Current definitions of open banking and open finance

Tuesday, October 27, 2020

As we ponder ‘where next?’, we challenged ourselves to define what the terms ‘open banking’ and ‘open finance’ mean to us today. What do you think?

Open banking

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, the European Union’s PSD2 (Second Payment Services Directive), Australia’s Consumer Data Right (CDR) and the industry-driven Financial Data Exchange (FDX) in the USA.

Open finance

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, regulations introducing open banking – such as Australia’s CDR – already envisage an extension to other financial products (for example, pensions) and indeed to other sectors such as utilities.