Open Banking

Exploring open finance for product innovation part 1

Open finance is similar to open banking but takes one step further to encompass a broad range of financial data. This open ecosystem can foster collaboration among various stakeholders, drive innovation, and create value for both consumers and businesses.

This is part 1 of a 2 part series on open finance for product innovation.  

Open Finance, at its core, refers to a shift in the way financial services are conceptualized, developed, and delivered. It revolves around the idea of leveraging technology, data sharing, and interoperability to create an ecosystem where various financial entities seamlessly collaborate and integrate their services. This open approach not only enhances transparency and accessibility but also empowers consumers with greater control over their financial data.

Open finance will have a significant impact on innovation in financial products and services. From traditional banking to digital and mobile banking, consumers have become increasingly comfortable with more integrated and real-time services. With open finance, product innovation and development teams will have access to a whole new set of tools to drive efficiency, growth and enhanced customer experiences. 

In this article, we explore and illuminate the pivotal role open finance plays in catalyzing innovation within financial products. By fostering collaboration between diverse financial entities, open finance creates an environment where data can flow securely and seamlessly. This, in turn, paves the way for the development of cutting-edge financial products that are personalized and effective. 

Understanding Open Finance

Nowadays, some people have heard of open banking - but what is open finance? Simply put, open finance is open banking stage two. Where open banking gives customers control over who gets access to what part of their banking data, open finance goes one step further and gives control over financial data. Financial data includes banking data (account and transaction data.), payment methods and histories, credit and loans, investment, insurance, and could also conceivably pull from market data, blockchain and cryptocurrency networks, IoT devices, regulatory and compliance data and more. 

Key principles and characteristics of open finance

Open Finance is built upon a set of key principles that guide its philosophy and operation. In Canada, the Advisory Committee on Open Banking agreed upon six key consumer outcomes to guide the basis for open banking, and by extension, open finance, in the future. Every country has its own guidelines, but in general they coalesce around the same principles of innovation, transparency, innovation and consumer empowerment. These guidelines generally include: 

  1. Consumer data ownership and control: As with open banking, in open finance, users have ownership and control over their financial data. They should be able to grant explicit consent for data sharing and have the ability to revoke access at any time.
  2. Consumer consent and privacy: Users must give explicit consent before any data sharing occurs. To this end, robust privacy measures are required to ensure correct and compliant handling of data. 
  3. Standardization of APIs and protocols: Financial data should be shared through standardized APIs and protocols, allowing different financial institutions and service providers to interact and exchange data. 
  4. Data portability: Users should have the right to easily transfer their financial data between different service providers, ensuring that they are not locked into a single platform or institution.
  5. Transparency: Financial institutions and service providers should be transparent about how user data is collected, used, and shared. Users should have clear visibility into how their data is being utilized and have recourse should problems arise. 
  6. Customer-centric design: Services developed within the open finance ecosystem should prioritize user needs, preferences, and experiences.

There are many more guiding principles to open finance, many of which include ethical treatment of data and transparency. 

How open finance facilitates innovation 

Open finance is a concept that is still being developed globally, with governments deciding on how data should be treated, who will ensure oversight, how APIs should be standardized and more. However, while official guidelines are still being written, open finance has already started to impact traditional finance. 

Increasing collaboration between parties

A key impact has been the introduction of regulatory sandboxes and active experimentation. Banks, financial institutions (FI)s and government bodies have developed test sandboxes with proxy data to encourage internal and external innovation. These allow for secure and controlled environments in which banks, FIs and fintechs can develop and integrate new banking services. In 2018, Japan went ahead with amendments to the Banking Law in order to establish an institutional framework for these innovations that also protected user data. The UK did as well when the CMA required banks to maintain and release data in line with Open APIs in the UK retail and SME banking market. 

This trend has led to more partnerships between banks, FIs and fintechs, blending traditional and new financial services. Moreover, there’s been a rise in fintech ecosystems, where multiple service providers collaborate to offer integrated and interconnected financial experiences for customers. This has led to the resurgence of embedded finance, where non-financial companies and transaction situations now incorporate financial services. For example, Air Canada joined forces with Hopper, a travel booking app to offer “Cancel for any Reason”, allowing for immediate refunds up to 24 hours before a flight’s scheduled departure. 

Driving customer personalization

One of the key outcomes that’s expected from open banking is data-driven personalization. With access to broader sets of financial data, fintechs, banks and FIs can offer more personalized solutions. For example, truly personalized financial management that’s easy for customers to set up and use will become more attainable if fintechs have access to real-time transaction data.

Another example are dynamically adjustable savings accounts. Traditionally, savings accounts offer a fixed interest rate that largely doesn’t differ from person to person. With open finance, banks, FIs and fintechs could offer a savings account that analyzes your financial behavioral goals and risk tolerance. It could couple this data with broader economic trends and financial market conditions. Based on this, the savings account’s interest rate could be dynamically adjusted in real time. Perhaps the interest rate could be increased during times of low spend to incentivize more aggressive savings. Or if there’s market downturns, it could automatically move some of the savings into stable investments or adjust the interest rate to protect against losses. It could also provide personalized notifications if the customer is spending too much. 

Improving data accessibility and sharing

Improving data accessibility and sharing lies at the heart of open finance, with APIs and data interoperability serving as its foundational pillars. APIs, or Application Programming Interfaces, facilitate the seamless connection and communication between different financial systems and platforms. By standardizing data formats and protocols, APIs enable the secure exchange of information, allowing users to access and share their financial data with various service providers. 

This interoperability allows fintech companies to create new and diverse financial products and services that cater to individual needs. As a result, consumers gain greater control over their financial data, enabling them to effortlessly manage accounts, make informed decisions, and explore personalized solutions that best align with their goals and preferences. This collaborative approach not only enhances user experiences but also ushers in a more competitive and dynamic financial landscape that benefits both individuals and the industry as a whole.

Furthermore, enabling secure and controlled data access is a paramount principle within the framework of open finance. This concept underscores the importance of protecting sensitive financial information while empowering individuals to control how their data is utilized. 

Robust security measures are implemented to safeguard data from unauthorized access and breaches, ensuring that personal and financial details remain confidential. At the same time, open finance empowers users to grant explicit permissions to trusted entities through secure authorization mechanisms. This controlled access allows users to selectively share specific data for tailored financial solutions without compromising their overall privacy.

Reducing barriers to entry 

Reducing barriers to entry is a core tenet of open finance, aimed at democratizing the financial landscape and making it more accessible to a wider range of participants. By leveraging APIs and standardized data protocols, open finance lowers the development costs and time-to-market for both established financial institutions and emerging fintech startups. This democratization not only promotes healthy competition but also encourages innovation by fostering an environment where experimentation and iteration thrive. Startups and innovators can more easily test new ideas and concepts, rapidly refining their offerings based on real-time user feedback. 

This iterative approach not only benefits consumers by delivering more tailored and diverse financial products but also accelerates the pace of technological advancement within the financial sector. Ultimately, open finance paves the way for a more inclusive and dynamic industry, where fresh ideas and agile development are key drivers of progress.

Click here to schedule a chat with an Olive expert.

Similar posts

Stay up-to-date with the latest in embedded finance and open finance

Our blog covers topics on embedded finance, open banking, open finance, open data, APIs, rounding, matching, customer loyalty and more.