From Open Banking to Open Finance: What’s in it for your Business?

Dubbed by the UK Financial Conduct Authority (FCA) as a platform to potentially transform financial services, the call to shift from open banking to open finance is exponentially growing and certainly getting more attention in the industry. 

Open finance is an extended version of open banking in terms of data sharing. While it’s true that open finance is still in its infancy, the FCA is looking at developing the ecosystem and building a robust support system for it. Let’s delve into the key differences between the two ideas.

Open finance vs. Open banking 

It can be pointed out that there may be fundamental distinctions between the two. But in a more realistic sense, they are two strategies sharing a common principle, and extending it beyond its breadth to further foster innovation in terms of financing. 

Related: EU PSD2 and Open Banking: What Do these Mean for your Business

What is the purpose of Open Banking? 

Open banking is a derivation from the EU’s PSD2 (Second Payment Services Directive 2) where a consumer’s banking and financial information becomes available to financial services firms through explicit consent. But the two still have differences in key areas. EU PSD2 only demands banks to share consumer data with external financial organizations, while UK open banking requires that the information released is in a standardised format.   

Essentially, it [UK open banking] is a solution for individuals and small businesses to be provided with tailor-fit services that best fits their needs and requirements through a third-party financial service provider.

However, as Brexit came to close last 2020, there remains a spillover effect of PSD2 to UK’s open banking, meaning any changes in the original regulation have lingering effects to UK regulations as well. 

The Next Step: Open Finance 

What is Open Finance? 

Innovation and competition underpinned the latest changes in the financial sector, which led us to what we call open finance today.

Open finance builds on the principle of open banking. It expands the scope of its predecessor by including investments, mortgages, savings, pension, insurance, and the likes in your dashboard.

According to FCA, open finance benefits individuals and businesses in:

1. Having access to broader financial products/services,
2. Gaining more control over their financial data, and
3. Managing finances and encouraging better financial decisions.

One good thing about open finance is its idea of consumer-centric services, and how it rests control of the decision making entirely to the consumer. Through open finance, previously excluded customers are empowered to interact with other financial sectors, and further evolve into a bigger picture with their best interest in mind — incoming financial advice, seamless product changes, financial literacy all at your convenience.

Open Finance in Practice 

We can see how the nuts and bolts of open finance will look like in practice. Through Application Programme Interfaces (API), affiliated financial service providers share user data across relevant firms to make financial products and services.

1. Get to know and compare deals from different service providers so you can save on payments. 
2. See how much expenses you generate when you pay your subscriptions and other payments.
3. Dashboards can reflect which lenders can offer more competitive services, and even lower risk of lending by presenting comprehensive data. 
4. Generate and see how much you’re spending.
5. Using your mortgage overpayments to top up your pension.
6. Manage your savings and investments in a given timetable.

 If open finance pushes through, you can have access to all of these, in just a matter of a few clicks. 

How’s it going? 

The FCA launched a Call for Input (CfI)  regarding open finance among consumers, banks, fintech companies, financial advisors, and other concerned bodies to gauge its opportunities, associated risks, and contributing factors in its implementation. And last March, they published the result of the CfI as follows:

1. Firms can leverage open finance in their operating environment, especially that the pandemic’s impact is still around the corner. 
2. Consumers’ usage and interaction with open finance will drive, proportionate, and phase the implementation of the proposed financial ecosystem. 
3. For open finance to develop, a degree of consensus in its foundation is needed, including a regulatory framework, standards, and implementation body. 
4. There is a degree of consensus around the key building blocks needed for open finance to develop in the interests of consumers. These include a legislative and regulatory framework, common standards and an implementation entity.

Aside from the above stated, it was shown that open finance can potentially create qualms about data ethics. The FCA is still coordinating with the government in creating legislations and designing smart data management to raise consumer confidence in using these services. 

Challenges of Open Finance 

Technology and Internet

Like any other advancement in other fields, technology and the internet are the biggest points of risks in open finance. 

Businesses and CFOs are concerned with the threats of security, frauds, and scams. You need to give the consumers an assurance that their data is being taken care of with high-level security, and that you have a stringent protection in place for their sensitive data.   

Unfair biases

Biases are also posing a threat in this area. There are projected gaps in between markets, as there are some who have easier access to technology and banking, and some who don’t have the same chances. If open finance successfully launches, they may have biases against those who belong in the latter due to insufficient banking and financial history. 

Transparency

Clients also want to know how their financial data is being used. Transparency and data security go hand-in-hand in cultivating and maintaining the trust of consumers.

When we give them an understanding of where their data is stored, used, and to whom it is shared, open finance will continue to progress- and even advance the system to a whole new level. 

What’s next for your business? 

There is an array of opportunities for the financial sector to make substantial growth once the movement from open banking to open finance finally takes off. There may be costs in terms of compliance, but as we get past all the initial pitfalls, we are slowly building an enduring success through this innovative line of financial service.

We can help you achieve that financial freedom. Our finance and accounting experts are here to guide you through the trends and changes in the industry. If you need the right hand to assist you in your CFO duties, look no further than D&V Philippines. 

You may download our whitepaper Finance and Accounting Solutions for UK CFOs to know how we can add value to your growing business or you can talk with our experts today.