Open Banking Is Great, but Open Finance Is Greater
Over the last three years, the concept of open finance has gained recognition all over the world, especially in Europe. But what does open finance bring to the table?
The concept of open finance came to light approximately at the same time that open banking started being implemented. This concept has since then been studied and tested with the intention of it being implemented in Europe by 2024 which may be extended due to the COVID-19 pandemic.
What Are Open Banking and Open Finance?
The concept of open banking and by extension open finance and open data came to be as part of:
- the growing consciousness that data has value
- the fact that it should not be kept in corporate silos
- the consumers desire to have full control of their own data
In a way, the GDPR Directive was pretty pedagogic to consumers on making them aware of which of their personal data was being kept by third parties and how they get the power to control it.
Specifically, the control of the financial data kept by their ASPSP is given to consumers in the scope of the PSD2 Directive which established the regulatory framework of open banking.
Along with these new regulations, new technologies were adopted and developed to allow the sharing of information in a safe, transparent, and simplified way in the banking industry. This innovative concept was further expanded on as it increased in scope and reach even with the appearance of COVID-19 and the problems that it brought.
The concept of open banking has been largely established through the use of APIs, so the next logical step would be to apply the same approach to other industries beyond PSD2 and the banking sector. In that sense, open finance is the successor of open banking in the process of opening the flow of the client’s information with the end goal being the concept of open data. These concepts, as of the moment of writing, are generally considered to be the set of regulations and infrastructures that allow for the safe and simplified sharing of the client’s financial information with their consent.
The concept of open banking has been largely established through the use of APIs, so the next logical step would be to apply the same approach to other industries beyond PSD2 and the banking sector.
However, contrary to open banking, open finance does not encompass only the Banks and FinTechs but expands to insurance and the other firms outside the financial market. Open finance does not correspond to just what open banking does not cover. This is also evident when we consider the open banking phases in Brazil that start merging with open finance towards the end. In essence, open finance includes what was within that concept and adds to it with other firms that are outside the financial market bringing greater benefits to the firms and clients alike.
What Does Open Finance Bring to the Firms?
This means that at the firm level, open finance tends to level the playing field. This is due to the aggregation of the financial information that the smaller firms might not have had the resources to manage on their own. As such, it should help them manage their finances effectively by using the open API data that simplifies the administration of their financial information. But open finance should not just improve the standing of small and medium firms, that have the necessary structure to use open API data, it will increase competition on the bigger firms. This is possible since it incorporates information from other firms that were not considered in open banking and as such, it should also enable firms to spot business opportunities more easily in the market and expand the range of services that they are able to provide to their clients.
What Does Open Finance Bring to the Clients?
Clients will also benefit from the changes open finance will bring. They will gain access to a wider range of services, have greater control over their financial information and be able to assess the state of the market more easily so they can ascertain which services are available in the market and which best suits their needs. In this sense, open finance will also help to reduce the information asymmetry between the clients and the providers of financial services.
What Is Needed to Implement Open Finance?
Considering the benefits that open finance brings, it is expected that it will be implemented at a global scale but for that to be achieved there are some requirements. First, there will be a need for the development of infrastructures. These are simplified by adapting the existing open banking resources and expanding their scope. Secondly, existing regulations (e.g. GDPR, Consumer Protection Directive) need to be adapted to safeguard the end clients since this concept is based on the sharing of their financial information.
What Has Been Done to Implement Open Finance?
In response to a publication by the European Commission on the Retail Payments Strategy for the EU, some institutions have started to take action. One such institution is the Berlin Group that has already started to test the use of an API framework dedicated to open finance. Another would be the European Payments Council that is considering the use of a Request to Pay scheme that could be used as a base to implement open finance.
What Can We Expect from Open Finance?
Similarly to what happened with open banking after the current phase of practical tests, open finance will start to be implemented on a global scale with a focus on Europe, Brazil, and Australia since these geographies have shown the most interest in this concept. Currently, it is still in the testing/conceptual phase, and it is expected that it will come into play on a global scale at least until 2022.
To conclude we believe that, in general, the benefits of open finance will outweigh the cost of ensuring the secure flow of information if correctly implemented. But as we have established in this article, open finance is on the verge of being implemented so what comes next? Will we finally achieve a world of open data or are there still steps to be taken before we reach that goal? And what changes and benefits will the next phase bring?
Now only one question remains: will you stay on the side-line and let this wave of innovation pass by, or will you join Xpandvertex on this journey through uncharted waters into a better future for financial services and customers?
Pedro Morgado – Service Management Coordinator