What is Open Finance and Why Does it Matter?
Open finance is set to bring next-gen financial services to consumers, but what is it exactly, and why does it matter?
In this guide, we’re exploring everything you need to know about this crucial (if slightly misunderstood) innovative concept that’ll affect banking, payments, insurance and beyond. Our topics will Include:
- What is open finance?
- What is the difference between open banking and open finance?
- What’s the difference between an AISP and a FISP?
- How could open finance benefit businesses and customers?
- How might broader EU regulation lead to greater data sharing?
- How is open finance being done in the UK market?
Read on to learn more and prepare your business for the future, where fast and secure data-sharing heralds an open finance future.
What is open finance?
Open finance is a forward-thinking vision of financial services that seeks to foster innovation and personalisation via greater data-sharing.
The aim is to improve people’s access to and use of financial services products such as loans, insurance and investments. Fully-realised open finance is still some way off. However, it’s likely to mirror the steps taken to launch open banking. Namely, by giving consumers new ways to share personal and bank account details with third-party service providers.
Given this, exactly what open finance will look like will differ depending on where you are in the world. For our purposes, we’ll be focusing on the EU’s recent Financial Data Access (FIDA) proposal while also looking at some recent developments from the United Kingdom, too. Both of which have highly mature open banking infrastructure which can give us a sense of how open finance initiatives might extend this.
What is the difference between open banking and open finance?
Open finance is about extending and building upon the work of open banking. Though related, the main difference between the two is that open banking is regulated. In contrast, open finance is becoming more defined in terms of its regulation and applications.
Open banking enables both account information and payment initiation service providers to offer value-added services by accessing user account data securely and consensually. Currently, this is regulated under PSD2 (soon to be replaced by PSD3) but is largely restricted to core financial services, including payments, cross-border transactions and so on.
Open finance supporters would like to see these data-sharing practices extended to other areas of financial services, such as lending and insurance. We look at why in our section on the benefits of open finance for both businesses and consumers below.
And what’s the difference between an AISP and a FISP?
Account information service providers (AISPs) are companies or institutions that help consumers share and manage information from one or more payment accounts. These are usually online portals provided by banks for consumers’ own bank accounts. However, they can also be third-party apps or pull data from other types of payment accounts (think prepaid cards or fully digital bank accounts). Regardless, the aim is to help customers better understand their financial health.
As defined in Article 4 of the European Commission’s FIDA proposal, financial information service providers (FISPs) are a newer, broader category of (soon to be) regulated third-party data holders. Rather than simple transaction data denoting money flows, FISPs will be able to access a wider range of customer data, including debt products and more.
How could open finance benefit businesses and customers?
Irrespective of where it’s been implemented, the general aim of open finance is to give businesses and consumers better access to financial services. In real terms, this means:
- More awareness and control over your finances – from payments to insurance, debt, assets, and more – by centralising all your financial data in one place.
- Greater innovation and access to financial services products to help businesses and customers build wealth and achieve their goals.
- More competitive loan rates or insurance premiums based on real financial behaviours rather than best estimates from external data sources.
- More secure and reliable data sharing, enabling faster product applications, onboarding, payments, etc.
Read our recent Consumer Lending Explainer for more information.
How might broader EU regulation lead to greater data sharing?
The EU is a world leader in open banking and home to many pioneering financial services hubs. Equally, the legislator is known for causing massive shifts in how organisations share and consume data. For example, both GDPR and PSD2 (soon to be PSD3) transformed how companies and people think about data the world over.
Broader EU regulation could lead to greater data sharing by mandating which financial institutions and companies have to share information and how. The European Commission recently proposed an initial Financial Data Access framework. In short, the current draft enhances data access/control rights but further work is needed to refine its scope, clarity and purpose. As a result, it’s still unclear when any new legislation will arrive and what it’ll look like.
Given the impact previous EU legislation has had on data sharing, it’s perfectly possible that other nations follow a similar approach. Specifically by designating lenders, insurance brokers and other financial services companies as FISPs, too. So, the proposal is worth watching.
How could this benefit customers?
The EU has a track record of creating pro-consumer, pro-innovation legislation. Equally, as noted above, both consumers and businesses stand to benefit from an open finance industry framework.
That being said, it’s still too early to say exactly how consumers will benefit. One thing we can say for sure is that it’s an exciting time for businesses and consumers alike to explore new innovations in financial services. For the time being, make sure to stay up to date with the latest news from our resources tab, where we regularly publish in-depth explainers and snapshot briefings of the latest FinTech developments.
How is open finance being done in the UK market?
The UK is a highly mature open banking market and has already seen some steps towards open finance practices. For example, a growing number of banks and mortgage brokers are using open banking technologies to validate applicants’ income. Similar steps are also being taken by landlords and subscription service providers to validate consumers’ affordability before they each complete transactions.
One interesting development has been Variable recurring payments (VRPs). Recently identified among our top 6 essential open banking trends for 2024, the scheme will help consumers manage their ongoing financial commitments more effectively, with comparative schemes likely to spread to Europe in the coming years.
Want to know more about the benefits of open finance and open banking? Brite is a second generation fintech that’s at the forefront of this next generation of payment technology. Across Europe Brite’s Data Solutions are enabling innovative financial products from customer onboarding at the same time as a payment, to simplifying EV charging payments. Get in touch with one of our open banking experts today to learn how we can help you prepare for the opportunities of open finance.