What is Open Finance?

When Finastra was born, we boldly stated that the future of finance is open.

What was then a vision is now a reality.

We harness the power of open finance through software that empowers the whole financial services industry to innovate, drive sustainability, and enable positive societal change through the democratization of banking.

We help the financial services industry to unlock the power of open finance, enabling accessible and affordable financial services for all. We’re driving change by connecting finance to people who need it most, providing the data to enable sustainable decisions, and pioneering new financial ecosystems.

Below, you can find everything you need to know as you begin your journey in a world of open, accessible and future-ready finance.

Introduction

Definition and Overview

Open finance is transforming the financial services sector, building on the principles of open banking to empower people and power inclusivity. It extends the ideas of data sharing and interoperability to a wider range of financial products and services, including savings, pensions, insurance, and more. Open finance empowers businesses and end customers with more ownership and control of their financial data, helping them access a wider range of financial services, make more informed decisions, and enjoy more personalized experiences.

It's about using technology to create an inclusive, innovative, and customer-centric financial ecosystem. It facilitates the seamless exchange of data across financial institutions and third-party providers, underpinned by secure APIs (Application Programming Interfaces). APIs ensure data privacy and protection, while fostering a more competitive and collaborative environment among service providers.

The Significance of Open Finance Today

In the modern financial landscape, open finance is a game-changer. It meets the growing demand for transparency, efficiency, and personalized financial services. By breaking down silos between different sectors and platforms, Finastra is central in creating a more interconnected and accessible financial ecosystem. This is essential in a world where financial inclusion and equitable access to banking is increasingly important.

Open finance also plays a big role in innovation. Startups and established financial institutions can both develop new products and services tailored to the unique needs of the market. This leads to better experiences and drives economic growth, by enabling more efficient allocation of capital and resources.

Open finance can boost literacy and empower people with a comprehensive view of their financial data, contextualizing everyday transactions and enabling customers to make more informed decisions, plan for the future, and navigate their banking lives with confidence.

This is not just about technological advancement. Open finance is a cultural shift towards a more open, transparent, and customer-focused world.

The Foundations of Open Finance

Open Banking as the Forerunner of Open Finance

Open banking emerged as a response to the need for more customer-centric banking experiences and to use technology to build a more competitive market. It allowed for the development of new financial services that integrated with bank data, offering consumers insights into their spending, savings, and financial habits, enabling them to manage their finances more effectively.

Open banking set the stage for a more transparent financial services industry, normalizing data sharing and giving customers more control over their financial information - paving the way for the even broader and more inclusive framework of open finance.

Differences Between Open Banking and Open Finance

While open banking and open finance are built on similar principles of data sharing and customer empowerment, there are key differences between them. Open banking is limited to data, focusing on payment accounts and transactional information. It is the first step towards a more open financial ecosystem but its scope is restricted.

Open finance extends beyond the banking sector to include a wider array of financial products and services. It encompasses savings, pensions, investments, insurance, mortgages, and other personal finance areas. Open finance aims to provide a holistic view of an individual's financial situation, offering the ability to manage all aspects of personal finance through a single interface or service. At the same time, it broadens access to financial services to more people, and opens up new routes to market and new sources of revenue for institutions.

The expansion from open banking to open finance represents a significant shift towards a more integrated financial services industry. It acknowledges that consumers' financial needs are diverse and that a comprehensive approach is necessary to meet them.

The Role of APIs in Facilitating Open Finance

APIs are the technological backbone of open finance. They act as the route for data to be shared securely and efficiently between financial institutions and third-party service providers. APIs enable different software systems to communicate with each other, allowing for data exchange in real-time.

In open finance, APIs facilitate the seamless integration of disparate financial services, creating an interconnected ecosystem where data can flow freely, with the proper authorizations. This interoperability is crucial for the development of innovative products that can access a broad range of financial data to deliver personalized solutions to customers.

The use of APIs ensures that data sharing in open finance adheres to high standards of security and privacy. They allow for the creation of secure connections where customers can give or revoke access to their financial data as they choose, ensuring their information remains protected.

APIs are not just a technical requirement for open finance; they are enablers of the vision for a more open, transparent, and customer-focused financial industry. They provide the infrastructure to support a new generation of customer-centric financial services.

Benefits of Open Finance for Businesses

Opportunities for Innovation and Development of New Services

Open finance is a fertile ground for innovation, allowing businesses and institutions to develop new services, powered by:

Cross-Industry Collaboration: Open finance fosters partnerships across sectors, including insurance, fintech, and pension funds, leading to cross-industry innovation and collaboration in developing new products and solving industry challenges.

