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What is FIDA?

In 2015, the European Union (EU) embarked on a transformative journey with the introduction of the Payment Services Directive 2 (PSD2) marking a significant leap toward Open Banking and Strong Customer authentication (SCA). The primary goal was to enhance competition, spur innovation, and broaden the financial services market beyond traditional banking institutions. While PSD2 revolutionized payment data sharing, its impact remained confined to the realm of payments, leaving aside other financial products data sharing.

In June 2023, the European Commission published a regulatory package that introduces the Financial Data Access (FIDA) proposal. FIDA represents a real shift, expanding the scope of data sharing under the umbrella of Open Finance.

This initiative aims to empower customers by giving them control and consent over the sharing of their financial data. It also seeks to promote innovation and competition within the financial sector.

FIDA’s Objectives

At the heart of FIDA lies a multifaceted set of objectives. Firstly, it seeks to establish a robust legal framework for the seamless sharing of customer data among various entities operating in the financial services industry. FIDA is laying the groundwork for new business models focused on processing and analyzing customer financial data.

This, in turn, is expected to spur innovation, leading to the development of cutting-edge financial products and services that cater to the diverse needs of consumers. Ultimately, this will spur economic transformation by encouraging digital innovation and data-driven business models within the financial industry.

Roles and products in the Scope of FIDA Regulation

Central to FIDA is the delineation of roles between data holders and data users. Data holders, typically financial institutions, are entrusted with the responsibility of collecting, storing, and processing customer data. On the other hand, data users, leverage this data to provide value-added services to customers. FIDA imposes stringent obligations on both data holders and users to ensure the confidentiality, security, and responsible use of customer data.

In the FIDA proposal, financial institutions that apply as data holder can also retrieve data in the role of data user, without having a separate license thereto.

Various financial products like savings, investments, mortgages, insurances, and pension products can exchange the data. Is out of scope data that could increase the risk of financial exclusion such as assessment of customers’ creditworthiness, data on sickness, health, and life insurance.

Granting access to customers’ Data

Customers have the right to request that data holders share their data with authorized data users. This data should be used exclusively for the purposes and under the conditions agreed upon with the customer. Personal data must be limited to what is necessary for its intended processing.

Data holders must provide data promptly and in real-time upon request, without charge. They can seek compensation only from data users and only if the data sharing follows set rules. Data holders must offer customers also a clear permission dashboard.

Data users can access data only for approved purposes, ensuring confidentiality, protecting trade secrets, and upholding security. They must prevent unlawful data transfers and restrict access to authorized entities within a group.

Financial Data Sharing Schemes

FIDA introduces the concept of Financial Data Sharing Schemes, akin to those established in payment markets. These schemes play a pivotal role in standardizing data sharing practices, defining contractual obligations, and providing mechanisms for dispute resolution. By promoting interoperability and market arrangements between data holders and users, these schemes serve as catalysts for the seamless exchange of financial data.

Both data users and data holders bear the responsibility of becoming members of one or more Financial Data Sharing Schemes within 18 months from the entry into force of the FIDA regulation.

The EU Impact Assessment Report

The EU Impact Assessment Report explains the reasons, advantages, and potential risks of the proposed framework. It accompanies the FIDA legislative proposal. The report provides information on why the framework is being proposed, the benefits it offers, and the possible drawbacks.

It outlines the impact the framework could have on various aspects. It highlights the growing trend of data use and sharing in the financial sector, emphasizing the potential of data-driven finance. The report mentions some challenges that are slowing down progress. These challenges include lack of trust, legal ambiguities, data standardization issues, and misalignment of incentives.

The EU is tackling these challenges by considering a preferred policy option bundle. The EU is addressing these challenges by looking at a preferred policy option bundle. This bundle includes mandating open finance permission dashboards for customers. It also involves granting access to selected customer data sets for data users.

Additionally, the EU is working on developing common standards for data and interfaces. Lastly, data holders will be required to implement APIs in exchange for compensation. This policy option was deemed preferable due to its effectiveness, efficiency, and coherence with existing EU regulations.

