Open Future World
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Open banking is a system where banks’ customers can choose to share their financial data with other organisations – for example, fintechs or competitor banks. Open banking initiatives are emerging in major markets around the world, driven by regulatory requirements and/or by industry collaborations.
Open banking aims to spur increased consumer choice, greater competition among banks, and the development of innovative financial services products. Early examples of open banking services include account aggregators (allowing customers to see all their bank accounts together), personal financial management tools, credit-decisioning services using transaction (and alternative) data, and new payment methods.
Legally mandated open banking systems tend to require banks to allow individual consumers, and sometimes smaller businesses, to share their data. However open banking is evolving to also include the sharing of corporate financial data, regardless of regulatory requirements.
From a technical perspective, the implementation of open banking generally involves the use of standardised APIs to share data. This aims to provide a more effective and secure means to share data than ‘screen scraping’ technology which relies on customers sharing their online banking credentials.
Open banking systems of some kind exist in more than 50 countries around the world. Well-known examples include the UK’s Open Banking and the European Union’s PSD2 (Second Payment Services Directive).
Open finance extends the idea of open banking – allowing customers to share their financial data – to a wider range of financial services providers and products. So open finance can include savings, investments, pensions, borrowings and insurance, and involve not just banks but investment managers, insurers and other providers.
Like open banking, open finance aims to increase competition and drive innovation. Open finance is likely to take a similar approach – for example, the development of standardised APIs.
Early steps towards open finance in the UK include the Financial Conduct Authority’s Advisory Group on open finance and The Investing and Savings Alliance (TISA) Open Savings & Investments Project. Outside the UK, the industry-driven Financial Data Exchange (FDX) in the USA goes well beyond payments accounts, while regulations introducing open banking – such as Australia’s Consumer Data Right (CDR) – already envisage an extension to other financial products (for example, pensions) and indeed to other sectors such as utilities.
Embedded finance is the integration of financial services within the digital offering of a non-financial company. Embedded finance provides financial services where and when they are needed, rather than the customer dealing separately with a financial services provider.
Embedded finance allows companies to deliver new value propositions and improved customer experiences. Early examples include the integration of payments functionality and point of sale credit offerings within apps and online platforms.
Embedded finance shares several similarities with open banking / open finance. These include the API-based technical integration, the unbundling/rebundling of financial services on different platforms, and the value that can be added by sharing customer data.