API-Driven Ecosystems: APIs enable a more interconnected financial ecosystem, where institutions can easily integrate and offer new services, enhancing their customer value proposition.

Customized Offerings: With the ability to access more data, financial institutions can create highly bespoke and niche services, tailored to specific market segments or individual customers.

Enhanced Customer Experience and Satisfaction

Open finance improves the customer journey within the financial landscape, leading to higher satisfaction through:

Seamless Integration: Customers enjoy a smoother experience, as they can manage multiple financial accounts in one place without the need to switch between different platforms or services.

Real-Time Data Access: With the ability to see and use financial data whenever they need it, customers can stay informed of their complete financial picture, and make timely decisions regarding their finances.

Streamlined Processes: From onboarding to support, automation can help to reduce friction and wait times for customers, leading to a more efficient, convenient experience.

Data-driven Insights for Personalized Finance

The data available through open finance enables businesses and financial institutions to get deep insights into customer behavior, which can be used to tailor financial solutions:

Understanding Customer Needs: Analyzing transaction data helps businesses to understand what products and services are in demand, allowing them to develop and scale in response to the real needs of customers.

Risk Management: Enhanced data helps improve risk assessment and management, enabling institutions to offer more accurate and fair financial products.

Targeted Marketing: Insights from financial data support targeted marketing efforts, ensuring that customers are shown solutions that are relevant to their needs, and can be offered contextually in any journey the customer is on.

Open finance presents a transformative opportunity for businesses and institutions to innovate, enhance experiences, and leverage data-driven insights to build bespoke solutions. As the industry continues to evolve, those who embrace open finance are likely to see higher growth and deeper loyalty.

Benefits of Open Finance for Customers

Enhanced Access to Financial Products and Services

Open finance broadens the horizon for consumers in terms of the availability of financial products and services. By leveraging the interconnectedness of financial systems and data sharing through APIs, consumers can benefit from:

Diverse Credit Services: Open finance facilitates a more diverse range of credit options and providers. Open finance data can speed up the credit assessment process by leveraging a new wave of ecosystem participants and data, allowing consumers to receive relevant offers more efficiently.

Integrated Financial Accounts: Customers can manage multiple financial accounts from various institutions in one place, simplifying the process of tracking their financial activities and providing a more holistic view of their financial health.

Tailored Financial Solutions: With access to comprehensive financial data, financial service providers can offer personalized products that align with individuals’ financial situations.

Improved Personal Financial Management and Planning

The insights gained from the aggregation and analysis of data through open finance enable consumers to make better financial decisions, leading to:

Better Budgeting: With enriched data, customers can use advanced categorization, planning and analytics tools, to better understand their spending habits and adjust where necessary.

Income and Expense Tracking: Real-time tracking of income and recurring expenses provides a clear picture of financial health and supports better financial planning.

Risk Insights: With valuable insights into their financial risk profile, customers can make decisions to improve their financial stability and planning.

Greater Control Over Financial Data

One of the big advantages of open finance is the power it gives people over their financial data:

Data Ownership and Consent: Customers have the right to own their financial data and control access to it.

Transparency and Security: Open finance ensures that customers’ data is handled under the best security standards, providing transparency throughout the data-sharing process.

Revocation of Access: Customers can grant or revoke access to their financial data at any time, giving them ultimate authority over their personal information.

Open finance offers consumers a more accessible, insightful, and secure way to manage their finances. With enhanced access to financial products and services, improved tools for financial management and planning, and greater control over their financial data, Finastra's platform and solutions empower customers to take charge of their own financial wellbeing.

Three Big Outcomes of Open Finance

Enabling New Financial Ecosystems

Finastra is pioneering open finance by enabling new marketplaces and economies with software, while empowering businesses with new, diverse revenue streams through greater competition, collaboration and innovation. Our technology enables businesses to boost operational efficiency, adapt to changing customer demands and elevate profitability, customer satisfaction and loyalty.

Here's how:

Integrating innovation and expertise

Open finance welcomes innovators, integrating new technology and customer-centric capabilities to accelerate growth.

Enabling collaborative problem solving

Our open ecosystem fosters collective efforts to solve industry problems and inefficiencies, using a shared base of insight to unlock effective solutions.