Market Reception of The UE FIDA Proposal: A Pragmatic View

The feedback from the market regarding the EU proposal has been cautiously optimistic at best. The financial industry agrees with customers sharing data between users and holders. However, they recognize the challenges of implementing this initiative.

The EU Commission recognizes that the main obstacles are the lack of standardization in products, systems, and data. This makes it difficult for different technologies to work together and hinders innovation in the industry.

Opportunities & Challenges of FIDA

Which Opportunities Brings FIDA?

All financial experts do recognize the substantial upside potential of FIDA. Here are some key opportunities:

1. Consolidating customer financial data and providing a holistic customer view: data users can aggregate and analyze diverse sources of customer financial data to create a comprehensive view of each customer’s financial situation. This holistic view enables to offer personalized recommendations, identify cross-selling opportunities, and enhance customer satisfaction by providing a seamless and integrated financial experience.
2. Delivering tailored advice based on customer data and profiling, including enhanced investment advice: by leveraging internal and external data, data users can better analyze customer profiles and deliver personalized financial advice and recommendations. This includes optimizing investment portfolios, managing risk exposure, and identifying opportunities for wealth accumulation or retirement planning.
3. Using external data to provide new products and services: data users can leverage on external data sources to have a better knowledge of their consumer behavior and tailor products to specific needs.
4. Integrating third-party services and extending services to other industries through partnerships: data users can collaborate with third-party service providers, such as fintech companies or data analytics firms, to enhance their offerings and even extend their reach into other industries beyond traditional finance.

At the same time, the EU Commission constraints, rightfully so, how such data could be used. The limitations designed to safeguard data usage are Purpose-Specific Access and Entity-Specific Access.

These specifications inherently limit the potential for extensive data usage.

Overcome Consumers’ Reluctance of Disclosing Financial Information

According to our recent study, people are globally reluctant to share their financial data. They are often concerned about privacy, security, and the potential misuse of their sensitive financial information. But one of the primary factors influencing people’s willingness to share their financial data is the perceived usefulness of doing so. Customers are more likely to consent to data sharing if they believe it will result in tangible benefits for them.

Overcoming this hurdle is crucial for FIDA success. To address this, data users must demonstrate added value to customers, highlighting how sharing financial data can lead to tangible benefits or improvements in their financial lives. The only way is offering new or enhanced products and services.

The Challenges in The Implementation

Implementation challenges loom large, including the need for standardized data and technical challenges, overly ambitious timelines. Additionally, data holders are required to share data when requested by customers. This, along with the challenges of real-time data updates and governance, creates operational and logistical difficulties for market participants.

This will have a significant impact on future operating model of each participant.

Adopt a Strategic Approach

A strategic approach to navigating the FIDA proposal entails several key considerations. Firstly, a comprehensive study of the diverse data, entities, products, systems, and platforms used across the EU is essential to understanding the landscape and ensuring effective implementation. And harmonizing FIDA with existing regulations and laws is paramount to avoiding conflicts and ensuring compliance.

Furthermore, the development of clear and consistent European FIDA standards for different product categories is crucial to reducing complexity and minimizing costs. These standards should address data quality, technical interfaces, and security protocols to facilitate seamless data sharing while safeguarding against potential risks.

Implementing FIDA in phases is important. It allows for thorough testing, adjustments, and risk mitigation. This approach focuses on one data category at a time. It minimizes disruptions and increases the likelihood of success.

This practical approach minimizes disruptions and increases the likelihood of success. It helps people in the market adjust to the new rules gradually. It also ensures that the financial system remains strong and stable.

Navigating the FIDA Project’s Journey

The FIDA project is monumental, and its impact will resonate for years to come. As financial professionals, we must remain vigilant, adapt to evolving regulations, and actively contribute to shaping this transformative journey. The next decade will undoubtedly witness significant developments in the financial data landscape, and staying informed is paramount.