There’s a significant distinction between open and closed systems. Closed systems are isolated, while open systems can interact freely with the outside environment. That distinction is starting to play out in finance, as innovations in technology, regulations and business models are beginning to emerge as open finance.
What is open finance?
Building on open banking, open finance is about simplifying sharing of more layers of data to enable new financial applications. Allowing people to connect information from various services provides opportunities for more holistic and personalized offerings.
Is open finance the same as open banking?
While open banking specifically deals with banking information, open finance considers multiple other data sources such as insurance, investments, consumer credit and mortgages. Open finance can also integrate data from non-financial organizations that embed financial services features into their products and offerings. Open finance can potentially integrate data from all of a person’s digital economic activities.
How does open finance work?
Open finance is still in its infancy. The concept is that all a person’s financial information is collected in one place under the control and permission of that person. They decide what information they want to share and own the resulting data.
The technology will be similar to how open banking uses APIs to simplify the integration with all the various data and services. But the exact legal frameworks, contractual arrangements, technical specifications and sharing agreements are a work in progress.
Open finance as a way to transform financial services
The Financial Conduct Authority (FCA) in the UK requested input on the topic and published an Open finance Feedback Statement in March 2021. It suggests:
Re-use of this data by other providers would take place in a safe and ethical environment with informed consumer consent. This would timean that a financial services customer who consents to a third party accessing their financial data, could be offered tailored products and services as a result. Access would be provided by that customer’s current financial services provider under a clear framework of consent.
The fantastic growth of the fintech sector demonstrates that API technology is advancing and quite capable. The global expansion of open banking initiatives points to regulators’ and lawmakers’ willingness to develop the necessary legal structures. But will people accept and participate in open finance? The Feedback points to the lessons of open banking that the “biggest single barrier to customer uptake was consumer sentiment and awareness.”
Why is open finance important?
If people better understand the benefits, perhaps the adoption of open finance will accelerate. Some of the promises of open finance include:
- Managing all financial activities from one dashboard
- Automating onboarding to new services
- Streamlining high-friction processes
- Accessing more financial services tailored to personalized needs
- Decreasing switching costs associated with moving to more appropriate or affordable services
- Simplifying complex financial information into more understandable views
- Speeding access to financial information to improve personal management or professional insights
Access to reams of financial data will help power robo-advisors, advanced software that uses algorithms to provide automated investment portfolio management advice with little or no human intervention. From filing taxes to buying a house, open finance can improve financial decisions, simplify lives and help create more wealth.
Open finance promises similar benefits to businesses. As the paperwork and processes of business financial management are more complex than for a person, the benefits are potentially multiplied.
Beyond improving financial activities, open finance can lead to the development of new competitive services and gains in productivity. Delivering financial services with less friction and better analysis can lead to quicker and easier sign-ups, lower costs and better targeting.
With significant cost efficiencies, global distribution and new regulatory outlooks that reward innovation, open finance solutions can help open up access to financial tools and information for the masses. Perhaps one day everyone in the world will be able to access services that help them create financial stability, growth and prosperity.
Financial consent and trust frameworks
For all the allure of next-gen fintech and new ways to create and manage wealth, the success of open finance comes down to trust: will people trust the technology in these new services? After all, financial information is some of the most valuable and sensitive data that people have, so will they willingly share it with little hesitation?
The frameworks for handling financial data will need careful consideration and operationalization:
- What are the legal and technical standards?
- What are the certification, audit and enforcement practices?
- Who has a liability, and how is the liability shared amongst parties?
- What cross-border data transfers are allowable?
- What financial regulators are in charge of which areas, and how is there regulatory cohesion?
On the customer experience side, how will the ability to access massive amounts of data be balanced with the desire to simplify financial choices? Without standardization and education, the immensity of opportunities might be overwhelming rather than enlightening:
- How can approval processes be transparent and fair?
- How can all the legal arrangements be clarified and managed appropriately?
- How can agents act on one’s behalf, considering all the intertwined possibilities?
- How can comparisons between different vendors be fairly displayed?
One key driver for open finance success is digital identity. As all providers in the space operate under financial laws and regulations, fulfilling Know Your Customer (KYC) requirements are necessary. Effective identity measures built into open finance can help facilitate quick, seamless, secure and compliant KYC.
One potential model for handling identity is using KYC utilities, central repositories that store KYC data and documents. While potentially offering advantages in terms of better coverage, data consistency and dissipated costs, careful consideration of the issues around sharing personally identifiable information (PII) and competitive information is necessary.
Also, each financial organization has different compliance procedures and risk appetites, thus requiring a level of trust that all of the KYC utility members are performing proper due diligence. In the end, compliance is the organization’s responsibility, which is nontransferable.
An open finance future
Creating a workable open finance system will require significant efforts. But the opportunity is substantial, both in terms of economic growth and effect on how people use financial services.
With better identity frameworks and secure ways to share financial information freely, open finance offers a path forward for continuing fintech expansion. Enabling access to financial intelligence for more people will result in more growth in personal wealth, more comprehensive economic benefits and better growth opportunities for those that embrace the model.
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