Future of Finance - Q2 2022

WRITTEN BY Iota Kaousar Nassr Senior Policy Advisor, OECD

Success of open finance could encourage customer empowerment and choice

Open finance is expected to stimulate competition by de-monopolising data and improving information availability, while also encouraging the emergence of cheaper and better financial products for consumers.

While the gradual evolution of data-sharing frameworks is taking place at different paces, common themes appear between countries’ approaches and experiences, and common challenges remain to be addressed.

Numerous benefits of open finance

Common objectives include fostering innovation, encouraging competition and customer empowerment and choice. Client empowerment is indeed being sought, as financial services customers possess control of their data and decide on which data they wish to provide. In some countries, customers claim that such frameworks are helping them keep to budgets, reduce unnecessary expenditures, shop around and minimise fees and charges.

Open finance could further contribute to the creation of new business models, to the servicing of previously underserved parts of the population and the offering of better customer experience and more — through closer cooperation between banks and fintechs or the emergence of new participants in the ecosystem.

Risks and the role of policy

Ensuing risks relate to inappropriate data usage and handling and other consumer risks; operational risks; threats to fair competition and even possible systemic implications for

Fintech sector aims to boost UK consumers’

financial wellbeing with new solutions

specific types of use cases. Risks will need to be accounted for and addressed by policymakers to allow for the potential benefits of open finance to materialise. As such, data-sharing frameworks will need to be built with safeguards in place to protect consumers, financial services providers and markets from such risks.

Further discussion may be warranted on how access to financial customer data can be ensured responsibly and safely; how liability should be attributed and what other consumer safeguards need to be in place (eg. around consent); or whether there is a need to support the development of technical infrastructure that will promote data interoperability without undermining the technologyneutral approach to regulation that Organisation for Economic Cooperation and Development (OECD) economies endorse.

Building trust in open finance ecosystems

The success of open finance-type of frameworks will — to a large extent — depend on user uptake. This, in turn, will depend on the level of trust that consumers have in such frameworks, as well as on the usefulness of the products/services built based on data-sharing.

Project Manager: Henry Fuller henry.fuller@mediaplanet.com

WRITTEN BY Janine Hirt CEO, Innovate Finance

Fintech has revolutionised the way we access and use our money. Digital tools can help us better track our finances and make more informed decisions about our financial wellbeing.

The UK fintech industry has positively changed the lives of consumers and businesses by making financial services more accessible, more inclusive and more democratic. Today, 80% of adults in the UK are using at least one fintech tool on a regular basis. Moreover, fintechs account for more than 55% of the SME lending market in the UK.

Financial wellbeing and the cost of living crisis With the cost of living crisis

affecting millions of households across the country, there is a renewed focus on how financial technology and innovation can support us all during these difficult times.

Plum, Zopa, Snugg and Minna Technologies are just a few examples of fintechs that are helping individuals and businesses better understand, grow and manage money in an easier, cheaper and more transparent way. Their solutions are enabling us to prepare for and better navigate through scenarios such as increased energy costs and interest rate fluctuations.

At Innovate Finance, we have recently launched ‘Wired Differently: Innovation in Finance.’ Produced by BBC StoryWorks, ‘Wired Differently’ is a new series of short films showcasing the incredible stories of innovative fintechs across the world. The series highlights the groundbreaking work fintech entrepreneurs are doing to shape the future of financial services by putting customers back at the centre of the proposition.

Creating an inclusive and accessible financial services ecosystem

By focusing on the consumer, the world-leading UK fintech sector has continued to grow from strength to strength. To continue this forward momentum towards a fairer and more democratic financial services system, industry, government and regulators must work collaboratively to fully unlock the power of financial technology and innovation, and enable the sector to deliver even better outcomes for consumers with new solutions.

Read more on Shifting from Open Banking to Open Finance: Results from the 2022 OECD survey on data sharing frameworks at doi.org/10.1787/9f881c0c-en

Today, 80% of adults in the UK are using at least one fintech tool on a regular basis.

smart financial decisions

Businesses face increasing pressures in maintaining or maximising profitability. However, modern fintech can simplify time-consuming practices and provide greater visibility while saving money.

