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Even in an advanced economy like the UK, it is estimated that just over a million adults don’t have a bank account, while around 20 million adults are thought to be underbanked — those that may have a bank account but don’t have access to other financial products such as credit cards or loans. The growth of open banking could help fix this by making financial services more inclusive and accessible to a greater number of people. In a recent Thistle Initiatives webinar, Lorraine Mouat, Partner and Anthony Corner, Senior Manager at Thistle, were joined by James Bushby, GM Europe and Head of Global Partnerships at Ozone API, to discuss how open banking and new regulations such as PSD3 could help boost financial inclusion in the UK.

Here are some of the key highlights from the webinar:

1. Digital payment services can widen financial inclusion

The ability to make payments both digitally and physically and domestically and internationally is a key financial service that everyone should have access to, says James. For example, open banking and instant payments can help individuals who rely on cash flow on a day-to-day basis, such as gig workers, freelancers or anyone who needs immediate access to funds, he says. This can also support cheaper and faster cross-border payments, which can benefit migrant workers sending remittances back home, as well as SMEs who might want to make overseas purchases but are put off by expensive FX rates with traditional banks. Digital channels such as mobile payments also reduce dependence on physical bank branches, helping those without a bank account access financial services. Lastly, for those that do have a bank account, open banking also allows consumers to make purchases directly through account to account payments, reducing the need for card payments and potentially helping lower costs—one of the biggest barriers to financial inclusion, says Anthony.

2. Open banking can help reduce costs for consumers

Aside from alternative credit scoring to expand loan provision to underserved groups, there are two other key areas where open banking can help drive financial inclusion. The first is that open banking is likely to intensify competition between fintechs and non-banks, therefore helping reduce costs significantly, says Anthony. This could be through fee-free accounts or no requirements to hold a minimum amount of cash in an account. “If low-income individuals who often experience a higher price entry point to financial services can now receive products that were previously out of reach, that’s a good thing for everyone,” he says. Another area is personal financial management and budgeting tools that use open banking data to help individuals manage their money more effectively, including debt management solutions. “This helps people who are financially vulnerable or already in debt better manage their finances, because it works by creating manageable repayment plans and offers advice on reducing unnecessary expenditures,” says James.

3. Lessons from emerging markets

Some emerging market countries such as Brazil and India are already using open banking to help boost financial inclusion among their populations where access to banks has traditionally been limited (either because of an absence of physical branch locations or because of costs). In Brazil, for instance, its Pix system has helped with real-time payments, while the country’s open insurance initiative has helped consumers access cheaper insurance offerings. “It went beyond open banking very quickly, and this has driven some really innovative use cases in that marketplace, especially from a financial inclusion perspective,” says James. Meantime in India, the explosion of account-to-account payments driven by its UPI (Unified Payments Interface) system has helped advance financial inclusion by enabling individuals to make real-time payments through their mobile phones, he says.

4. Regulation can support open banking expansion

The regulatory objectives of financial inclusion are multifaceted, from alleviating poverty and giving people more control over their finances, to increasing their ability to participate in the digital economy, says Anthony—something that not everybody in the UK has access to. The introduction of PSD3 regulations, while not yet formally in place, is expected to expand open banking into open finance, which will support greater financial inclusion by extending data-sharing benefits to products such as savings, mortgages and pensions. “Integrating more of these financial products can give individuals, who have typically had limited access to traditional banking, access to more alternative financial services,” says James. Another way it will help is to simplify consent management to make it easier for individuals to understand and control who has access to their financial data and for how long, improving the end-user experience and helping build trust, he says.

5. Compliance strategies must focus on consumer protection

Against this heightened regulatory backdrop, financial institutions should be thinking about more stringent data protection and increasing transparency for customers, something that open banking will play a big role in, says Anthony. Firms must also adapt to the evolving world of financial crime, particularly in relation to fraud and being able to monitor that in real time. “There’s only a finite amount of time where you can actually act before the transaction has gone and the funds have disappeared,” he says. Financial institutions must also invest in systems that ensure a faster and more transparent dispute resolution process, particularly as banks will now be obligated to reimburse victims of fraud up to £85,000, Anthony says. “Compliance departments are going to need to monitor and manage that fraud liability across their different channels so that customers are protected from unauthorised transactions and any errors in the system as well,” he adds.

To learn more about open banking and PSD3’s impact on financial inclusion, watch the full webinar below.

For more information about how Thistle Initiatives can help improve your compliance strategy, contact Lorraine Mouat or Anthony Corner by calling Thistle Initiatives on 0207 436 0630 or emailing info@thistleinitiatives.co.uk

If you would like to learn about how Ozone API can help you with your Open Banking API compliance please contact James Bushby james.bushby@ozoneapi.com.