What is Open Banking?
Open Banking is a type of financial technology involving the exchange of data and services between financial institutions and third-party providers (TPPs). The advantage of open banking is that by allowing access of transaction data with the use of open banking application programming interfaces (APIs), third party providers can build innovative FinTechs, making it easier to deliver enhanced capabilities and experiences to consumers. For example, in the case of mortgage/loan applications, with open banking, customers can receive quicker, more informed decisions from mortgage/loan providers by consenting to share electronical/online transaction data. Open banking has increased and enhanced opportunities for financial services to engage with customers. In many countries, including the United Kingdom, European Union, Australia, and Brazil, open banking is governed by quite specific regulations. In the United States and Canada, however, it is more broadly driven by the user/institution permitting the financial data to be shared with a third party.
What is Open Finance?
Open Finance is an innovative type of financial technology that takes the concept of open banking even further, by going beyond the scope of data and banking services, to all of the financial data that is relevant to understand a customer’s entire financial footprint. For example, with the consumers consent, financial data related to investment assists, pension, tax and insurances, crypto wallets, and other types of financial services could all be accessed by a trusted third party. This helps financial institutions offer better and more personalized services, whether it be for payments, loans, or other financial products and for consumers, and opens up a new world of financial possibilities. With open finance, consumers could potentially have greater access to a more effective array of financial services such as private mortgages, savings systems, pension funds, insurance, credit, and investments. Essentially, open finance can empower consumers to take control and do more with their money. Banks can collaborate with various providers to deliver a wider variety of services based on consumer data.
How Open Finance paves a way for financial inclusion?
The role of Open Finance in financial inclusion is to facilitate access, expand markets, assist digitization, and support business acceleration.
Open finance would mean fairer and more inclusive financial practices, especially when it is implemented using Artificial Intelligence, which is usually free from human biases (as long as the training data is representative), and will strive for fairness and equal opportunities for all, by taking into account/consideration less than ideal formal financial backgrounds. Additionally, open finance builds transparency, where customers have the freedom to choose from various financial services options available and make the best decision for them. Open finance empowers customers to have control over their finances and data, and allows them to choose much of the data they want to share, as well as decide how to manage their finances well/better, by allowing access to a wide array of financial services.
Open finance encourages collaboration between third party providers and the traditionally closed financial industry. However, both FinTechs and traditional financial institutions will have to reinvent themselves and innovate to stay relevant in this increasingly complex and technologically pervasive world, and will have to work to integrate their products/offerings with open finance/banking in mind. Also, governments around the world have to work together with FinTech and financial industries to create sufficient policies and regulations, whether it be for data safety, consumer protection, etc. Open finance and open banking will be beneficial to both individuals and businesses, as it would enable easier access to financial data and therefore access to more/better information, helping financial institutions make better decisions and allowing consumers to make well informed financial decisions, thereby leading to financial inclusion. Therefore, it is important that we understand the combined direction of the FinTech and financial industries in open banking/finance, and support such sustainable innovation to work to empower all people with their economic well-being.