With economic instability over the last 12 months, it’s no longer enough to focus on short-term profitability and growth. Finance teams must engage in conversations with senior stakeholders earlier, insists Karen Ko, Senior Finance Director of business spend management solution, Pleo.

money in order to secure their path to profitability. With insights gathered from such data, they can engage in predictive analytics.

Control for finance decision-makers and employees

WRITTEN BY Angelica O’Toole

Their recent report, with insights from over 3,500 decision-makers across Europe, shows that 25% predict that inflation will have the most negative impact on operations. Another 24% expect it to be high energy bills and 22% think it will be the high cost of goods, materials and services.

Financial visibility with data and predictive analytics

With costs skyrocketing, decision-makers are expected to be better prepared. “Early in my career, there was less emphasis on forecasting and predictability. Now, because of the current landscape and a lot of unexpectedness in the last 12–18 months, finance teams are being asked to predict the future and do more scenario planning. We don’t just focus on growth but also downside scenarios — for example, what levers can we pull if we see market downturn?”

However, 53% of businesses in the UK say they don’t have strong visibility of financial health and performance. Businesses need quality data on where their costs are and where they make

Real-time expense tracking in one place Finance tools enabling full visibility will allow businesses to plan ahead — but 32% of UK businesses are overloaded with software and financial tools. In a single platform, Pleo’s spending solution includes subscription management, spend categorisation, invoice payments, email synching and direct reimbursement.

“With insights from operation teams, we can find out what projects are coming for us to provide better forecasts in our models. We also need good-quality data to provide analysis on the key drivers,” explains Ko. “This allows us to guide the management teams on where we need to invest, keep steady or dial back on investments.”

Businesses can keep track of each expense in real time by giving their employees a Pleo debit card. In businesses that use it, 77% of admins report that they spend less than an hour a week on expenses. This is especially beneficial for those with small and stretched finance functions.

“When a business grows, finance function often doesn’t grow at the same speed. You want someone who can manage all expenses. This gives the business a clear view of how much they are spending on each category,” she adds.

Ko highlights the importance of setting out clear budget guidelines. Teams and individuals must know they are accountable and trusted to handle their budget — and without tedious expense reports.

“Control comes from both sides. As a business owner, you can set limits for each individual. It gives them autonomy by saying, ‘This is what we have agreed you can spend to reach revenue targets.’ Employees see their limits on the app; there’s no ambiguity on what they can and can’t do — giving them the freedom to get on with their jobs,” explains Ko.

Employees can simply upload receipts onto the app without worrying about losing them. Finance teams can review real-time expenses to see if they’re going in the right place. “There’s no additional task or burden of paying out-of-pocket expenses,” she adds.

Start speaking to your finance teams

Looking forward, Ko hopes that employees will engage with finance teams more. “Finance is often seen as a back-office function. We want to encourage anyone to speak to their finance teams and know more about what we do because that’s the only way we can help each other.”

By maximising financial tools, businesses can gain full visibility, have the capacity to plan for the future in economic uncertainty and delegate financial control to their valued employees.

Paid for by Pleo

How businesses can save time and keep control while enabling

Navigating change as a finance leader with

Pleo’s CFO

INTERVIEW WITH Karen Ko Senior Finance Director, Pleo

Why we need to carefully regulate artificial general intelligence

AGI risks and opportunities exist not only across the financial services sector but all parts of our daily lives. AGI refers to highly autonomous systems that can outperform humans at economically valuable work. This raises concerns about the control and oversight of AGI systems.

Artificial general intelligence ethics and job impacts

Without regulation, AGI could be developed with inadequate safety measures, potentially resulting in catastrophic outcomes. Establishing a regulatory framework will ensure that it is developed responsibly and ethically — with proper safety precautions.

