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How Open Finance Extends Capabilities of Open Banking

Open banking is a relatively new concept in the field of financial technologies. It was adopted after 2015 when the European Parliament issued a PSD2 directive that facilitated safer and more innovative payments. However, there were already 27.4 million users of this service in 2020, and their number is projected to reach 132.2 million by 2024.  

Open banking is evolving, and open finance is the next step of its development, extending its capabilities and driving more value to both financial institutions, third-party providers, and customers.

Let’s find out how the concept of open finance is projected to transform open banking and what opportunities it promises to open up.

Open Banking and Open Finance – How These Terms Relate

To explain the revolutionizing opportunities of open finance, it would be logical to get started with finding out what is open banking.

Open banking is the approach that allows third-party financial service providers to access the bank’s customers’ data via APIs.

So, how does open banking work? Simply put, this is the way the banks share the information on their customers’ transactions with third parties so that the latter can develop better personalized and use-case-tailored offers. And these are the core open banking benefits.

The data the banks share within an open banking concept, however, is rather limited - it does not go beyond the financial operations made within the bank’s app or in a branch office.

And what is open finance? Open finance, in turn, suggests gathering all the financial data of the users in one place, including but not limited to bank transactions, digital wallets spendings, insurance and retirement accounts, investments, money transfers, and crypto deals.

Consequently, open finance becomes the next stage of open banking development. While the advantages of open banking are limited as it allows the third-party providers to access only a small piece of the data generated by the customers, open finance provides them with an ultimate and fully data-driven picture.

What is more, open finance stands for the right of the customers to own and control the data generated by them, deciding on the ways to share it with other parties.

The Place of Open Finance in Banking
Open Finance vs Open banking [scheme1]

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Open Finance vs Open Banking Comparison Chart

Open Banking

Open Finance

API providers

Only banks are API providers

Other financial organizations may also be API providers

Data ownership and control

The bank decides what information to share

The customers decide what information to share

Legal regulation

Open banking is relatively regulated by the Payment Services Directive or PSD2

To date, open finance lacks legal regulation

Contract

Open banking does not require a contract between an API provider and a client

Open finance requires a contract between an API provider and a client

How Open Finance Transforms Open Banking and What Values It Drives

Open finance is projected to be the future of open banking. It transforms and leverages the benefits of open banking by adding the following values for each of the parties:

  • Transparency for lenders and customers. Open finance promises more transparency for both lenders and borrowers. The latter get an opportunity to grow their credit score without being limited to the financial data that their bank owns but taking into account all the data about their income and spendings. The same opportunity is beneficial for the lenders since they gain the ability to make less-risky lending decisions, predicting the probability of seamless pay-off with the help of AI.
  • Greater data volume. With the help of open finance, financial institutions, insurance companies, fintech organizations, and banks will be able to gather voluminous data arrays about the spending behavior of the users. AI-powered data analysis, in turn, will allow for making even more accurate suggestions on the services the customers may need, capturing and analyzing spending trends, anticipating the needs, and helping the users make more profound financial decisions.
  • Better data control. The core idea of open finance is the right of the customers to decide what data and which companies to share with. The implementation of open finance through APIs also suggests leveraging stronger authentication mechanisms and access control systems, allowing for enhanced data security.
  • The centralization of services. Open finance consolidates all the financial services the customers use in one place. For them, this is an option to manage all their financial accounts and transactions in one place, saving time and effort.

Below are the most promising open banking use cases which show the areas of how open finance changes the game:

  • Connecting unbanked users. 1.7 billion people are unbanked globally, and 14.1 million of them are in the US population. For them, open finance is the opportunity to firstly consolidate their financial accounts in one place, secondly, prove their solvency, plus get AI-supported financial advice based on their spending patterns.
  • Better opportunities for gig economy workers. Open finance promises financial inclusion for gig economy workers (34% of the US population) who typically use the fintech services like Payoneer or other digital wallets instead of bank cards. Fortune has recently stated that gig workers shouldn’t be “credit-invisible” since it limits the services they actually can afford – for example, applying for a mortgage.
  • Wiser financial decisions. The concept of open finance allows the users to make better decisions when it comes to the management of their finances and using financial products or services perfectly tailored to their goals. For example, with the help of deep learning and being powered by the ultimate set of data, an in-built algorithm of a budgeting application can suggest ways to save, invest, or spend more wisely on everyday needs. Also, having all the offers in one place, the users can apply for the best deal for them – this is how marketplace banking works leading to the rise of banking as a service (BaaS).
  • Financial data-driven automation. Some data-driven decisions modern banks make, being guided by the customer data, are already automated. Open finance, in turn, enables them to streamline decision-making at a higher probability of a beneficial outcome. For example, they will be able to instantly approve or reject a lending application, being fully informed about the customer’s solvency and their current financial situation at the highest possible level of transparency.

