the fintech has no legal ownership of the account, an important legal distinction, as the bank controls the funds and the regulations fall upon the bank, not the fintech. For example, consider a U.S. money transmitter, a defined type of money service business. In terms of licensing requirements, they require both federal and state licenses. A federal license requires registering with FinCEN (Financial Crimes Enforcement Network) and following AML (anti-money laundering), KYC (know your customer) and BSA (Bank Secrecy Act) rules. Each state that the money transmitter wants to operate in requires its own license, which is a costly and time-consuming process, taking up to two years to register in all fifty states. An alternative to registering as a separate money transmitter in each state is setting up an FBO account from a licensed, nationwide, chartered U.S. Bank. The quicker go-to-market opportunity is enticing for fintech companies focused on rapid growth. From the bank’s point of view, they can increase their amount of funds and the associated fees, or investment profits, without customer acquisition costs. FBO risk considerations and controls Of course, these are complex legal arrangements, and careful attention to the exact relationship and structuring of accounts is necessary An increase in the risk profile for the bank is possible. With one bank account for the fintech to cover all of their accounts, the bank relies on the fintech to have an effective customer identification program and perform proper due diligence. If those procedures are robust and sync with the risk-based approach of the bank, then the risk profile can be similar. The bank needs to be very careful about its fintech onboarding procedures using this approach. The fintech does need to ensure that its clients are legitimate, as problematic accounts or transactions can tarnish the whole relationship. But for the bank, all the fintech activities are under one account. So, clarity from the beginning on acceptable accounts and behaviors and ongoing transparency into transactions is vital. On the fintech side, compliance procedures echoing the bank requirements will help establish the account and keep it in good standing. There’s also the need to have strong ledger controls to ensure that accounts are precise and reconciled correctly. The relationship can benefit both parties if the fintech has equivalent procedures, tools and risk-based approaches as the bank. The FBO fintech model should not bypass any risk and compliance controls but rather is about having the proper controls in place for the partnership. To that end, any fintech that wants to get an FBO account needs to have its compliance measures in place. Some KYC and due diligence procedures that would be commonly required include: Ascertain the identity and location of the customer and gain a good understanding of their business activities. When authenticating or verifying a potential customer, classify their risk category and define what type of customer they are. Ascertain whether Enhanced Due Diligence (EDD) is necessary. EDD checks can be an ongoing process, as existing customers can transition into higher-risk categories over time. In this context, conducting periodic due diligence assessments on existing customers can be beneficial. Factors one must consider in determining whether EDD is required include, but are not limited to, the following: Location of the person Occupation of the person Type of transactions Expected pattern of activity in terms of transaction types, dollar value and frequency Expected method of payment Keeping records of all the CDD and EDD performed on each customer, or potential customer, is necessary in case of a regulatory audit. Transaction monitoring to detect and understand spikes in activities, exceeding thresholds, out-of-area or unusual cross-border activities, the inclusion of people on sanction lists or other suspicious activities A fintech that wants to speed up the FBO account creation and build a successful long-term partnership should have compliance best practices such as: Robust corporate governance Clear management oversight Effective employee training Proper internal controls Accurate reporting FBO accounts are a deep connection between a bank and a fintech requiring ethical operations and careful implementations to justify the efforts. FBO as a critical fintech innovation Another fintech model that can prove insightful when considering FBOs is the payment facilitator (PayFac) approach. By using sub-accounts of the PayFac merchant account, businesses don’t need to go through rigorous onboarding and operational processes for electronic payment and processing services. The results are massive transaction volumes (estimated to be over $4 trillion by 2025) and the creation of payment giants such as Stripe and Square (now Block). Simplifying the onboarding of other financial services via the FBO model might prove to be as successful and lucrative as the PayFac approach. With proper customer onboarding, due diligence and risk management procedures, the FBO approach can drive success for banks, fintechs and their customers. Posts navigation 1 2 … 79 Next
There’s a significant distinction between open and closed systems. Closed systems are isolated, while open systems can interact freely with the outside environment. That distinction is starting to play out in finance, as innovations in technology, regulations and business models are beginning to emerge as open finance. What is open finance? Building on open banking, open finance is about simplifying sharing of more layers of data to enable new financial applications. Allowing people to connect information from various services provides opportunities for more holistic and personalized offerings. Is open finance the same as open banking? While open banking specifically deals with banking information, open finance considers multiple other data sources such as insurance, investments, consumer credit and mortgages. Open finance can also integrate data from non-financial organizations that embed financial services features into their products and offerings. Open finance can potentially integrate data from all of a person’s digital economic