Another key argument for regulation is its impact on the job market. AGI can automate a wide range of tasks and jobs, potentially leading to job losses. Without proper regulation, this transition could occur without adequate support mechanisms for those affected.

I don’t believe that regulation will stifle innovation and progress. Regulations can help us harness AGI’s capabilities. We have seen this in the fintech sector where regulation has kick-started innovation, for example in the open banking sector.

Establishing ethical guidelines and promoting transparency

To effectively regulate AGI on a global scale, policymakers must focus on four key areas: establishing ethical guidelines; promoting transparency; fostering international

cooperation; investing in education and reskilling.

On the 16th of May, OpenAI CEO Sam Altman testified before the US Congress to advocate for regulatory measures in AI as he believe it could cause irreparable damage if not controlled. He proposed the creation of a regulatory agency tasked with issuing licences and safety benchmarks for companies like OpenAI, which develop large models. In other words: treat AI models like pharmaceutical drugs.

Ethical guidelines, such as this, must be established to ensure AGI is developed and utilised in a responsible and beneficial way. The potential risks, such as job losses and privacy breaches require proactive measures. Transparency is crucial to building trust and accountability. Developers and organisations must be transparent about the data used, decision-making processes and potential biases.

Fostering international cooperation and investing in education

Global cooperation is essential to effectively regulate AGI. International collaboration supported by organisations such as FINTECH Circle can foster the exchange of knowledge, best practices and regulatory standards. Furthermore, investing in education and reskilling programmes will prepare the workforce for challenges and opportunities.

We need to quickly develop a regulatory framework to help mitigate the many risks while allowing society to harness the benefits of AGI in a responsible and controlled manner.

Rapid technology advancements

have brought us to the brink of a new era, where Artificial General Intelligence (AGI) has arrived with all its risks and opportunities.

WRITTEN BY Susanne Chishti

CEO, FINTECH Circle

Without regulation, AGI could be developed with inadequate safety measures, potentially resulting in catastrophic outcomes.

WRITTEN BY Henk Van Hulle CEO, Open Banking Limited

How open banking transforms into open finance — and smart data

Open banking is fast evolving into open finance and will eventually become ‘open everything.’ We explore some of the products and sectors that will benefit.

Since open banking technology was launched, it has transformed the way 7 million consumers and businesses in the UK are able to pay for goods and services, manage their finances and benefit from cost-effective credit by allowing them to share their financial data with third parties.

Open banking to open finance

Money management apps give consumers a clear picture of their spending, helping them to budget better and find deals, while savings apps have helped people build regular savings habits, boosting their financial resilience.

For businesses, real-time insights into their finances — often powered by open banking-enabled accounts software — enable accurate forecasts of their cash flow, offering a way to tackle late payments and make cost savings.

As open banking morphs into open finance, eventually becoming smart data (‘open everything’), we look at pioneering products making their way to market and predict which other sectors may be set for a similar transformation.

Open finance could simplify mortgages

A leading UK building society announced that it would incorporate open banking-driven affordability checks into its mortgage assessments. By linking borrowers’ current account payments to their credit score, additional evidence of a good financial track record — such as regular council tax payments and

subscriptions to entertainment services — can be factored into mortgage approvals.

Open finance has the potential to disrupt the mortgage market further, for example, by connecting a buyer’s bank data to digital — and traditional — brokers to provide a comprehensive overview of mortgage products tailored to their financial needs, potentially in minutes. This could also be linked to online advice, given in near real-time, guiding buyers step-by-step through the approval process.

Open everything: smart data With open finance picking up pace, we are also on the path to ‘open everything.’ This will be supported by the introduction of new smart data legislation. By harnessing the same data-sharing principles of open banking, the aim is to help consumers and businesses find cost-effective tariffs for essential utilities such as energy, water and broadband, potentially saving hundreds of pounds.

It will also help to address the loyalty penalty — the difference between what loyal and new consumers pay for an identical service — which costs households around £1,100 a year on their mobile tariffs, mortgages and broadband.

