Open banking and now open finance are trading headlines when it comes to fintech, innovation and what the future holds. Differentiating the two isn’t always simple, but in the end, they’re both about empowering consumers and small and mid-size businesses (SMBs) to use their financial data to their benefit.
Depending on the geographic region, you are likely to get a nuanced answer for both terms’ meanings. In many respects, banking is finance and finance is banking. When it comes to consumer-permissioned data, it’s a distinction without a difference.
What is Open Banking?
Open banking empowers the consumer by allowing them to link or permission their financial data from bank accounts to trusted third parties for specific purposes. In some regions like the United Kingdom, European Union, Australia and Brazil, open banking is governed by very specific regulations. In others like the United States and Canada, it’s more broadly defined by the simple act of permissioning financial data to be shared with a third party. This is where it starts to blend with open finance.
What is Open Finance?
Open finance also utilizes consumer-permissioned data, but from financial accounts rather than typical bank deposit accounts. Examples include investment accounts, small business accounts, crypto wallets or fintech apps. This introduces new data types and new data uses because of how much more expansive the available data is.
The key is that it’s still permissioned data for a specific purpose. It’s typically something that benefits the consumer that they wouldn’t receive without sharing that data. In the U.S., what’s commonly referred to as open banking encompasses where the E.U. is heading with its open finance regulations.
Consumers were permissioning their data for use in fintech apps and other solutions long before the terms “open banking” or “open finance” were coined. These sharing and permissioning actions encompass the data currently covered by open banking and open finance in the E.U. It didn’t start solely with the Second Payment Services Directive (PSD2) and other open banking regulations. Consumers in the U.S. have been using the same data in apps dating back to the early 2000s.
In some markets, open banking and open finance are associated specifically with account data being connected via an application programming interface (API) with tokenized access. However other markets, including the U.S., often use both terms to describe the broader permissioned data sharing experience. It includes both next-gen connections via APIs with tokenized access and legacy technologies. Whatever the case, when a consumer wants to put their data to use, they can permission it in a few simple steps.
Open Finance Powers New Innovations
A lot of early use cases for consumer-permissioned data revolved around payments and personal financial management (PFM) apps. The next generation of solutions include innovations on the traditional payment and PFM experiences as well as new capabilities made possible through connections to more types of accounts, more data fields and a more expansive set of tools.
- Lending – Whether consumers are looking for a new credit card, personal loan or mortgage, open banking and open finance can help them qualify in a few steps. And small businesses can demonstrate their qualifications for needed capital through cash flow, business cards, other timely loan payments or a quick overview of their transaction history. Fairer representation of an individual’s creditworthiness can extend access to the digital economy to millions of people.
- Next-gen digital payments – Moving money from account to account was one of the things early open banking regulations in the U.K. set out to solve. Next-generation payment innovation is improving the payment experience from account setup through payments. It’s solving real-world challenges; offering more ways to pay with greater speed, convenience and confidence. Payments can flow and be optimized across any type of account, from paying simple monthly subscriptions to automating the flow of income from a single deposit account across a variety of connected accounts.
- Personal financial management – Open finance allows for the broadening of PFM from simple budget apps that track transactions to a view of investments, health savings accounts, crypto wallets or any other app. This new data provides more utility and a better understanding of financial health.
Benefits of Open Banking and Open Finance
Open banking empowers consumers and small businesses by creating a simple platform for accessing, controlling and permissioning their data so they can benefit from it. With connected accounts across the financial services spectrum, consumers and small businesses can put their data to work, whether it’s for one specific purpose or across multiple apps and services.
Open banking plays a central role in the financial ecosystem as a secure data exchange. Keeping the data flowing between accounts and apps securely and efficiently will continue to fuel innovation and provide benefits across the industry.
Where Open Banking and Open Finance are Headed
As an industry, data stewards and recipients are moving away from credential-based access and screen scraping to direct APIs for consumer-permissioned data sharing. APIs remove credential-sharing from the market and enhance access to quality data. Some markets define open banking and open finance as only full API access. Others view open banking and open finance as being about consumer empowerment to permission the use of their data via legacy and API access. Wherever a particular market is in the evolution of open banking and open finance, it is widely agreed that direct API access is superior and markets are moving toward this technology implementation. At the same time, we don’t want to lose ground in innovation by not allowing consumers to have continued access to their financial data as they did with legacy technologies. Like any technology transition, there is a need for “backward” compatibility for a period of time.
Open banking is a technological shift that is still very much in its early stages. As it emerges and matures, policymakers play a meaningful role in the direction and pace of this transformation. Providing clarity on data protection expectations, data privacy requirements and consumer data rights will help shape a more secure, diverse and inclusive financial market.
As we transition technologies and enable more seamless digital experiences, we, as an industry, alongside regulators, must ensure that consumers have data continuity.
What is data continuity? It’s the data consumers have used from their bank statements, paper checks and online banking apps. It’s the data that they’ve used widely for their financial lives and to get financial services up until now. It needs to follow them into the digital realm—in other words, open banking and open finance.
Open Finance and Open Banking are All About Empowering Consumers
As market dynamics continue to fuel the growth of data exchanges and identity markets, participation is pivotal to expanding new platform opportunities, such as open finance, that expand payment choice, improve financial literacy and extend financial inclusion to the underserved.
Consumer demand is already showing that these capabilities are long-awaited in the market and the desired outcomes are already being delivered. Whether you say “open banking” or “open finance,” or you use one for the other, it’s all about empowering consumers to use and benefit from their data. Either way, they will continue to make the next generation of consumer fintech apps and services more powerful and easier to use.