Key takeaways from the new SFSA report on open finance in Sweden

Open finance remains a hot topic in the financial and fintech sectors, particularly so on the Swedish market which has a thriving ecosystem of major financial institutions as well as successful fintech companies.  

The Swedish Financial Supervisory Authority (the SFSA) has now, in expectation of proposals for the new EU legislation on open finance (including PSD3), conducted a survey on the use of open financial services in Sweden. On June 28, the SFSAs findings and conclusions was published in a report on the use of open financial services in Sweden. In this article, we summarize the key topics of the SFSA’s open finance report.

Background

Open financial services revolve around the sharing and reutilization of customer information, enabling customers to grant third-party providers access to their data to receive offers of various financial services. While regulation currently exists for payment account information under the second Payment Services Directive (PSD2), the European Commission plans to propose broader regulation in their proposal for a Financial Data Access and Payments Package (now also published on 28 June 2023) including a third Payment Services Directive (PSD3).

Going into 2023, the SFSA was commissioned by the Swedish government to survey and analyse the use of open financial services in Sweden, in preparation of the upcoming proposal from the EU Commission.

Challenges with Both Regulated and Unregulated Open Finance Methods Remain

The landscape of open finance currently encompasses both regulated (mainly under PSD2) and unregulated methods of access to financial information (using existing digital interfaces, via web scraping or reverse engineering). The SFSA finds that while regulated methods offer clarity regarding the rights to access, third-party providers have expressed concerns about the quality and functionalities of the interfaces provided, which according to banks have led to some third-party providers to prefer the unregulated methods.

In light of this, the SFSA notes, the challenges remain between the parties providing and using the open finance opportunities to access information. In particular, the use of unregulated methods is found to be characterised by unclear legal conditions and a continued ambiguity on the market regarding the use of these methods, which creates friction between the parties. Nevertheless, only a few actively oppose the access and use through unregulated methods and the unregulated methods only amount to less than ten percent of the total use.

Early Adoption of Open Finance on the Swedish Market

The SFSA’s report highlights that Swedish fintech companies have embraced open finance, to an extent which exceeds that of their European counterparts. This can be attributed to the highly digitized financial industry in Sweden, the presence of innovative fintech firms, and the early and extensive use of mobile e-IDs. According to the report, Sweden now boasts a robust technical infrastructure, offering access to multiple banks through a single API which is available to the whole market, in turn enabling scalability and cost-effectiveness.

Payments a Prevailing use Case of Open Finance

The SFSA reports that payments were one of the most widely used applications of open financial services in Sweden in 2022. Third-party providers conducted an estimated 100 to 150 million payment initiations with Swedish banks during that time. However, payment initiations through open finance solutions are shadowed by and have recently also lost ground to other popular payment solutions (such as Swish, a bank-provided mobile payment solution).

Transfers to Gambling Companies Surprisingly Prevailing

According SFSA’s survey, payment initiations to and from companies in the gambling market ranked third among the types of payment initiations in Sweden in 2022. However, the SFSA suggests that the usage of gambling-related payments is more frequent than indicated by the survey – a fact that the SFSA considers problematic due to the gambling industry’s high inherent risk for money laundering and terrorism financing.

Account Information Services are Common and have Several Use Cases

According to the report, account information services are widely used in Sweden, under the regulated method of open finance (as provided by PSD2). Such account information services commonly serves purposes for personal finance aggregation, credit assessments, and consolidating multiple bank account balances into a single interface.

Growing Open Finance Adoption in the Insurance Sector

According to the SFSA, there are currently no regulated data retrieval methods for open finance use in the Swedish insurance industry. Although not widely used by insurance customers at present, the SFSA’s survey shows a rising trend of open finance adoption within the insurance industry in Sweden. However, the SFSA has identified market concerns regarding the challenges in establishing EU-wide regulation for the insurance sector due to its reliance on national conditions like welfare and pension systems.

Open Finance is Utilized in the Lending Industry

SFSA’s survey highlights the utilization of both dedicated interfaces and unregulated methods for gathering loan information in Sweden. Moreover, dedicated interfaces play an important role in account verification, automatically verifying recipient accounts and holders to prevent fraud and comply with regulations.

A Limited Amount of Data Sharing in the Saving and Investing Industry

According to the SFSA’s survey, the use of open finance in the saving and investing industry is currently relatively low. However, the SFSA notes that open finance has use cases particularly regarding pension and savings transfers. Following dialogue with companies and industry stakeholders, SFSA notes that Sweden is deemed advanced in the development of pension and savings transfers, which may be provided through open finance solutions.

The SFSA’s Assessment of the Opportunities with Open Finance

The SFSA states that improved data sharing has the potential to empower consumers in financial markets and level the playing field while also fostering competition, market efficiency, and innovation. To further support the use of open finance services, the SFSA proposes further improving the regulation of open finance. This would, the SFSA finds, lead to several positive effects such as providing a clearer legal basis for data sharing and a reduction of the potential risks associated with the unregulated methods.

Consumer Risks and Integrity Concerns Associated with Open Finance

The SFSA highlights that while open finance has the potential to reduce consumers’ information disadvantage, there is a risk that companies may further exploit their knowledge and information advantage in open finance, potentially resulting in negotiation imbalances, discrimination, unsuitable advice, and fraud. Additionally, increased data sharing norms may lead to unnecessary privacy risks if consumers are required to share more information than necessary for the provided service. The risks increase when the information concerns sensitive information, such as health data. Increased availability of information may also lead to increased information and cybersecurity risks.

Final notes; The SFSA sees a need for Broader Regulation

In light of the various nuances surrounding open finance, the SFSA highlights the importance of broader regulation for open finance. Such regulation would help clarify the legal landscape and facilitate the emergence of diverse financial services that benefit consumers. By reducing ambiguities and enhancing regulatory oversight, broader regulation would also offer greater consumer protection in the context of open finance.

Read the full report here (in Swedish).