Although open banking has been around for some time, many people are still unsure of its true purpose. Open finance, a new buzzword, has joined open banking as a source of uncertainty.
But how precisely do the two vary from one another?
The advent of open banking contributed to the democratization of the financial services sector. Third-party access to banking data through the use of APIs gave customers access to a variety of financial services and products while also giving them back control over their finances.
Open finance has now entered the market as a result of the expanding wave of open technology, which may lead to new changes in the financial industry for both customers and third-party providers.
What distinguishes open finance from open banking, though?
Comparison table between open banking and open finance
| Open Banking | Open Finance | |
| API Providers | Only banks are API providers | There may be further banking institutions that offer APIs. |
| Data Ownership and Control | Bank decides what information to share | Customers select which data to share. |
| Legal Regulation | The Payment Services Directive, or PSD2, somewhat regulates open banking. | To date, open finance lacks legal regulation |
| Contract | A client and an API provider do not need to enter into a contract in order to use open banking. | An agreement between an API provider and a client is necessary for open finance. |
Open finance enables a trustworthy third party to access more comprehensive financial data, such as tax, insurance, and pensions, outside of the realm of payment methods. Financial institutions will find it simpler to offer services and solutions that are individually designed to satisfy the needs of a particular customer because to this access to data.
The primary distinction between open banking and open finance at the time of writing was that the former was subject to much more stringent regulation than the latter. Open banking, for instance, is covered under the 2018-enacted PSD2 directive throughout Europe.
In order to open up banking in a safe and secure manner, a regulatory framework was built, and it is hoped that the same notion of openness will soon apply to a larger range of financial product markets. It is safe to expect that as this process proceeds, the regulatory bodies in charge of such matters, such the FCA in the UK, will create the rules required to protect consumers.
Innovation is best fueled by the competitive market that new technologies like open banking and open finance create.
Open Finance: Principles and Guidelines
The primary distinction between open banking and open finance is that the former is partially governed by a legal system while the latter is not (yet).
As you may already be aware, PSD2, or the updated payments services regulation, regulates open banking to some extent throughout Europe. The financial services sector might be opened up thanks to this directive, which became effective in 2018, and it is hoped that further open finance legislation would maintain this progress.
No financial restrictions apply to open finance, which refers to the availability of information about your retirement plans, investments, and other sorts of financial services. However, this might alter soon. Both the European Commission and the UK’s Financial Conduct Authority (FCA) are looking into whether or not open finance needs to be regulated. Through market innovation and competition, better financial health is to be encouraged.
What advantages does open finance offer?
Finance as we know it has been democratized and changed through open banking. The next step in this process is open finance, which will promote cooperation between outside service providers and the formerly closed banking sector.
Both firms and consumers would benefit from open finance since it will make it easier for customers to access and understand their financial information. Better financial decisions result from having access to more information.
Consumers are given more financial control thanks to open finance’s transparency. A step toward open data, where everyone has a say in who has access to their information, both financial and nonfinancial, is open finance.
What Values Open Finance Drives and How It Transforms Open Banking
The future of open banking is anticipated to lie in open finance. By incorporating the following values for each of the parties, it transforms and maximizes the advantages of open banking:
- Transparency for both clients and lenders. More transparency is promised by open finance for both lenders and borrowers. The latter have the chance to raise their credit score by accounting for all of their income and expenditure data rather than just the financial information that their bank owns. The same opportunity is advantageous for lenders as they may use AI to anticipate the likelihood of a flawless pay-off and hence make less hazardous lending selections.
- Greater volume of data. Banks, insurance firms, fintech companies, and other financial institutions will be able to collect extensive data sets on individuals’ spending habits thanks to open finance. In turn, AI-powered data analysis will enable even more precise service recommendation, tracking and analysis of spending patterns, foreseeing needs, and assisting users in making more insightful financial decisions.
- Improved data control The fundamental tenet of open finance is the freedom of the consumer to select which companies and which data to share. The use of more robust authentication and access control systems to execute open finance through APIs implies leveraging improved data security.
- The centralized management of services All of the financial services that clients utilize are gathered under the umbrella of open finance. They may handle all of their financial accounts and transactions in one location using this option, which will save them time and effort.
Conclusion
The next development in open banking is open finance. Although the majority of banks are aware of the benefits of open banking, following open finance trends can put institutions one step ahead of the competition.
The financial institution’s two key duties along this route will be addressing consumer concerns and preparing for robust technical support.
Get in touch with us at Infopulse so that we can assist you with your digital transformation and adoption of open finance.