‘Open everything’ will help consumers and businesses navigate complicated markets, receive more accurate and personalised financial advice — and save time and money. We call that a truly connected digital economy.

WRITTEN BY Iota Kaousar Nassr Senior Policy Advisor, OECD

Why international collaboration around cryptoasset regulation is critical

Because digital assets such as cryptoassets — and the wider decentralised finance market — are global by nature, we need to achieve a global consensus on how to address emerging risks.

Decentralised finance markets involving crypto, stablecoins, DeFi protocols and other digital assets are borderless by nature. That can allow for regulatory arbitrage opportunities, especially given the speed and ease with which crypto firms can move geographic locations.

Important risks involved with cryptoassets

An incomplete and fragmented regulatory landscape has led to market participants effectively providing financial services outside of the traditional regulatory perimeter. The fact that these markets are currently characterised by an absence of regulatory safeguards for consumer protection and market integrity creates material risks.

The recent period of rapidly declining valuations in the crypto markets left retail investors disproportionately affected by the failures of cryptoasset firms compared to insiders who managed to cover some of their losses fast.

Future downturns could have a greater impact on the stability of our traditional financial markets through increased interconnectedness between the two markets. This is why it is imperative that we, as policymakers, advance our work in the space.

Global consensus on how to address risks is critical

We must seek global consensus on how to address risks emerging in the wider market for decentralised finance, including crypto, to protect investors and avoid regulatory arbitrage opportunities. The Organisation for Economic Cooperation and Development (OECD) can play a vital role through

capital markets tokenisation

evidence-based policy analysis and facilitating international dialogue with relevant stakeholders.

Cryptoasset mining — the most energy-intensive part of this market — is an excellent example that illustrates the importance of cross-border coordination: in the face of countryspecific bans, the negative externalities of crypto-mining have simply been transferred from one geography to another, with the overall negative impact on the environment remaining the same.

Exploring benefits

Despite challenges, there are aspects of decentralised finance that hold promise for financial markets more broadly. We should seek to identify and learn from the parts of these markets that can help improve productivity in traditional financial market infrastructure (eg. atomic settlement; smart contracts; programmability).

While there remains work to be done, we are seeing regulatory progress across the world. For instance, the recent consultation for a regulatory regime for cryptoassets in the UK; and at the G20 level, the FSB framework for international regulation of cryptoasset activities. Embracing technological progress and innovation while ensuring relevant safeguards can benefit consumers and markets alike. It is our duty to ensure this outcome.

WRITTEN BY Yvonne Deane Harte Principal, Capital Markets & Wholesale Policy, UK Finance

Tokenisation can make transactions swifter and cheaper, making it the future of capital markets. It can also remove barriers to entry and democratise the markets.

The more things change, the more they stay the same. The preoccupations of those who manage money and investments are ageold. The technology wrapped around these services, however, changes at pace.

Digitalisation and tokenisation repurposing crypto technology

Recent decades saw a move from open outcry trading floors to electronic exchanges. Trading, and the transfer of stock ownership, became electronic. The plumbing or posttrade processes, however, remained largely unchanged.

Digitalisation is now underway to transform the capital markets.

From the crypto revolution sprung technology with wider potential. Distributed ledger technology (DLT) creates virtual networks allowing participants — rather than one authority — to record and move something of value.

Rather than reconciling separate records, participants use protocols to quickly agree on an immutable version of the truth. Across multiple jurisdictions, digital mirror images of existing securities or native digital securities are being created so that they can be represented and traded on DLT platforms.

Why tokenise a financial instrument?

Done well, the use of DLT could bring unprecedented efficiencies to post-trade processes, making transactions swifter and cheaper. Smart contracts could codify events

in an instrument’s life cycle, such as a coupon payment in a bond, f rom the outset.

More fundamentally, the savings made through trading in this way could remove barriers to entry and democratise the markets. The crypto revolution shows that many consumers will seek out investment avenues.

