Open banking has transformed the financial industry and the way financial services can be shared and used by multiple actors. Open finance is the next step, offering further opportunities for innovation, choice and customised financial services. We will take a closer look at what Open banking and Open finance mean and how they differ. We will also look at the challenges they can bring, and what is needed to implement Open banking and finance in a safe and successful way that attracts customers.
Open banking brings innovation, transparency and choice to the financial industry
The foundation of both Open Banking and Open Finance is the ability to share financial data between different actors via APIs (Application Programming Interfaces). These are secure and standardised interfaces that are used to transfer data between different systems in a controlled manner.
Open banking means that banks and other financial institutions make it possible for other parties to access financial information and services, with the customer’s consent. An example of open banking is when authorised third-party providers use the bank’s APIs to access a customer’s transactions, balances or account information in order to offer financial services. Examples include budgeting tools, financial counselling, credit scoring, or comparing different financial services. Another common use is when third-party providers make payments directly from the customer’s bank account without having to go through other payment service providers.
Open banking has largely been driven by regulatory requirements, such as the EU’s PSD2 (Payment Services Directive 2). The aim of Open Banking is to increase competition in the market and make it more transparent, driving innovation and new services. In particular, Open Banking aims to give consumers more control over their financial data and access to more options.
Open finance takes Open banking even further
Open finance is the natural extension of Open banking and includes additional financial data beyond just bank accounts. Open finance shares data from several different types of financial services. For example, for loans, investments, pension savings, and insurance. This gives customers additional control and insight into their financial assets, opportunities and products – regardless of the provider they use. By sharing data across even more providers, customers will be able to bring all their financial tools together in one place to get a better overview and make better decisions about their finances.
While both Open banking and Open finance are built on the same technical foundation with APIs to share data, there are differences between them. Where Open banking is about banking data, Open finance has a wider scope and involves more types of financial services. This means that Open finance can offer consumers even more control and even more opportunities, but it also requires more from the actors involved. Open banking is already established, governed by regulatory frameworks such as PSD2, and Open banking has ecosystems in place to share banking data in an orderly and secure way. Open finance is evolving and is still in the process of designing the required frameworks and standards. This is also more complex as Open finance involves more sectors of the financial industry and therefore needs to take into account different types of regulation and data standards.
The opportunities of Open banking and Open finance
It is easy to see the customer benefits of Open banking and finance. When consumers’ data can be used by more players, they get a more transparent, accessible and competitive market. Shared data allows customers to choose between different customised services based on a complete picture of their financial information. In short, they get more and better services with lower fees, and therefore more control over their finances. But banks also have much to gain from Open Banking and Open Finance. Some of the new opportunities that open up include:
- New revenue streams. For example, from API services or licences for the third-party providers that use the information. Or through strategic partnerships with specialised players that allow you to quickly offer more advanced solutions and services.
- A better customer experience. Open banking allows banks to integrate more services, giving customers more tools and opportunities. Greater access to deeper customer data allows banks to tailor their offerings to each customer for a more personalised and relevant experience that strengthens customer loyalty.
- Faster innovation. By partnering with, or integrating solutions from, third-party providers, banks can quickly offer customers new services. Third-party solutions and integration via APIs allow banks to quickly and cost-effectively develop new products that give them a competitive edge. This can be done without having to build the necessary in-house IT infrastructure.
- Better insights. With data from a wider range of financial actors, banks can get a clearer picture of each customer’s financial situation. This makes it easier to offer the right services, such as loans and investments. Analysing data from multiple sources also makes it easier for banks to make informed decisions about credit risks for better risk management.
- More efficiency thanks to automation. APIs enable automatic data sharing, reducing the manual labour involved in internal processes. Faster data sharing can also reduce operational costs while increasing the quality of services.
The challenges of moving to Open banking and Open finance
Open banking and open finance offer great opportunities for innovation, new services and an improved customer experience. At the same time, it requires new thinking from all stakeholders in the banking and finance industry. If Open Finance is to be successfully implemented, banks and third parties need to be willing to work together to develop a functioning ecosystem with common standards for data sharing and regulation. This requires a partnering mindset that focuses more on collaboration than competition. This openness needs to be as much in the mindset of banks as in the integration capabilities of their data systems.
There is also a major technical challenge with Open banking and Open finance. Both require an API-first technology that enables fast, orderly and, above all, secure data sharing. Many banks still use older legacy systems for their IT, which can be difficult to integrate with modern API solutions. This requires a technical rethink that prioritises APIs that support Open Banking and Finance. It’s not just a matter of getting the technical conditions right. If consumers are to be able to trust that their financial data is shared in a safe and secure way, they need to be guaranteed that this is done via robust and secure APIs. Customer privacy must be protected through the use of secure authentication methods. However, investing in robust APIs is a good investment. For those banks that think ahead, recognise the opportunities of open banking and finance, and invest in the technology that enables them, the future is bright.
Aptic provides you with the prerequisites for Open banking and Open finance
At Aptic, we specialise in software solutions for the financial sector. We have extensive knowledge of how online banking and financial services processes work, both in Europe and beyond. We work with regional experts to ensure the best, most secure and reliable integrations for Open Banking and for PSD2. Our CLVR platform is built on open APIs that make it easy to integrate with other systems. This makes it a stable and flexible foundation for Open Banking and Finance with future-proof integrations that enable new services and lucrative partnerships. Today’s consumers have a holistic approach to banking and financial services. With built-in flexibility to meet the demands of the future, we have therefore built a platform that supports a number of banking services. This applies to both Open Banking and Open Finance, as well as to the new opportunities the future may bring. Want to know more? Contact us and we will help you!