Open finance revolution: what’s the impact for financial institutions?

Open Banking is a concept founded on APIs that mandates banks to share financial information about themselves and their customers with third parties. Allowing start-ups and fintechs to better understand customer profiles, crafting products and services ideally tailored to their needs, and ultimately increasingly competition. In March 2022, there were 128 fully regulated firms with Open Banking-enabled products and services in the UK market. Furthermore, the Open Banking Implementation Entity (OBIE) reported that most users of Open Banking appliances say it’s “helping them resolve their biggest financial challenges.” 

Open finance is a wider concept which encourages financial institutions such as banks and fintechs to share customer data – essentially expanding the principles of Open Banking to the wider financial ecosystem. Open finance is underpinned by the notion that widespread exchange of data, within a well-regulated environment, will improve innovation. With more data available for analysis and interpretation, regulators hope that pre-existing actors and newer entrants will devise products and services that improve the customer experience.  

Analysis from McKinsey supports the rise of Open Finance, arguing that “the boost to the economy from broad adoption of open-data ecosystems could range from about 1 to 1.5 percent of GDP in 2030 in the European Union, the United Kingdom, and the United States, to as much as 4 to 5 percent in India.” McKinsey also believes that “all market participants [will] benefit, be they institutions or consumers.” But what could these positive impacts be? 

Removing market entry barriers for new players, facilitating price transparency and price comparisons, Open Finance could greatly improve competition, democratising the financial services sector. Evidently, this new era of open finance could result in even more choice for consumers, lower prices, and better value. For instance, in the credit space, Open Finance could drive further financial inclusion.  

However, the benefits Open Finance provides are not reserved exclusively for customers. Financial institutions are also set to benefit. Indeed, lower prices could result in reduced best execution costs when trading, as well as adding value when it comes to operational efficiency. Often, most data is still located in physical documents or digital documents in unconnected places, adding unnecessary, cumbersome actions to internal processes for operators. Open Finance removes this necessity. Instead, it cuts costs and makes it easier to adopt automation technologies which leads to improving efficiency and benefitting customers through a faster, more effective service. 

With automated solutions also comes better fraud protection. Open Finance provides real-time access to customer data, supporting advanced techniques used to identify fraud and mitigate its risks. The result could be that the cost imposed on corporations by fraud – estimated globally to be more than $4.5 trillion each year – reduces dramatically. 

The same is true of compliance and risk management. By facilitating the adoption of high-quality technology and leveraging the power of connectivity, Open Finance helps streamline the onboarding process. This not only offers seamless customer experience but benefits financial institutions through a more data-driven approach to risk management. When banks make credit decisions, Open Finance also allows for verification of information customers have provided, allowing financial institutions to accurately build risk profiles. Evidently, high quality data when combined with best-in-class technology can help institutions make the big decisions whilst reducing risk.  

Open Finance also serves to streamline internal business practices. When institutions have an abundance of high-quality data, customer activity can be analysed thoroughly. Having built an accurate picture through the use of data, banks can ensure that employees are working on the most profitable tasks, like focusing valuable company time and resources on customers with a higher-risk profile. This in turn, bolsters the bottom line through the improvement of efficiency by capitalising on the use of open data when managing the workforce.  

Compared with Open Banking, financial institutions benefit from the rich contextualised view of individuals finances provided with the use of Open Finance. Indeed, by combining the use of both analytics and technology such information can be used in a range of useful ways. 

Open Finance has equally positive ramifications for financial institutions themselves. Open Finance acts as a catalyst, boosting the efficiency of internal operations and processes, streamlining compliance procedures, and facilitating effective risk management practices.

Open Finance remains a new development, at the start of its journey toward wide-spread integration in financial institutions. However, there is every reason to be optimistic for 2023, as Open Finance realises its potential.