Open finance

Open finance allows for a customer's financial data to be shared between financial institutions and third-party service providers through the use of Application Programming Interfaces (APIs).

Open finance seeks to afford consumers and businesses enhanced control over their financial information, enabling access to a broader spectrum of financial products and services. This encompasses data sharing that extends past conventional banking, which was the focus of open banking, to cover domains such as investments, pensions, mortgages, and insurance. Applications include financial information aggregation, comparison of financial products, and services supporting lender decisions.

Proposed benefits include increased competition, innovation, transparency, and customer control over financial information. Potential risks include unauthorised data use, privacy and security breaches, discriminatory treatment, and difficulties allocating responsibility among participating organisations.

Development

Traditionally, financial information has been held within closed systems of individual financial institutions. Customers who wish to use information across providers have at times depended on manual records, downloaded statements, or services that employ screen scraping to retrieve information from websites. Screen scraping techniques proved unreliable and generated security concerns, because they depend on parsing website data that had not been designed for programmatic access.

Regulatory initiatives that support open banking created a more structured means for third parties to access bank account data. In the United Kingdom, the Competition and Markets Authority's 2017 retail banking order obligated the nine largest current-account providers to adopt common standards for customer-authorised access to account information. In the European Union, the revised Payment Services Directive 2 (PSD2) set out a framework for third-party access to payment account information and for payment initiation. Open finance subsequently emerged as a broader concept encompassing financial information beyond payment accounts.

The Organisation for Economic Co-operation and Development (OECD) has characterised the shift from open banking towards open finance as an expansion of both the sources and the types of financial information that may be shared. The development of such arrangements has not conformed to a single international model: certain countries have imposed mandatory requirements, whereas others have relied on voluntary industry standards or are in the process of developing legislation.

Operation and governance

Open finance arrangements typically comprise a data holder (for example, a bank or insurer), a customer, and a data recipient (for example, another financial institution or a financial technology provider).

Under the applicable framework, the customer is able to authorise the recipient to obtain specified information for a defined purpose. Access can be administered via authentication, consent records, and mechanisms for modifying or withdrawing permission.

Standardized APIs enable organisations to exchange information without disclosing customers' account passwords. Technical specifications define data formats, how organisations are identified, authentication methods, and security requirements. Interoperability rests on both the availability of data and the capacity of different systems to interpret that data consistently. Frameworks can set out rules governing the permitted use of data, data retention, complaints, liability, and compensation.

The label open does not imply that an individual's financial records become publicly accessible. Instead, it denotes mechanisms for accessing and sharing information under defined conditions. The degree of customer control, the categories of covered data, and the obligations imposed on firms vary according to the laws or contractual arrangements of each system.

Applications

One use of open finance involves aggregating information obtained from various financial providers. Where access is available, a service may combine data on current accounts, borrowing, investment holdings and pension arrangements in order to provide an overview of a customer's financial position. Further potential applications include assisting customers in comparing financial products, transferring information when they change providers, and receiving financial guidance grounded in more than one account or product.

Access to customer information drawn from multiple sources may assist lenders in assessing creditworthiness and affordability. Small and medium-sized enterprises may be able to draw on financial records held by various institutions in support of loan applications. Research into the earlier development of open banking in the United Kingdom identified evidence of new lending relationships between small businesses and financial technology firms, although its findings do not establish that every open finance scheme will produce the same outcomes.

Regulatory approaches

Potential benefits and risks

Advocates of open finance contend that broader access to data authorised by consumers could lower information barriers among providers, foster competition and underpin services adapted to individual circumstances. Proponents argue that the benefits include simpler comparison of financial products, improved financial management, and alternative sources of information for lending decisions. However, the implementation and design of open finance frameworks, industry participation, data quality, and consumer trust are considered important factors in ensuring the realisation of such benefits.

There are potential privacy, consumer protection and operational risks associated with open finance. Sharing information among a greater number of organisations can heighten exposure to data breaches, fraud and the use of information beyond the purposes anticipated by customers. More granular financial profiles may enable discriminatory pricing or the exclusion of particular customers, especially where automated decisions rest on biased or incomplete information. Customers who are reluctant or unable to share their data may encounter fewer options or less favourable offers.

Implementation gives rise to further questions regarding the cost of maintenance, the reliability and comparability of data, the allocation of liability, and whether data holders should receive compensation for granting access. Although interoperability may lower barriers to entry, an increase in competition is not assured. Some argue that organisations with pre-existing customer relationships, extensive technical infrastructure or access to multiple data sources may gain unfair competitive advantages. 

International organisations have consequently stressed the importance of effective governance, consumer protection, clear liability arrangements and proportionate technical standards in the development of open finance frameworks.

See also

• Open banking

References