We’ve talked about Open Banking ad nauseam on this blog, but then again, that’s what we’re here to do, right? Today, our exploration of this groundbreaking technology is taking us into the not-so-far future.
What is open finance?
Open Finance is simply the evolution of open banking — accessing non-banking data such as mortgages, savings, pensions, insurance, and consumer credit, using trusted third-party APIs. 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 benefits
It’s important to establish here that open finance is not a figment of our imagination but something already in the works. Statements from market regulators, such as the FCA Feedback Statement on Open Finance, recognise the importance of open finance and reveal its potential benefits:
- Improves user experience through tailor-made products and services
- Allows for wiser financial decisions and better financial management
- Improves efficiency and productivity for Corporates and SMEs
- Improve competition among financial services providers, spurring innovation, developing new services, and increasing demand
To further elaborate on its potential benefits, let’s take a look at some specific use cases.
3 potential use cases that make the most out of open finance
The lending industry is one of the most stagnant business sectors in the market. Third-party lenders must evaluate applicants’ risk profiles and financial behaviour to determine their creditworthiness. This is done in a slow, manual and biased manner or by employing algorithms that are often too simplistic in their analysis.
What’s the problem with both of these approaches? They are prone to human mistakes and never have the depth of information necessary to create an informed customer profile. Simply pulling some numbers from a system does not give you a realistic idea of whether someone can repay their loan.
Where does open finance come into this? It fits rights in because it allows lenders to derive data from different sources of an applicant’s life. From taxes to spending habits, lenders can tap into data and information they previously were oblivious to.
Enhance consumer financial decision-making
Just as open finance helps lenders, it also helps consumers. Open finance will further evolve personal finance management (PFM) apps and give people with average to low financial literacy the tools they need to make informed decisions. People will no longer need to call their accountant, tax advisor, or insurance to make decisions.
Logging on to their app will be enough to oversee and manage all the financial aspects of their life.
One of open banking’s main advantages is the personalisation of banking products and services. By giving consent to share their data, consumers allow businesses to tailor their offerings based on their specific needs. Open finance can take that notion a step further.
Open finance can allow businesses from different sectors to collaborate and create packaged offerings for their customers. Opening up the floodgates of a customer’s financial footprint can create unthinkable opportunities. How do tax, insurance, and loans interact? What offers can be derived if we could track trends and relationships?
The future of open finance
We are slowly yet steadily entering the era of open finance. Is it something that will happen from day to day? No. There is still a lot to figure out about the regulation and privacy of this idea, but all signs show this is not a matter of if, but a matter of when.
We can confidently tell you is that no matter how things develop, we will be here to discuss it and give you all the information you need to know. Until next time.