Through tokenisation, less accessible assets can be broken down (fractionalised) into smaller units, granting investors greater access to the markets and a sense of ownership in UK plc.

How the UK can make the tokenisation transition

The UK has not yet led the way on securities tokenisation but is well placed to do so, with its worldleading common law system and commercial courts, strong infrastructure and deep pools of liquidity.

Regulators will rightly seek to ensure that operational resilience and investor support measures are in place. Government and industry will need to collaborate in the transition. For vibrant digital markets, separate technological walled gardens must give way to systems that interoperate well with each other.

Equally, we cannot rest on our laurels. The City of London’s capital markets have provided a home for new opportunities to meet investment since the 16th century. By acting swiftly and decisively, the UK can protect the relevance of these valued markets.

The UK is well placed to lead the way in

DLT could bring unprecedented efficiencies to post-trade processes, making transactions swifter and cheaper.

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How fintech helps SMEs tap into the global marketplace

Fintech is a force for good that facilitates business and helps protect customer finances, says Piers Marais, Chief Product Officer at cross-border payments platform, Currencycloud.

What does the UK fintech landscape look like at present?

The UK is a world leader in fintech — for various reasons. The country generally — and London specifically — has a long financial history. We have a progressive regulatory framework that has allowed electronic money institutions to thrive, and we have a fantastic pool of innovative talent. While there have been challenges over the last year — due to inflation, the pandemic and war in Ukraine — the UK is a great place to do fintech business.

You’ve described the UK’s fintech industry as ‘a force for good’ — in what ways?

WRITTEN BY Tony Greenway

Fintech makes it easier for SMEs to do business while keeping customer finances safe. For example, we partner with ComplyAdvantage — one of the leading tech players within the anti-fraud and anti-money laundering space. Then there is Onfido offering businesses digital ID verification. Fintechs like these investigate and solve a particular problem. They allow financial companies and institutions to stitch solutions into their own apps and ecosystems quickly and efficiently.

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How is fintech expanding financial inclusion?

By taking a customer-centric approach which, coupled with technology, can serve niche parts of the small business market. Starling Bank is a great example. A traditional bank might offer SMEs a one-size-fits-all bank account, but Starling builds solutions that are relevant to their customers’ specific needs.

Can fintech help improve financial literacy?

Yes, which is important for communities and the economy. Take Monzo, which allows people to see and categorise their spending easily, via a mobile app. There are also apps that — thanks to the open banking regulatory frameworks — allow you to see all your accounts in one space.

Is this an exciting time for fintech?

How does fintech empower SMEs to do business?

By facilitating quick, cheap and more efficient cross-border payments, allowing them to grow internationally. It gives thousands of UK SMEs access to the global digital economy, which shouldn’t be underestimated. For example, we have a globalised virtual collection solution that customises payment options wherever a company’s customers are located.

We’re in the middle of a perfect storm. The cost of living crisis gives fintechs specific challenges to solve while tech advances such as AI, chatbots and machine learning allow new ideas to be realised in a cheaper and faster way. That could lead to innovations that fundamentally change the way we think about financial services. I see this as the start of an exciting next wave of fintech.

Can A2A offer consumers rewards and benefits?

There are so many back-office efficiencies with A2A that merchants can pass benefits onto their customers as an incentive to try it. For example, they might offer higher cashback or double points on a loyalty programme.

Account-to-account payments are quick and secure ways to pay that benefits customers and merchants alike, says Lisa Scott, CEO Europe of global payments network, Banked.

What are account-to-account (A2A) payments?

There are many players in the financial industry offering accountto-account payment tech. Our A2A product is called ‘Pay by Bank’ because you use it to pay for a product or service directly from your bank account. Essentially, we create a secure connection to your banking app that allows you to authorise payments via the biometrics you already have — simply and efficiently.

How is A2A being used at present?

