Open banking has been a game-changer for financial services. It has enabled financial institutions and third-party providers (TPPs) to exchange data and services – not only enhancing existing capabilities but delivering improved experiences to market with
access to transaction data.
Take a mortgage application, for example. With open banking, customers can receive quicker, more informed decisions from mortgage providers by consenting to share transactional data electronically.
Yet, there’s still confusion surrounding the potential of open banking. And to add to this, open banking has been joined by another proposition: open finance.
So, what’s the difference? And what potential is there for financial services to fuel innovation for customers with greater data shareability?
First up, has open banking missed the mark?
Today, there are mixed opinions about whether open banking has been a success. Views tend to depend on whether a business thrives from open banking or must face competitors because of it.
Open banking has created a space for companies to innovate in a sector otherwise dominated by traditional banks.
It’s created countless opportunities for competition, and fintechs were the first to realise this.
Not only does open data allow customers to have greater choice in how they use and access their data. it has also increased and enhanced opportunities for financial services to engage with customers.
Open banking has accelerated open data initiatives beyond the financial services sector. Customers can benefit from sharing their data across multiple sectors, from utilities to property and healthcare.
But with the advent of open banking, regulation has quickly followed. And this is where open finance comes to the fore.
So, is open finance any different?
While open banking is subject to legal, regulatory framework and only shares basic account data, open finance is currently not subject to regulation and provides more detailed data across a broader range of services.
Open finance enables easier entry to the market for new businesses, as it’s designed to enable access to a customer’s entire financial footprint. It will also help to level the playing field when it comes to the financial services ecosystem.
Building on the concept of open banking, open finance is considered to be the next step in the open banking journey.
And for consumers, open finance will drive innovation and competition between services like never before, providing embedded, personalised solutions and supporting financial inclusion.
Financial inclusion: fairer finances for all
While there are still concerns about data protection and bias that must not be dismissed offhand, open finance is a concept still in its infancy. As many still grapple with the potential of open banking, it’s clear that the necessary mechanisms aren’t yet
in place to unleash open finance to its full capacity.
So, as businesses continue to explore opportunities to integrate products with open finance, it’s important to keep in mind the risks and rewards.
One of the biggest benefits to open finance is the potential for fairer, more inclusive financial practices. When implemented correctly with the necessary steps taken to lower the risk of bias in AI –particularly when it comes to those with a-typical or
perhaps less-than-ideal financial backgrounds - the results delivered could therefore be fairer to all.
Additionally, open finance holds potential to build transparency for customers by lifting the veil on their financial options. By revealing all possible options, customers are empowered to decide if their current providers or services are the best for them
and move if there’s a better choice available.
In essence, open finance enables more financial freedom for customers. It allows them to choose the data they want to share, as well as decide how they wish to engage with their finances and deliver access to products and services that they might otherwise
not have access to.
What’s key to future financial services innovation?
Open finance houses potential that open banking didn’t see coming. And this comes down to data – its availability and shareability.
Here, open finance is where the potential to build innovative financial services becomes possible. It offers the chance to create entirely new-to-market business models that leverage data that was otherwise previously inaccessible.
The role that data sharing will play in the development of open finance will enable further competition in the financial services market. It will fuel opportunities for smaller, more agile businesses to shake up entrenched and traditional services.
What we will see next will depend on how financial service institutions use the cloud to harness data and offer differentiated experiences and services to customers. And it’s all to play for.