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How does open finance differ from open banking?

| Article by: Laura AasheimProfile Image Laura Aasheim 3 min

Open banking came along and helped to democratise the financial service industry. With the use of APIs, third-party access to banking data allowed consumers to connect to a wide range of financial products and services while also regaining control over their financial well being. Now, with the growing wave of open technology, open finance has entered the playing field and could result in new developments in the financial market for both consumers and third-party providers. But, how does open finance differ from open banking?


The rise of open banking

Since the introduction of PSD2 in 2018, open banking has been on a steady rise. Consumers were primed and ready for seamless banking connections and the COVID-19 pandemic catapulted the need for open banking services even further.

In general, open banking means customers can gain access to new financial services and products from regulated third party providers. This is made possible by banks who built APIs that follow PSD2 standards and third party providers who get licenses to connect to them. The PSD2 regulation mandated banks to provide free access to their API. As a result, it has made it easier for new market entrants and third party providers to gain access to this new market, improve their product offerings, and increase competition. Open banking allows more developers and businesses to build new fintech services that compete with large retail banks.

Competitive markets are the perfect environment for innovation, which ensures customers' needs are met to the highest level by forcing competitors to offer the best product at the best price. And the list of open banking innovations is endless. From offering ways to reduce debt to facilitating better credit scores, access to open banking data has already resulted in a range of new products and services- open finance will take this one step further.


What does open finance look like and how does it differ from open banking?

Financial data, such as mortgages, savings, pensions, insurance, and consumer credit could be accessible by trusted third party APIs, with consumer consent. While open banking already allows regulated products and services to access transaction data from banks, open finance will provide access to a consumer's entire financial footprint.

Open finance will further level the playing field for the banking industry as well as provide consumers with an even better customer experience. For the banking industry, open finance means new market entrants have even easier entry to the ecosystem. They will be able to offer products and services that will attract more deposits, more lenders, and create better, less risky customers. Not only this, open finance will enable wider integration to include nonfinancial industries, such as healthcare and government. For customers, open finance provides them with embedded, personalised solutions as well as supports financial inclusion.

The fundamental difference between open banking and open finance is that one has a legal, regulatory framework while the other does not. Open finance will build on the concept of open banking to allow access and sharing of customers’ data in relation to even more financial products and services. Open finance can be thought of as the next step to the open banking journey.

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