Open finance is a business model based on standardized and secure exchange of data between banks and trusted third-party providers (TPPs), typically fintechs, wealthtechs or other banks. The financial information that is shared can range from payments, mortgages, savings, investments, pensions and insurance to consumer credits. “It basically gives you a consolidated and transparent overview of your financials and for financial transactions in a fast and easy way”, explains Swiss Fintech Innovations (SFTI). Open finance represents a paradigm shift, as it is potentially able to give control over client data to TPPs on behalf of the consumers agreement.

The European Union’s revised Payment Services Directive 2 (PSD2) effectively marked the inception of open banking in Europe, when it entered into force in January 2018. The directive requires all EU- and EEA-based banks to open their clients’ payment account data to TPPs. The UK version of PSD2, so called Open Banking UK, is going even further as it dictates that banks share data to third parties in a standardized format.

Switzerland relies on market-based solutions in the area of open finance

Financial institutions in Switzerland do not fall under any of these regulations. “Switzerland’s unique situation – a financial center where authorities, the regulator and financial institutions work in close collaboration – is predestined for a market-driven approach. In certain business domains we see more innovation than in neighboring countries and the EU, despite the absence of a specific open banking respectively open finance regulation. For example, Switzerland is ahead when it comes to Open-Wealth management solutions. If there is demand, banks will provide their clients with solutions”, says the Swiss Bankers Association (SBA). “Ultimately, it’s the customers and their specific needs that should be at the center of all open finance activities.”

From a technical perspective, data is shared fast and securely via standardized application programming interfaces, known as APIs, which allow for an extension of the value chain with specific and targeted financial services and solutions. Today, Swiss financial institutions can do this either via a centralized platform like SIX bLink or directly by sharing data with fintechs that take on a specific component of the value chain.

“Fintechs providing financial solutions within an open finance ecosystem seldom offer the full scope of financial services, hence partnering up with banks brings the full scope of open finance to the consumer” underlines SFTI.

Legal, reputational, and strategic risks

Open finance is still in its infancy and challenges such as the standardization of interfaces and caution of well-established financial institutions to share client data with potential competitors, remain. Legal aspects, compliance views and reputational risks also need to be considered in the various partnership models between fintechs and banks.

To strengthen the market driven approach of different collaboration models in open finance, SFTI is currently working on the project "Collaboration Models" in cooperation with the FHNW and the Swiss Bankers Association.

“Another concern of banks is the risk of losing the customer interface when engaging in open finance. Therefore, banks must position themselves strategically in such an ecosystem along the lines of their value proposition and core competences”, explains the SBA. “We have summarized these and other findings in a whitepaper to help our members in taking these decision.”

Strong commitment of the Swiss banking sector

The Swiss banking industry sees great potential in open finance for the Swiss financial center. The country has a strong pool of innovative fintechs, which benefit from the favorable rules in place supporting innovation. The Swiss financial center can further strengthen its competitiveness, by playing an active role in open finance.

Switzerland can and should, however, not tackle open finance on its own. It must look at international developments – notably at EU level – to develop API solutions compatible with its EU peers. For fintechs, scalability is an issue in Switzerland. The country is relatively small, and they must have access to financial institutions abroad to be able to expand.

In order to also take this important aspect into account, both the SBA and SFTI are in constant exchange of information with major international initiatives. This includes, for example, The Berlin Group (TBG), the leading pan-European association where technical standardization recommendations are developed, as well as Open Banking Europe (OBE), the premier organization when it comes to directory services covering all authorized TPPs in the EU.

“Swiss banks are clearly committed to open finance. There are many partnerships (between banks and fintechs) currently in the proof-of-concept phase, but it will take a couple of years before it takes off,” SFTI foresees.