Historically, traditional retail banks are the only ones who are responsible for collecting, processing, and managing customers’ data. And because of this, knowledge about the financial information and the services that can be offered using this data was exclusive to the banks until the arrival of third parties into this ecosystem.
To understand Open Finance, it is important to know about Open Banking. Open Banking is a practice where banks allow third parties to access customer financial data via Application Programming Interface (APIs).
The idea of Open Banking revolves around the premise that customers have the right to access their data (such as transaction history, and payment) that are being held by their banks and can provide consent to any third-party financial service providers to use this data for customer’s benefit.
What is Open Finance?
Open Finance is an extension of Open Banking. Apart from sharing basic account data from banks, customers also allow the exchange of data from a wide range of other financial companies with third parties for better services. In other words, the entire financial footprint of the customer now gets securely shared with the third parties through APIs for better financial services.
While Open Banking already has standardized frameworks, Open Finance, being in its infancy, has just started to formulate its standard operating procedures.
Growth of APIs
The UK, being an early adopter of Open Finance, has seen a considerable amount of API calls growth in the last 3 years. The number of successful Application Programming Interface (API) calls made by third parties via open banking APIs has grown manifold from 1.9 million in 2018 to 694 million in 2020. It is expected that the adoption of API-based services will continue to surge in the coming years as well.
What’s in it for the customers?
- Access to more tailor-made products that cater to the customer’s need of the hour. With more third parties trying to offer products, providing personalized experience becomes key to retain customers
- Increased awareness about the financial position: Personal financial management will improve as a direct result of having access to the holistic and accurate assessment of an individual’s financial footprint, in turn improving their overall financial prosperity
- Effortless to switch service providers: Open Finance can entirely automate the process of finding the best service providers and inform customers when they are overpaying for a product or a service
What’s in it for the financial institutions?
- Open Finance will lead to the financial inclusion of more people which means a wider marketplace
- The third-party providers typically being the neo-banks and fintech, in their way to become successful, will drive innovation ultimately elevating the end-user experience
- Cross-selling products has become easier than ever before for businesses when banks, fintech, and third parties work together
Top open finance trends to look out for:
- Embedded finance is the future of everything finance. It’s the unification of a non-financial service provider (Example: Amazon, Uber, etc.,), with a financial service provider. Banks have always acted as the player who bridged the gap between the customer and the company they did business with. Embedded finance could simplify the financial processing involved in payment transactions, lending, and so on. Embedded finance is immediately expected to revolutionize payments, lending, insurance, and banking soon
- Demand for integrated experiences: There is seemingly a surge in the demand for a single platform and ecosystem where customers can perform their financial management seamlessly. While we have previously seen integrated experiences in the technology space (Eg: Apple ecosystem, Android community, Microsoft products, etc.,), Open Finance paved way for the possibility of having an integrated financial marketplace
- Contactless payments have been growing for a few years now and it got its big push in 2020 because of COVID-19. Although we may not eliminate cash from our society, people got comfortable using contactless payments for everyday transactions. Click here for the Top Payment Technology trends to look out for in the post-pandemic world.
Common risks in Open Finance:
- In the age of notorious cyber-attacks, cyber-security risks pose a serious challenge in the implementation of Open Finance
- Open Finance demand financial awareness among customers and make them keep pace with the fast-changing digital world
- · Risk of businesses having access to more data and may involve in personalized pricing of essential products and services which may seriously affect vulnerable customers
Open Finance is a Win (Customer)-Win (Financial institutions) situation for everyone if implemented properly. For customers, financial decisions could become simple and hence improved financial well-being. Financial institutions, on the other hand, get top-line growth and also have bottom-line savings at the same time. The success of Open Finance majorly depends on the accountability of the businesses and financial service providers to a fair and secure ecosystem.
