What is Open Finance, and how does it differ from Open Banking?

Years after Open Banking has entered the financial landscape, we can see what benefits it brought to financial institutions, companies and individuals. Sharing various banking data via secure APIs with consumer consent has opened the doors to innovations, created a better customer experience and helped companies save on payment costs.

With such an extensive pool of benefits, open banking has paved the way for even broader secure data sharing. Open Finance is ready to expand the opportunities that Open Banking has created and bring even more benefits to customers.

So what is Open Finance, and how does it differ from Open Banking? First, let’s revisit what Open Banking is.

What is Open Banking?

Open Banking describes a practice of financial institutions sharing data with regulated third-party service providers via secure APIs. The third-party service providers use APIs to access customer account data and initiate payments, all with the customer’s consent.

The goal of Open Banking is to create greater financial transparency and provide customers with better access to and more control over their financial data.

What is Open Finance?

Open Finance is the next step of open banking. While Open Banking enables account information (AIS) and payment initiation (PIS) services, Open Finance will encompass more financial products and services, not just banking.

Open Finance works on a much larger scale than Open Banking. It could allow authorised third-party service providers to access a wider range of customer data from various accounts, including savings, pensions, investment, insurance, mortgage and more. This data could be used to create and offer more personalised financial products and services.

The goal of Open Finance is similar to that of Open Banking - providing consumers with more control over their financial data. But since Open Finance functions on a greater scale than open banking, it could help release the full potential of the latter.

For example, Open Finance could make account aggregation more comprehensive by bringing multiple customer accounts, such as savings, investment and current account, into one interface. Moreover, Open Finance could also enable automatic money transfers between different accounts, i.e. savings and investment accounts.

Open Finance regulations

Open Finance, contrary to open banking, is not regulated by any legal framework. However, it’s only a question of time until it becomes regulated, as the European Commission is looking into it. In 2022, the Commission launched a public consultation with a broad range of stakeholders to discuss an open finance framework and data sharing in the financial sector.

Following the targeted consultation, the European Commission has announced a legislative proposal for a new open finance framework. According to the Commission Work Programme, the legislative proposal is scheduled to be delivered in the middle of 2023.

Meanwhile, Open Banking in Europe is regulated by the Second Payment Services Directive (PSD2), which is a framework for electronic payment services. The review of the application and impact of the directive is also on the Commission's agenda, together with the regulations of Open Finance.

The difference between Open Banking and Open Finance

The core difference between Open Banking and Open Finance is the scope.

Open Banking has a limited scope compared to Open Finance. Open Banking in Europe is limited to providing Account Information Service (AIS) and Payment Initiation Service (PIS). Both of these services have created great opportunities for companies to build and offer various financial services and brought many benefits to consumers.

For example, open banking enabled account-to-account (A2A) payments that allow direct money transfers between customers and businesses while eliminating unnecessary intermediaries. In doing so, payment costs and settlement times were significantly reduced.

However, Open Banking’s scope is limited to payment accounts. Other financial services such as saving accounts, mortgages, investments and pensions are out of Open Banking’s scope. This means banks and other financial institutions aren’t required to give third-party service providers access to data related to these services.

Open Finance can expand open banking services by applying them to more financial products and services. This would create more opportunities and value for businesses and consumers.

Open Finance benefits for consumers and businesses

Open Finance will bring a number of benefits for businesses and consumers. It will drive the competition and innovation in the financial sector even further and provide consumers with better access to their financial data and more control over it.

Here are the main benefits of Open Finance:

• Improved user experience — Open Finance could automate money transfers between various accounts, such as investment and savings accounts. This would improve user experience and simplify transactions.
• Better financial management — Open Finance will enable consumers to gain a holistic view of their finances by providing various financial information in one place.
• Improved business efficiency — just as Open Banking has increased business efficiency by introducing more effective payment methods, open finance can take it a step further and create even more opportunities for various businesses.
• More innovations and competition — we can already see how opening data that was long kept private can increase competition and drive innovation. Open Banking has boosted the development of fintech companies and brought a number of new services to the financial market. Open Finance can create even more opportunities.

Open Finance examples

Open Finance will affect various sectors, including banks, lenders, electronic money and payment institutions, insurance and mortgage companies and others. It can be applied to these and more sectors to create various opportunities. Here are a few examples:

Lending

Open finance will make lending quicker and more efficient. The lending sector is already greatly benefiting from Open Banking, and Open Finance will improve lending services even more. Having access to all consumer’s financial data in one place, including taxes, investments and mortgages, will help lenders provide more tailored offerings much quicker.

Better personal financial management

Through Open Finance, consumers will gain access to more insights about their financial standing. Having all the different services and their overview in one place will allow consumers to make informed financial decisions. Most likely, all this information will be available in a single application and consumers will no longer need to contact their financial advisor or accountant to get structured feedback on their financial stand.

This will be especially beneficial to users with low financial literacy and provide them with more data-based and personalised resources, which will help to make informed decisions.

The future of Open Finance in the UK and Europe

Back in 2019, the Financial Conduct Authority (FCA), the financial services regulator in the UK, published a call for input. The goal of this call was to explore the opportunities and risks that open finance could bring. Nearly three years on, the European Commission announced a legislative proposal for a new open finance framework.

It’s clear that Open Finance is coming and will continue the job that open banking has successfully started - developing a more competitive financial market that fosters innovations and provides consumers with more control over their financial data.

What is not clear yet is how open finance will be regulated. The European Commission will deliver the proposal on an Open Finance framework during the second quarter of 2023, which may shed more light on the regulations.

Meanwhile, what we can see clearly is that Open Banking is not the end of a digital banking revolution, and open finance won’t be, either. Financial consultants, researchers and various institutions are already talking about the next big thing - open data.

Open data would encompass even more than Open Banking and Open Finance. It would cover all types of data, including social media, health and others. But what it will really look like, only the future will show.

Open Banking is not going anywhere

While Open Finance is surely going to bring more opportunities, it’s a continuation of what Open Banking has started. Open Finance isn’t a competition to Open Banking but rather an extension that will create even more opportunities for companies and individuals.

Open Banking has been the basis for great innovations such as A2A payments and a frictionless checkout experience that you can implement into your business. Partner with kevin. and continue enjoying the benefits that Open Banking has to offer.