Facilitating wider access to banking services

Open finance enables non-banks to provide banking services through BaaS and embedded finance, widening access to financial services, opening up new routes to market and providing new sources of revenue for institutions.

Driving Sustainable Decision-making

Financial services plays a big role in driving sustainable investment and facilitating the transition to a low-carbon economy. Finastra empowers sustainable decision-making by using open finance to connect capital with impactful initiatives. Our software helps drive positive change, supports green finance and promotes digitization, helping build a resilient, sustainable and inclusive financial ecosystem for everyone.

Providing the environment to thrive

Open finance software gives businesses the transparency and visibility to navigate new regulations more easily. Plus, with access to ESG data, institutions can understand risks and positions better, to build an environment that encourages sustainable growth.

Enabling impact investing and effective capital allocation

We empower more impactful investing and decision-making, with robust software to help channel funds into green initiatives and support profitable, sustainable portfolios. We help to provide the agility and visibility of risk to help banks adapt to changing regulations and drive sustainability forward.

Creating inclusive trade through digitization

Open finance contributes to more inclusive, transparent trade practices that take environmental impacts and provenance of products into account. Open finance promotes supply chain digitization to track the provenance of green goods, helps to integrate eco-friendly transactions and digitizes trade practices, enabling more participants within the ecosystem and accelerating environmental action.

Supporting Positive Societal Change

Finastra provides the software needed to transform societies, reduce bias and shape a progressive future. By leveraging technology and championing equitable, accessible and inclusive finance, we bridge gaps to drive economic empowerment and better reach the unbanked and underbanked.

Championing financial inclusion

By democratizing finance, we ensure that financial services are not restricted. We are maximizing the reach of digitization and the power of a connected ecosystem to transcend geographical and financial barriers, bringing banking to more people and supporting underserved communities.

Fostering economic development

Open finance empowers economic development through technology. New tools can enhance sales, boost production and increase employment, to build a dynamic ecosystem of growth and prosperity.

Powering innovation

Open finance removes traditional obstacles, fostering an environment where the financial services industry can co-create and innovate together. Breaking down these barriers enables Finastra and our customers to create practical, consumer-centric financial products and services.

Regulatory Framework and Compliance

Overview of Existing Regulations

The regulatory landscape of open finance is shaped by several existing frameworks and directives, primarily stemming from those that began with open banking. The Revised Payment Services Directive (PSD2) in the European Union is a cornerstone of Europe's open banking ecosystem, which mandates banks to provide secure access to customer payment account data through standardized APIs. This directive established requirements for strong customer authentication, data protection, and consent mechanisms.

While PSD2 covers payment accounts, it does not extend to other financial products. This limitation indicates the need for an expanded regulatory framework, potentially a PSD3, to encompass the whole scope of open finance. The European Commission has proposed new open finance legislation, to promote data sharing across a wider range of services.

The Importance of Security and Data Protection

Customer consent, data privacy, security and data protection are the primary requisites of an open finance regulatory framework. The General Data Protection Regulation (GDPR) provides a robust foundation for data protection within the EU, and similar principles are being integrated into open finance regulations to ensure that customers' privacy and security are protected.

The technology-laden environment open finance operates in requires data-driven supervision and oversight mechanisms to monitor the datafication of financial services. Governance mechanisms for data privacy and protection are critical to ensure trust in the wider market, while regulators are tasked with creating holistic frameworks to minimize data breaches and fraud.

Future Regulatory Outlook and Implications

Open finance is poised for significant regulatory development. The European Commission's draft open finance Act, published on 29th June 2023, introduces a legal framework regulating the access and use of customer data in the financial sector. This act is expected to drive data-driven innovation across all sectors of the economy, including finance.

Regulations are also evolving to facilitate cross-border transactions and enable banks and fintechs to expand their client base and design customized financial services. Policymakers are working to bolster the regulatory environment with robust prudential and supervision mechanisms. The rapid changes in technology and pricing structures used by service providers do present challenges which regulators must navigate to maintain equilibrium between innovation and stability.

The industry faces the challenge of striking a balance between commerce and compliance. New regulations can increase costs for market participants, impacting profit margins and innovation. Small start-ups may face high barriers to entry, while larger institutions may experience their own slowdown in innovation. It is crucial for the industry to find ways to innovate services without falling short on the ever-growing list of regulatory demands.

The regulatory framework for open finance is in transition, with existing regulations like PSD2 combining with new proposals. Security and data protection remain at the forefront of regulatory concerns, and the outlook suggests a more comprehensive and inclusive framework that will shape the financial services industry for years to come.

