Picture the average day for a US or Canadian citizen right now.
They might start their morning by checking their stocks via an investment app; later, while grabbing coffee, they use their freelancer invoice app to send a payment reminder to a client; before bed, they might use their AI budgeting assistant to give them a quick update on their pensions savings goals.
All of the above is made possible by open finance, the glue that binds various strands of modern financial life.
The data suggests we’re on the verge of an open finance revolution, with mobile banking app, digital wallet, and personal loan app downloads topping five billion worldwide, according to data.ai research.
These apps are the gateway for more advanced products set to hit the mainstream financial sector over the next few years.
Knowing how to integrate it into a business is set to be a major competitive advantage, yet open finance is a broad term that may confuse if not clearly defined.
To avoid any doubt, we’re going to take a look at what exactly open finance means for businesses right now, including how it’s set to impact them over the coming years.
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What is open finance?
Open finance is the term used to describe consumers accessing, managing, and sharing their personal banking data with their chosen financial service providers.
This is made possible through application programming interfaces (APIs).
What are open finance APIs?
Open finance APIs are the pipes through which we share financial data between different accounts and apps.
One example of this could be a budgeting app that uses open finance APIs to connect to your bank account information and automatically track your spending. Another is for a business to issue virtual cards to its customers via smart APIs.
Open finance vs open banking
Open finance builds on the foundation of open banking by expanding data sharing beyond just financial institutions.
This includes businesses that offer anything from budgeting advice to car rentals and thousands of other services.
Open finance uses customer data sharing, combined with strict regulatory oversights, to create an open finance ecosystem full of innovative apps designed to enhance the user experience.
Some prominent examples include open finance crypto wallets, peer-to-peer lending platforms, invoicing tools, and embedded B2B payments, all of which operate outside the scope of open banking finance.
How open data is changing the face of finance
Open data is a fast-moving trend and experts believe it’s set to redefine the way we do finance over the next few years.
While such rapid change is daunting, studies by financial experts McKinsey suggest it could contribute up to 5% of GDP (depending on the region) if correctly implemented. This presents a win-win situation for businesses and consumers.
There are two key factors needed to maximize the value of open financial data across the world, according to the above report.
- Data standardization: Data must be formatted consistently and easily accessible for different open finance platforms to share and use.
- The breadth of data sharing: More types of data need to be shared across a wider range of institutions, with consumer consent, to create a robust ecosystem.
By achieving these conditions, open financial data can be a powerful economic driver for all participants.
What an open data financial ecosystem would mean for businesses and consumers
Source: McKinsey
1. Faster account opening and onboarding
Secure data sharing gives businesses all the security information they need to quickly open an account and streamline onboarding.
For both businesses and consumers, open finance eliminates the tedious process of manually filling out lengthy forms for each new financial service. With secure data sharing, the business can re-populate consumer data when opening the account.
Businesses save the time and labor that manual verification requires and can start offering financial products and services quickly.
Customers spend less time waiting around for their account to open, a key pain point that might cause them to give up on the bank if they’re forced to wait around too long.
2. Improved credit access
Open data allows lenders to access a more holistic view of a borrower's financial health. This goes beyond just bank statements and covers aggregation of other factors like investment data and tax filings, allowing them to make more informed decisions.
Lenders have the chance to generate more revenue by lending to a wider market of borrowers.
Small businesses that need to borrow money can access growth funding, while even smaller businesses with a limited financial history now have alternative ways to demonstrate their creditworthiness.
Individual consumers, meanwhile, can explore loan options with potentially better interest rates and terms thanks to open data giving the lender a better understanding of their financial situation.
3. Enhance fraud protection
Open finance isn't just about convenience; it strengthens fraud protection for both businesses and consumers.
Secure data sharing across institutions makes inconsistencies easier to spot. Imagine a business trying to open a new account with suspicious financial activity linked to a known blacklisted consumer. Open data sharing could flag this instantly, preventing potential fraud.
Consumers also benefit. A more consolidated view of their financial data across platforms means they can easily see unauthorized transactions, allowing for quicker intervention and preventing a loss of funds.
This collaboration between institutions empowers both parties to stay ahead of evolving fraud tactics.
4. Less customer service friction
Open finance acts as a grease for customer service interactions, reducing friction in several ways.
Firstly, data sharing eliminates the need for repetitive financial information gathering.
Let’s picture a consumer calling their bank for a loan application - with open finance, their financial data (income, credit score) is already securely shared with the bank (with their consent), so the bank can quickly give them a decision.
Secondly, open finance allows for a more holistic view of the customer's financial situation. Bank workers will offer more personalized and relevant solutions, leading to faster resolutions and a more satisfying customer experience.
How open finance will impact businesses over the next decade
What we have seen from open finance is just the tip of the iceberg.
Rapidly improving financial technology promises a dramatic shift in how businesses operate and interact with customers over the next decade.
Here’s a breakdown of some of the predicted open finance developments set to take place by 2030.
Hyper-personalized embedded finance solutions
In a digitized society, consumers are used to getting what they want when they want it – and this is sure to translate to the financial world.
Open finance, coupled with advancements in technology, paves the way for a hyper-personalized financial eco-system tailored to specific customer needs, right within the apps they already use daily.
“(Consumer) behaviors are changing as they start to move between different realities, including the metaverse.” says David Rice, Global Chief Operating Officer, Commercial Banking at HSBC. “Banks have to think about how their customers experience this new means of interaction”.
The answer lies in integrating financial tools directly into existing apps and workflows.
Use cases might include a customer receiving personalized investment advice from their budgeting app, getting real-time loan pre-approvals, and automatically applying for the loan – all without switching platforms.
Businesses that can adapt quickly and develop secure, data-driven business models will thrive.
Fast API development
How will businesses bring these new financial tools to life? Matthew Allen, Global Head of Financial Services at Eversheds Sutherland has a simple answer.
“The ability to develop APIs at speed is a more important competitive advantage than ever.” he says. “Banking-as-a-service enables innovation at a more rapid pace, with companies scaling distribution at an accelerated pace”
APIs, acting as the bridge between financial institutions and new applications, will unlock the potential of Banking-as-a-Service, allowing businesses to rapidly scale their financial tools and reach a wider audience.
New security and compliance challenges
New open finance financial products are exciting, but they also raise concerns.
Businesses must prioritize robust cybersecurity measures to protect sensitive customer data and comply with new regulatory frameworks.
The European Union, for example, is proposing a new law dedicated to open finance that would allow customers to share their financial data (like bank accounts, investments, loans) with other financial institutions or tech companies, but only with the customer's permission.
If EU companies fall foul of this legislation, then the penalty for breaking these data privacy rules would be severe.
A safe open finance ecosystem will only become possible via this type of collaboration between financial institutions and regulators.
The Takeaway
Open finance presents both challenges and opportunities. Businesses that embrace open finance, invest in data security, and adapt to changing regulations will be well-positioned to capitalize on this financial management revolution and unlock new avenues for growth.
Want to stay at the forefront of the open finance revolution? Sign up today and find out how Berkeley Payments helps you use advanced API technology to offer innovative payment products to your customers.
