Open finance is the practice of using open APIs (application programming interfaces) to give third-party developers access to the data they need to build applications and services in the financial industry. Open finance is an extension of open banking. While open banking focuses specifically on banking data, open finance includes a broader range of financial services such as insurance, investments, and pensions. This facilitates the creation of more varied products and services that let consumers manage their financial assets, liabilities, and insurance products in one platform, regardless of where these assets are held.

The open banking market is projected to increase from $57 billion in 2023 to $330 billion in 2027. Below, we’ll explain what you need to know about open finance: how it works, where it’s used, and how it’s shaping the future of finance.

What’s in this article?

• What are the principles of open finance?
  
• How does open finance work?
  
• What is open finance used for?
  
• How open finance benefits consumers
  
• Open finance technologies: APIs and their functions
  
• Privacy and security in open finance
  
• The future of open finance
  

What are the principles of open finance?

Open finance is governed by core principles that value consumer rights, accessibility, ease of use, and maximum functionality. These principles serve as best practices for the open finance industry.

• Data access and sharing: Consumers should have access to their financial data and should be able to share it with authorised third-party providers (TPPs) through application programming interfaces (APIs).

• Consumer consent: Consumers should have control over their financial data and should need to give explicit consent to sharing it with TPPs. This includes knowing how their data will be used and having the right to revoke consent at any time.

• Data portability: Consumers should be able to transfer their financial data easily between different providers, which promotes competition and innovation in the financial sector.

• Interoperability: Different financial systems and platforms should be able to communicate with each other and exchange data, enabling consumers to access a wider range of services and products.

• Security and privacy: Open finance systems must prioritise the security and privacy of consumer data by implementing strong measures to protect data from unauthorised access and misuse.

• Transparency: Open finance providers should be transparent about their data practices, fees, and terms of service so consumers can make informed decisions.

• Innovation and competition: The goal of open finance is to foster innovation and competition in the financial sector by facilitating the creation of new services and products that benefit consumers.

• Financial inclusion: By providing greater access to financial services and products, open finance promotes financial inclusion for underserved populations.

How does open finance work?

Open finance uses application programming interfaces (APIs) to share financial data between different institutions and authorised third-party providers (TPPs). Here’s how it works.

• Consumer consent: The foundation of open finance is consumer consent. Before any data sharing occurs, the consumer must grant permission to a TPP to access their financial data. This consent is usually given through an online interface.

• API access: Once the consumer grants consent, the TPP can access the consumer’s financial data through APIs provided by the institution. APIs function as sets of rules and specifications that allow different software applications to communicate with each other.

• Data usage: The TPP uses the customer’s financial data to provide a variety of services to the consumer, such as personalised financial advice, account aggregation tools, budgeting apps, investment platforms, and lending services.

• Security measures: Throughout this process, stringent security measures including encryption, authentication, and authorisation protocols protect the consumer’s financial data, ensuring that only authorised parties can access the data. Privacy regulations and guidelines further safeguard consumer privacy.

What is open finance used for?

Open finance has a wide range of applications that benefit consumers and businesses. Here are some of the main uses.

Consumer uses

• Account aggregation: By combining financial data from multiple institutions into a single platform, open finance offers consumers a holistic view of their finances.

• Personalised financial management: Open finance analyses financial data and offers consumers tailored advice on budgeting, saving, investing, and debt management.

• Simplified product comparison: Consumers can compare financial products from different providers, such as loans, credit cards, and insurance policies.

• Improved financial inclusion: Populations that are underserved by traditional banking can gain greater access to financial services with online tools.

Business uses

• Customer acquisition and retention: Businesses can attract new customers and retain existing ones by using open finance to offer innovative and personalised financial services.

• Risk assessment and underwriting: Businesses can use open finance to access more accurate and up-to-date financial data for better risk assessment and underwriting decisions.

• New product development: Businesses can use the customer insights that open finance yields to create tailored financial products that meet specific needs and preferences.

• Improved customer service: Businesses can analyse the data that open finance makes available to provide customers with better and more personalised customer service.

Sample products powered by open finance

• Robo-advisors: Automated investment platforms that use algorithms to build and manage investment portfolios based on individual risk tolerance and financial goals.

• Financial wellness apps: Applications that track spending, set budgets, and offer personalised financial advice.

• Alternative lending platforms: Online platforms that connect borrowers with lenders, often using open finance data to assess creditworthiness.

• Insurance comparison tools: Online tools that help consumers compare insurance policies from different providers based on their individual needs and risk profile.

How open finance benefits consumers

Open finance allows consumers to actively engage with their financial data and become more financially literate. Consumers better understand financial concepts and become more proactive in managing their finances. Open finance also fuels a competitive marketplace that can lead to lower costs and more choices and expands the reach of financial services compared to traditional banking.

• Financial transparency: By granting consumers more access to and control over their own financial data, no matter where the data is located, open finance provides consumers with a comprehensive overview of their financial situation. This allows them to better understand their spending patterns, debts, assets, and overall financial health.

• Financial management: With access to aggregated and analysed financial data, consumers can make informed decisions about financial products and services such as automated investments. They can compare offers from different providers based on personalised insights and choose options that suit their individual needs and goals.