Infopulse case study: Our company developed a web-based solution for a large Scandinavian bank. The main goal of the project was to create an automated credit scoring, analysis, and approval solution to reduce operational costs and make better decisions at a higher speed.

That is why we enabled instant data capturing, seamless integration between the bank’s and the third-party’s apps, and flexible configurations.

Open Finance Challenges

Despite its promising potential, open finance comes with challenges and loopholes. The following are the main concerns related to the adoption of open finance, shared by the potential users and financial organizations:

  • Distrust of the customers. According to Zopa research, 63% of people have never heard of open banking, not to mention open finance. The same research also revealed that 26% of open banking users indeed do not want companies to have access to their financial records.
  • Data safety. The first challenge of open finance is directly related to the data safety issue. According to the research we have cited above, 18-22% of users are less or more uncomfortable with open banking because of data security concerns. Is open banking safe? Logically, the more financial and sensitive data is collected in one place, the more attractive it becomes for scammers, so the data safety issue should be the first priority on the way to open finance adoption.
  • Lack of legal regulation. The UK pioneered the development of open banking. To date, this field is regulated by the Payment Services Directive or PSD2, and the country has 325 regulated providers as of July 2021. In our recent post, we dwelled on the reasons why PSD2 implementation is important for banks. As for the US, the adoption of open banking is mainly triggered by the Financial Data Exchange – the consortium of the financial companies that stand for safe and secured data sharing between its members to give each of them the opportunity to make fully-informed financial decisions. Still, both open banking and open finance lack legal regulation, and at this point, it would be logical to get back to the first challenge. The lack of legal framework is among the reasons for customers’ distrust, so to date, this is a kind of vicious circle.
Approaches to Open Banking Regulation
Open Finance vs Open banking [scheme2]

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How to Get Ready for Early Adoption of Open Finance?

While open banking solutions are projected to become one of the strongest fintech trends for the next few years, revolutionizing into open finance, neither all the financial companies nor their customers are fully ready for these innovations. Customers’ concerns are the main stumbling blocks on the way to the adoption of open finance.

Vaughan Jenkins, Sales Director at Moneyhub, shared his opinion about the adoption of open banking and open finance in the Open Banking Report 2021. According to him, “When Open Banking was introduced in the UK, there was no public awareness campaign highlighting the benefits.”

That is why before getting started with open finance as an approach, the companies need to establish ultimate trust between themselves and their customers so that the latter can feel their data is used ethically and is securely protected.

The next step along this path is applying for the highest-end digital transformation services for banks and financial organizations.

A tech-savvy vendor will be able to carefully evaluate the current state of your IT infrastructure, suggest ways to optimize it, and then develop an open finance solution perfectly tailored to the business goal and the expectation of the customers.

The experience and expertise Infopulse has allows us to competently support you on the way to adopting open finance and AI integration, staying within the legislative framework, and following the best data protection practices.

Conclusion

Open finance is the next step of open banking evolution. While most banks already understand the value of open banking, adopting open finance trends can be a step ahead of the competition made in advance.

The two main tasks the financial organization will face along this path are working with the customers’ concerns and a reckoning for strong technical support.

We at Infopulse would be glad to support your digital transformation and the adoption of open finance, so get in touch with us!

About the Author

Oleksandr Nikolaienko has 20 years of overall IT experience, 15 years of which he dedicated to project management and business analysis. He contributed to the development and delivery of financial software, risk management solutions, internet and mobile banking solutions. He has proven expertise in managing the entire portfolio of projects in FinTech, Logistics, and Telecom. Oleksandr is a highly qualified expert having earned such international certifications as Project Management Professional (PMP)®, Certified ScrumMaster® (CSM), Certified SAFe 4 Agilist® (SA), and ICAgile Certified Professional – Delivery at Scale (ICP-DAS).

Oleksandr Nikolaienko

Head of FinTech Practice

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