Is Open Finance the Path Forward for Financial Institutions?

Open finance describes the process through which financial data is made available to multiple stakeholders – banks, third parties, fintechs, and customers – and allows those parties to make intelligent and evidence led decisions, personalize experiences, enable new business models, support financial wellness, and mitigate the risk of fraud.

Open finance goes a step further than open banking – which is limited to applications within retail investment banking – as it enables the sharing of customer data to even more financial products and services, not just those directly associated with banking. These applications can include loans, customer credit, investments, and pensions. Open finance also allows for a deeper integration of financial data with organizations not financial in nature such as healthcare or government.

The majority of financial data sharing carried out these days is done through a process called screen scraping. However, this practice has numerous issues associated with it, including being less secure than other methods, limiting the visibility of financial institutions to see where their customers share data, and requiring customers to share their usernames and passwords with a third party.

Protecting Customer Data

Unlike screen scraping, open finance allows for the access of transaction data with the need to share information such as usernames and passwords. Direct connections are used instead of credentials and allow for faster speeds, a lower technical burden, and better security, and higher connection success rates.

In the modern era of data sharing, the most critical concern of most organizations is to maintain the security and privacy of customer data. An increasingly draconian regulatory environment has created an atmosphere where organizations which fail to adequately protect customer information can find themselves facing astronomical fines and incalculable damage to their reputations.

Acts such as the EU GDPR, UK GDPR, Californian Consumer Privacy Act, and the New York Privacy Act, are just a few examples of these new regulations which financial brands must consider if they serve any customers which live in their associated regions.

Within open finance, there are three distinct roles – data providers, data recipients, and intermediaries. Data providers are the entities which hold financial information and includes banks, credit unions, and brokerages. Data recipients are the third-party service companies which use the data gleaned from open finance to provide services associated with finance. Intermediaries are the aggregators which facilitate financial data access, transit, storage, and/or permissioning on behalf of data recipients or end users.

Benefits to the Customer

While there are certainly risks associated with open finance, there are also significant benefits which can be passed onto the customer.

Primarily, open finance allows for greater access to financial services. For example, open finance data can be leveraged to help assess the creditworthiness of applicants for products and services not directly connected to financial institutions such as cellphone contracts, property rental, or health insurance.

According to McKinsey, "…including utility data allowed 20% of customers with scant documentation in support of their credit application to move on to become "thick-file” customers. Scaling such gains to an economy-wide level, we find that increased access to credit using alternative data could raise an economy’s credit-to-GDP ratio by 20 basis points in the United States and the European Union. In India, the lift could be as much as 130 basis points, the equivalent of about $80 billion to $90 billion in GDP by 2030.”

Increased convenience for customers is yet another advantage of open finance. With a more open attitude to data sharing, documentation can be prepared and delivered faster than ever and significantly reduces the onboarding time for new clients. It can also eliminate the need for third parties during certain processes. For example, open access to data on available mortgage products, with applications automatically prefilled, allows consumers to apply for loans without needing to use mortgage brokers.

Open finance also makes it easier for customers to access a wider range of financial products, such as when switching accounts.

"Open financial data can broaden and improve the range of product options available to customers, saving them money,” continues McKinsey. "For example, an open-data ecosystem makes it easier to switch accounts from one institution to another, helping retail and MSME customers achieve the best yield.”

Final Thoughts

Open finance has wide ranging benefits for stakeholders throughout the financial industry – including financial institutions, third parties and fintechs, and customers. As we move into a new era of financial service provision, we are going to see open finance become ever more prevalent in the space.

Open finance is sure to be part of the conversation at Future Branches Boston, being held in June at The Westin Copley Place, Boston, MA.

Download the agenda today for more information and insights.