activities. How does open finance work? Open finance is still in its infancy. The concept is that all a person’s financial information is collected in one place under the control and permission of that person. They decide what information they want to share and own the resulting data. The technology will be similar to how open banking uses APIs to simplify the integration with all the various data and services. But the exact legal frameworks, contractual arrangements, technical specifications and sharing agreements are a work in progress. Open finance as a way to transform financial services The Financial Conduct Authority (FCA) in the UK requested input on the topic and published an Open finance Feedback Statement in March 2021. It suggests: Re-use of this data by other providers would take place in a safe and ethical environment with informed consumer consent. This would timean that a financial services customer who consents to a third party accessing their financial data, could be offered tailored products and services as a result. Access would be provided by that customer’s current financial services provider under a clear framework of consent. The fantastic growth of the fintech sector demonstrates that API technology is advancing and quite capable. The global expansion of open banking initiatives points to regulators’ and lawmakers’ willingness to develop the necessary legal structures. But will people accept and participate in open finance? The Feedback points to the lessons of open banking that the “biggest single barrier to customer uptake was consumer sentiment and awareness.” Why is open finance important? If people better understand the benefits, perhaps the adoption of open finance will accelerate. Some of the promises of open finance include: Managing all financial activities from one dashboard Automating onboarding to new services Streamlining high-friction processes Accessing more financial services tailored to personalized needs Decreasing switching costs associated with moving to more appropriate or affordable services Simplifying complex financial information into more understandable views Speeding access to financial information to improve personal management or professional insights Access to reams of financial data will help power robo-advisors, advanced software that uses algorithms to provide automated investment portfolio management advice with little or no human intervention. From filing taxes to buying a house, open finance can improve financial decisions, simplify lives and help create more wealth. Open finance promises similar benefits to businesses. As the paperwork and processes of business financial management are more complex than for a person, the benefits are potentially multiplied. Beyond improving financial activities, open finance can lead to the development of new competitive services and gains in productivity. Delivering financial services with less friction and better analysis can lead to quicker and easier sign-ups, lower costs and better targeting. With significant cost efficiencies, global distribution and new regulatory outlooks that reward innovation, open finance solutions can help open up access to financial tools and information for the masses. Perhaps one day everyone in the world will be able to access services that help them create financial stability, growth and prosperity. Financial consent and trust frameworks For all the allure of next-gen fintech and new ways to create and manage wealth, the success of open finance comes down to trust: will people trust the technology in these new services? After all, financial information is some of the most valuable and sensitive data that people have, so will they willingly share it with little hesitation? The frameworks for handling financial data will need careful consideration and operationalization: What are the legal and technical standards? What are the certification, audit and enforcement practices? Who has a liability, and how is the liability shared amongst parties? What cross-border data transfers are allowable? What financial regulators are in charge of which areas, and how is there regulatory cohesion? On the customer experience side, how will the ability to access massive amounts of data be balanced with the desire to simplify financial choices? Without standardization and education, the immensity of opportunities might be overwhelming rather than enlightening: How can approval processes be transparent and fair? How can all the legal arrangements be clarified and managed appropriately? How can agents act on one’s behalf, considering all the intertwined possibilities? How can comparisons between different vendors be fairly displayed? One key driver for open finance success is digital identity. As all providers in the space operate under financial laws and regulations, fulfilling Know Your Customer (KYC) requirements are necessary. Effective identity measures built into open finance can help facilitate quick, seamless, secure and compliant KYC. One potential model for handling identity is using KYC utilities, central repositories that store KYC data and documents. While potentially offering advantages in terms of better coverage, data consistency and dissipated costs, careful consideration of the issues around sharing personally identifiable information (PII) and competitive information is necessary. Also, each financial organization has different compliance procedures and risk appetites, thus requiring a level of trust that all of the KYC utility members are performing proper due diligence. In the end, compliance is the organization’s responsibility, which is nontransferable. An open finance future Creating a workable open finance system will require significant efforts. But the opportunity is substantial, both in terms of economic growth and effect on how people use financial services. With better identity frameworks and secure ways to share financial information freely, open finance offers a path forward for continuing fintech expansion. Enabling access to financial intelligence for more people will result in more growth in personal wealth, more comprehensive economic benefits and better growth opportunities for those that embrace the model.
