Open finance is a concept that enables access to and sharing of consumer data to more financial products and services than available with open banking. A central idea within an open finance system is that data supplied by and created on behalf of consumers are owned and controlled by those consumers.
Under open banking, consumers are able to own and control their banking information, which includes account and payments information. With open finance, consumers are able to own and control their financial data, which includes:
- and more.
Open finance broadens the ecosystem of players within the open environment, including asset and wealth management firms, pension and mortgage providers, and insurance companies. This is why open finance can be thought of as an expansion of open banking, and a subset in the broader concept of open data.
A Real-World Example of Open Finance
Robert has student debt that he’s looking to pay off as soon as possible so that he can start saving up for a house.
With open finance, he can log into his open finance-enabled fintech app and see all of his financial information in one place. He can view his outstanding student debt, his current account balance, his savings balance and savings rate, his pension total, the mortgage rates available to him, his investments and any other relevant financial information related to him and his accounts.
With this view, Robert is able to better understand his finances and make well-informed and holistic decisions to reach his goals.
He sees that he’s overspending on subscriptions by $50. These are subscriptions that he isn’t getting very much value out of. If Robert sends this $50 towards his student loans every month, he could pay off his debt earlier by 1 year. He realizes that with this plan, he could qualify for mortgages with better rates and terms, and be much closer to his goal of home ownership.
Open finance is the next and natural evolution of open banking. By allowing consumers ownership over their own financial data, consumers can benefit from greater choice of financial products and services, such as greater personalization, added transparency of offers, more accuracy in loan and mortgage applications, and more. Companies can benefit as well from better financial and cash flow management. Overall, open finance promises a future of responsible data ownership and security, more innovation and broader financial inclusion.
How does Open Finance Work?
Like open banking, open finance is a data-sharing model that allows consumers to share data with third-parties through application programming interfaces, or APIs. Unlike open banking, open finance connects and shares data across the entire financial ecosystem. For example, a consumer can view his or her entire financial situation (including mortgages, loans, income and investments) in one app. From this, personalized recommendations can be made to the consumer on the best strategy to achieve financial goals.
However, open finance is still nascent in the market. There are several regulatory challenges, including licensure laws, compliance and security, and operational complexity, among others. In short, as with open banking, the government needs to create clear and intentional guidelines around data ownership.
Europe, and especially the UK, are ahead in this respect, but companies there also face technical and business challenges, like cross-platform friction, insufficient collaboration, high costs of developing APIs and lack of consumer trust in the system.
Business Use Case - Mortgage Lending
The mortgage industry has long remained stagnant with the same manual and cumbersome processes. Applicants have to gather a number of documents and forms, and wait lengthy periods of time before they receive an answer. Applicants with short credit histories are particularly disadvantaged, either being denied or having to accept higher interest rates.
With open finance, mortgage lenders and applicants can more easily access more types of data and benefit from a more streamlined and efficient process. This will decrease the time it takes to assess the application and improve accuracy, resulting in shorter deal cycles and more clients.
Mortgage applicants, too, have much to gain. They will have more control over their data, and be allowed to include additional data sources to supplement their application, such as rent payments. They can also review inaccuracies and discrepancies in their data.
Why is Open Finance Important?
Open finance extends and builds upon open banking and expands the benefits of open, secure data sharing to more consumers and applications. It puts the consumer in control of their financial data, and allows for better products and services. Open finance also permits FIs, like pension providers, insurance companies, mortgage lenders, and more to innovate faster and more, expanding their product offerings.
Open Finance and Olive
As an embedded finance platform, Olive delivers open finance services for clients. We expand our capabilities beyond financial data by focusing on outcomes. What kind of outcomes? Simply put, the ones that matter for your customers, and therefore, for your business. Whether it's helping to invest, save, donate or purchase, Olive can power goals.
For more information, check out Olive's use cases. You can also chat with an Olive expert.