• Personalised financial services: TPPs can use shared financial data to develop personalised financial products and services tailored to individual consumers. This includes personalised investment advice, targeted insurance policies, and customised budgeting tools that can help consumers manage their finances more effectively.

• Financial inclusion: Open finance can extend financial services to underserved populations who might have limited access to traditional banking. By sharing their financial data with TPPs, consumers with thin credit histories or alternative financial backgrounds can gain access to credit, insurance, and other important financial products.

• Increased competition and innovation: Open finance creates a more competitive financial landscape. New entrants and fintech companies can use shared data to develop new products and services and challenge traditional financial institutions. This increased competition drives innovation, which benefits consumers by giving them more choices.

• Reduced costs and fees: As open finance leads to competition in the financial sector, consumers can expect reduced fees and costs for financial products and services. TPPs often have more transparent pricing models and lower fees compared to traditional institutions.

Open finance technologies: APIs and their functions

In the context of open finance, APIs facilitate the secure and standardised exchange of financial data between different parties. APIs allow authorised third-party providers (TPPs) to access and retrieve specific financial data from banks or other financial institutions on behalf of the consumer. Here’s a breakdown of the key functions of APIs within open finance.

• Data access: APIs establish a secure channel for data sharing, ensuring that only authorised TPPs, with the consumer’s explicit consent, can access the requested financial data.

• Standardised data formats: APIs define standardised formats for data exchange, making it easier for different systems and applications to interpret and process the shared information. This promotes interoperability and integration between financial platforms.

• Functionality exposure: APIs also make specific functionalities of financial institutions available to TPPs. For example, a payment initiation API would enable a TPP to initiate payments directly from a consumer’s bank account.

• Innovation and collaboration: APIs enable TPPs to build new financial products and services on top of existing infrastructure, encouraging collaboration between traditional financial institutions and agile fintech companies and leading to a wider range of solutions for consumers.

• Efficiency and automation: APIs automate many manual processes involved in financial data sharing, making these processes faster and reducing the need for paperwork and manual intervention. This creates a better user experience.

• Real-time data access: APIs grant real-time access to financial data, providing consumers and TPPs with up-to-date information. This is particularly valuable for services that require real-time insights, such as investment platforms and budgeting apps.

Examples of API usage in open finance

• Account aggregation: APIs allow TPPs to gather financial data from a consumer’s accounts at different institutions and provide a consolidated view of their financial situation.

• Payment initiation: APIs enable TPPs to initiate payments directly from a consumer’s bank account, facilitating transactions within their applications.

• Credit scoring: APIs can retrieve credit scores and other relevant financial data from credit bureaus to assess a consumer’s creditworthiness.

Privacy and security in open finance

Open finance raises important privacy and security considerations. These include:

• Data breaches: Cyberattacks or vulnerabilities in third-party providers’ systems could permit unauthorised individuals to access financial data, leading to identity theft, fraud, and financial loss for consumers.

• Data misuse: Third-party providers could potentially misuse the data they access, such as by selling data to unauthorised parties or using it for discriminatory purposes.

• Privacy violations: Sharing financial data could reveal sensitive personal information, leading to privacy violations and potentially harming consumers.

Parties involved in open finance are using the following strategies to tackle these privacy and security concerns.

• Strong security measures: Implementing security measures such as encryption, multi-factor authentication, and regular security audits protects data from breaches.

• Strict consent mechanisms: Obtaining explicit and informed consent from consumers before sharing their data ensures they have full knowledge of and control over how their data is used. Consumers should also have the right to revoke consent at any time.

• Data minimisation: Collecting and sharing only the minimum amount of data necessary for the specific service or purpose further protects privacy.

• Transparency: Providing clear and accessible information about how data is used and shared empowers consumers to make informed decisions and exercise control over their information.

• Regulations: Governments and regulatory bodies are developing and enforcing comprehensive data protection regulations to protect consumer rights and ensure businesses use data responsibly. Open finance must comply with existing data protection regulations such as the General Data Protection Regulation (GDPR) in Europe and California Consumer Privacy Act (CCPA).

The future of open finance

Open finance is changing the way businesses and individuals access, share, and use data within the financial services industry. The new services that open finance facilitates have promoted innovation and expanded consumer choices. Here are the ways in which open finance is expected to evolve.

• Greater scope: While open finance broadens the scope of open banking beyond banking and payment services, its principles are expected to expand further. This broader scope will further integrate consumers’ financial activities into cohesive, manageable systems.

• Stricter regulatory frameworks: As open finance matures, so will regulations. Stronger and more comprehensive regulations will protect consumer data and privacy while promoting innovation.

• Advanced use of AI and machine learning: The future of open finance will see greater integration of AI and machine learning technologies, which will analyse vast amounts of data to gain predictive insights, automate services, and improve decision-making processes for consumers and providers.

• Blockchain integration: Blockchain technology could further revolutionise open finance by offering even more secure and transparent ways to share and verify financial data. This integration could lead to the development of decentralised finance (DeFi) services that operate entirely on blockchain networks, creating alternatives to traditional financial structures.

• Global standardisation: As more countries adopt open finance frameworks, there will be a push toward global standards and interoperability. A global network of financial services could simplify international transactions and global financial management, benefiting consumers and businesses.