Having the proper balance between risk and speed is vital, especially in the fast-moving world of fintech and banking. Getting accounts opened and doing business are crucial, but ensuring effective compliance and fraud prevention measures are fundamental to ongoing operations. One rapidly developing example is the opening and management of For Benefit Of (FBO) accounts. In general, an FBO account is an account held in the name of a beneficiary. For example, a trust might have an account that names a child as the beneficiary providing a legal way to hold money until they become of age. Or, multiple accounts can be set up where each account is below deposit insurance limits but are all for the benefit of one person. These types of accounts can also simplify various financial transfers such as donations and retirement planning. FBO accounts and fintech Innovative use of FBO accounts enables fintech companies to quickly offer banking-like services without the complexities and costs of getting a banking license. The fintech company has a master account with a financial institution that already has the necessary licenses, and then virtual accounts are set up for each client of the fintech. As each virtual account is for the benefit of a specific client, the fintech has no legal ownership of the account, an important legal distinction, as the bank controls the funds and the regulations fall upon the bank, not the fintech. For example, consider a U.S. money transmitter, a defined type of money service business. In terms of licensing requirements, they require both federal and state licenses. A federal license requires registering with FinCEN (Financial Crimes Enforcement Network) and following AML (anti-money laundering), KYC (know your customer) and BSA (Bank Secrecy Act) rules. Each state that the money transmitter wants to operate in requires its own license, which is a costly and time-consuming process, taking up to two years to register in all fifty states. An alternative to registering as a separate money transmitter in each state is setting up an FBO account from a licensed, nationwide, chartered U.S. Bank. The quicker go-to-market opportunity is enticing for fintech companies focused on rapid growth. From the bank’s point of view, they can increase their amount of funds and the associated fees, or investment profits, without customer acquisition costs. FBO risk considerations and controls Of course, these are complex legal arrangements, and careful attention to the exact relationship and structuring of accounts is necessary An increase in the risk profile for the bank is possible. With one bank account for the fintech to cover all of their accounts, the bank relies on the fintech to have an effective customer identification program and perform proper due diligence. If those procedures are robust and sync with the risk-based approach of the bank, then the risk profile can be similar. The bank needs to be very careful about its fintech onboarding procedures using this approach. The fintech does need to ensure that its clients are legitimate, as problematic accounts or transactions can tarnish the whole relationship. But for the bank, all the fintech activities are under one account. So, clarity from the beginning on acceptable accounts and behaviors and ongoing transparency into transactions is vital. On the fintech side, compliance procedures echoing the bank requirements will help establish the account and keep it in good standing. There’s also the need to have strong ledger controls to ensure that accounts are precise and reconciled correctly. The relationship can benefit both parties if the fintech has equivalent procedures, tools and risk-based approaches as the bank. The FBO fintech model should not bypass any risk and compliance controls but rather is about having the proper controls in place for the partnership. To that end, any fintech that wants to get an FBO account needs to have its compliance measures in place. Some KYC and due diligence procedures that would be commonly required include: Ascertain the identity and location of the customer and gain a good understanding of their business activities. When authenticating or verifying a potential customer, classify their risk category and define what type of customer they are. Ascertain whether Enhanced Due Diligence (EDD) is necessary. EDD checks can be an ongoing process, as existing customers can transition into higher-risk categories over time. In this context, conducting periodic due diligence assessments on existing customers can be beneficial. Factors one must consider in determining whether EDD is required include, but are not limited to, the following: Location of the person Occupation of the person Type of transactions Expected pattern of activity in terms of transaction types, dollar value and frequency Expected method of payment Keeping records of all the CDD and EDD performed on each customer, or potential customer, is necessary in case of a regulatory audit. Transaction monitoring to detect and understand spikes in activities, exceeding thresholds, out-of-area or unusual cross-border activities, the inclusion of people on sanction lists or other suspicious activities A fintech that wants to speed up the FBO account creation and build a successful long-term partnership should have compliance best practices such as: Robust corporate governance Clear management oversight Effective employee training Proper internal controls Accurate reporting FBO accounts are a deep connection between a bank and a fintech requiring ethical operations and careful implementations to justify the efforts. FBO as a critical fintech innovation Another fintech model that can prove insightful when considering FBOs is the payment facilitator (PayFac) approach. By using sub-accounts of the PayFac merchant account, businesses don’t need to go through rigorous onboarding and operational processes for electronic payment and processing services. The results are massive transaction volumes (estimated to be over $4 trillion by 2025) and the creation of payment giants such as Stripe and Square (now Block). Simplifying the onboarding of other financial services via the FBO model might prove to be as successful and lucrative as the PayFac approach. With proper customer onboarding, due diligence and risk management procedures, the FBO approach can drive success for banks, fintechs and their customers.