People are using it to pay their tax bills and top up their neobank accounts, but we want to make it more prolific. A good example is e-commerce. If you use your debit card to pay for a product online, you have to enter your 16 digits, CVV number, expiry date

and billing address. However, if you use A2A, payment comes from the same place (ie. your bank account), but you simply open the banking app on your phone with your biometrics. You authorise the payment — and it’s done. You could use it to make in-person digital payments, too.

Are A2A payments safer than mainstream payment methods?

Yes because you don’t share any of your financial information with anyone online. You’re also not sharing your card number or creating a new account, requiring yet another set of login details to track and monitor, so it’s highly secure. And because you’re using already-established biometrics to pay via your banking app, there’s no need for additional authorisation steps such as a six-digit code sent via SMS.

Does A2A give users more control over finances?

Many customers are canceling direct debits with utility companies because they want to maintain control of when payments are made from their bank account and have more transparency. But that means they have to make payments over the phone, which is time-consuming, or they log on to a company portal, which means remembering a password and taking additional steps to complete the transaction. Or they do it via internet banking, which requires putting in a reference. A2A is a quicker, simpler and safer alternative for the consumer and service provider — empowering users to have visibility into where their money is going in real time.

INTERVIEW WITH Lisa Scott CEO, Banked Europe

WRITTEN BY Tony Greenway

Many customers are canceling direct debits with utility companies because they want to maintain control of when payments are made from their bank account.

Currencycloud processed cross-border payments for 9.9% of all UK SMEs trading internationally (over 36,500 UK SMEs) over the last 12 months. We continue to distribute our services widely to UK SMEs, having onboarded 196 financial institutions serving UK SMEs and UK Fintechs since January 2020. Visit currencycloud.com to find out more.

Why account-to-account payments are the next big thing in finance

Why Britain’s small businesses will always find opportunities for growth

Small businesses are vital to the UK economy. If they are resilient, adaptable and have access to the right funding, they will be able to survive and thrive in challenging times.

Don’t underestimate the adaptability and importance of Britain’s small and medium enterprises (SMEs), insists Alexander Allen, UK Managing Director of leading small business lending platform, Funding Circle.

SMEs seize business growth opportunities

“We can’t shout loudly enough about SMEs,” he says. “The average small business we talk to consists of 8 to 10 people and has a turnover of £1 million. The loans we gave SMEs in 2022 generated £6.9 billion in GDP, supported more than 106,000 jobs and generated £1.4 billion in tax. Small businesses are crucial for their communities and the wider economy.”

The last few years have — to put it mildly — been a testing time for small businesses, but Allen never ceases to marvel at their inventiveness and flexibility. It’s a quality he sees in all customers at Funding Circle. “They’ve had to deal with the pandemic, the cost of living crisis, soaring inflation and supply chain challenges,” he says. “SMEs have pivoted, adapted and done things like move online or change their product portfolio.”

Support for small businesses in a difficult economic climate

There are three elements to small business resilience, says Allen: financial resilience, operational resilience and personal resilience. “Financially, SMEs need access to

capital so that they can respond to the unexpected. They then need operational resilience — flexibility and agility — to be able to react quickly. Finally, their leaders need personal resilience — a determination to keep their business working under any circumstances. It’s why thriving SMEs have a focus on good mental health and wellbeing.”

Even the best small businesses can be buffeted by economic headwinds, so finding the right funding for their specific needs is key. “Cashflow is one of the main challenges facing SMEs,” says Allen. “In the current climate, we’re seeing strong demand for our services, so we’re expanding our product range and recently introduced FlexiPay to fulfil SMEs’ needs for short-term finance, because we know that small businesses sometimes need more than a term loan. We have to be able to offer them other options.”

“It’s a tough environment out there, but I know that CEOs of small businesses are optimists who are always looking for opportunity,” adds Allen. “Despite the pressures they face, our research shows that 74% of SME leaders say they would recommend starting a small business. So, where there are growth opportunities, the small businesses of Britain will find them.”

INTERVIEW WITH Alexander Allen

UK Managing Director, Funding Circle

WRITTEN BY Tony Greenway