Everything You Need to Know about Open Finance VS Open Banking

The world is evolving, and so is the financing industry. In 2015, the European Parliament released a PSD2 directive that supported more innovative payments in a safer way. PSD2 is a European regulation for electronic payment services. This regulation adapts open banking as a new concept in financial technologies. According to Statista, by 2020, open banking had already had 27.4 million users and was projected to reach 132.2 million in 2024.

There is also open finance facilitation as the next step of open banking. In short, open finance is a data-sharing model that allows consumers to share their financial data with third parties, not only from the bank but also from other financial sources. Both open finance and open banking are revolutionary solutions that offer many benefits to the users. What are they? How does open finance correlate with open banking? Open finance vs open banking, which one do you need? Read on to find the answers below!

What is open finance?

As mentioned before, open finance is a movement that establishes the rules that allow users to share their financial information with third parties using Application Programming Interfaces (API). The information also includes financial data not only from banks but also from other sources such as insurance and investments too.

One of the most common open finance use cases is the significant improvement in personal finance management. Thanks to open finance, consumers can make better decisions regarding their financial management. They can also use products and services perfectly tailored to their financial goals.

Using deep learning technology, open finance’s centralized data helps to create financial insights. On the one hand, financial institutions can get a clear picture of what consumers benefit from. On the other hand, consumers also get a clear picture of how their money is performing.

Open finance is based on the principle of customer data usage that the data supplied by and created on behalf of financial services customers are owned and controlled by them. Following the principle, using the data with informed consumer consent is possible as long as the providers occur in a safe and ethical environment.

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Why do you need open finance?

With open finance, people can have a secure channel to share their banking information with other companies. By doing so, the companies will use the banking data to build new financial products and services linked to the users' banking accounts and are more specific to their financial situation and needs.

More financial data from fiscal authorities, insurance, pension funds, or even utility providers will help financial innovators get a more comprehensive view of the population's actual financial activity and needs. As a result, the companies are able to  develop more relevant and tailored services for the customers.

Users can share their financial data from anywhere with third parties through APIs to access new products and services tailored to their specific needs. It also gives users actual ownership of their data, which includes the freedom to decide how and when they want to access and manage their financial data, whether inside the mobile banking app or other tools in their daily lives.

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How does open finance correlate with open banking?

To understand the relation between open finance and open banking, it is necessary to know how open banking works. Open banking allows banks to share the information on their customer's transactions with third parties so it will develop better-personalized offers. However, open banking is somewhat limited since it does not go beyond the financial operations made within the bank's mobile apps or in a branch office.

In turn, open finance will gather all the users' financial data in one place, including but not limited to bank transactions, digital wallet spending, insurance and pension accounts, investments, money transfers, and even crypto deals.

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Open finance challenges

The promising potential of open finance faces challenges. The main concern to the adoption of open finance include:

• Customer distrust - Most people have never heard about open banking and open finance, so the trust issue is quite challenging. According to Zopa's research, 1 of 4 open banking users does not want the company to have access to their financial records.
• Data safety - In the same study cited, data security concerns make 18-22% of users uncomfortable. Since the more financial and sensitive data is collected in one place, the more attracted scammers become. Hence, data safety issues should be the priority to open finance adoption.
• Lack of legal regulation - Like brand new and evolving solutions, both open banking and open finance are lack of legal framework. This has become one of the reasons why the costumes distrust them, which makes it a kind of vicious circle.

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What is open banking?

Open banking means customers can access new financial services and products from regulated third-party providers, which allows more businesses and developers to create new fintech services. They can build various new services and products that fit the customers’ necessity, from offering ways to reduce debt to facilitating better credit scores.

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How do these two differ from each other?

Both open banking and open finance allow consumers to share their financial data. However, while open banking allows regulated products and services to access data from the banks, open finance provides access to entire financial footprints.

Open finance can also further level the banking industry as it provides consumers with a better customer experience. It will offer services and products that attract more deposits and lenders. On the other hand, it can also create better, less risky customers. Also, open finance will enable broader integration to include non-financial industries such as government and healthcare. Open finance will also provide the customer with an embedded, personalized solution to support financial inclusion.

So, what values do open finance and open banking drive?

Open finance and open banking have transformed finance to be more democratized. As the next step of the evolving financial solution, both of them will be good for businesses and individuals to gain easier access to their financial data and learn more about their finances. Moreover, open finance and open banking transparency will drive more consumers to gain better control over their finances.

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