Challenges and Considerations

Data Privacy and Security Concerns

Financial institutions are custodians of highly sensitive information, and the advent of open finance necessitates the sharing of this data with third-party developers. To mitigate any risks associated with data sharing, it is crucial to establish robust data protection and privacy policies. These may include:

Informed Consent: Customers must provide informed consent for the collection, transfer, and use of their personal information. This involves transparent communication about how their data will be used and the measures in place to protect it.

Regulatory Compliance: Financial organizations must comply with existing regulations such as GDPR and any future legislation aimed at safeguarding data within the open finance framework.

Cybersecurity Measures: Continuing to assess and evolve cybersecurity protocols and infrastructure is essential in an evolving world of fraud and cyber threats.

Integration and Interoperability Between Systems

A lack of standardization in open finance can lead to cross-platform friction and data asymmetry, where not all parties have access to the same information. The numerous integrations required can lead to inconsistencies and inefficiencies, impacting the user experience and the potential for innovation. There are ways to mitigate this:

API Connectivity: APIs are the building blocks of open finance, ensuring seamless connectivity and functionality across different platforms.

Collaborative Initiatives: Greater collaboration between conventional banks and fintech companies is crucial to overcome these hurdles and benefit all industry leaders and users.

The Case for Standardization

The absence of industry-wide standards is a barrier to the growth and scalability of open finance. Standardization is essential for creating a cohesive ecosystem where applications and services can operate seamlessly across different institutions. Achieving this will require concerted effort in several areas:

Common Standards: Industry players must work together to develop common standards that facilitate interoperability and data sharing.

Regulatory Guidance: Policymakers must establish and enforce these standards to ensure a level playing field.

Innovation with Regulation: While standardization is necessary, it is also important to maintain a regulatory environment that encourages innovation and does not stifle the creative potential of fintechs.

While open finance presents numerous opportunities for innovation and financial inclusion, it also brings with it challenges that must be carefully navigated. Integration and interoperability between financial systems demands both technological solutions and collaboration. Addressing these challenges is essential for Finastra and the broader open finance ecosystem to realize the full potential for the democratization of finance.

Open Finance Technology Ecosystem

The Emerging Technologies Supporting Open Finance

Open finance is not only built on APIs, but also propelled by emerging technologies such as blockchain and artificial intelligence (AI) which offer additional layers of security, efficiency, and personalization.

Blockchain: A decentralized and secure ledger that can record transactions across multiple computers, ensuring that records cannot be altered retroactively. In open finance, blockchain can be used to:

• Enhance security and transparency in financial transactions.
• Enable smart contracts that automatically execute when certain conditions are met, reducing the need for intermediaries.
• Support the creation of decentralized finance (DeFi) applications that operate on open blockchain networks.

Artificial Intelligence (AI): AI and machine learning algorithms can analyze vast amounts of financial data to provide insights, predict trends, and personalize services to support:

• Personalized financial advice and product recommendations based on individual spending habits and financial goals.
• Fraud detection and prevention through the analysis of transaction patterns and the identification of anomalies.
• Process automation, including for credit scoring and risk assessment, to streamline operations and reduce costs.

The integration of these technologies within the open finance framework is instrumental in shaping a more interconnected, secure, user-friendly, and innovative finance. Technology will play a key role in the expansion and sophistication of financial services, contributing to a more inclusive financial system that benefits all stakeholders.

Finastra is already strategically positioned to leverage these technologies to further enhance our offerings and provide cutting-edge solutions to customer challenges.

Open Finance Terms and Definitions

Key Terms Used

Open finance uses several key terms and concepts to facilitate the sharing and utilization of data:

APIs (Application Programming Interfaces): These are sets of protocols and tools for building software and applications. In open finance, APIs enable third-party developers to access financial data provided by banks and other financial institutions to create new apps and services.

AIS (Account Information Services): These services provide access to account data from banks and financial institutions. AIS providers can aggregate information from multiple sources, giving users a comprehensive view of their finances.

PIS (Payment Initiation Services): PIS allows third-party providers to initiate payments on behalf of users. This service enables users to make direct payments from their bank accounts without using traditional payment methods like credit cards.

TPP (Third-Party Providers): These are entities that provide financial services through the use of APIs in open banking and open finance ecosystems. They can offer a range of services, from payment initiation to financial management tools.

Definitions of Relevant Financial Products and Services

Open finance encompasses a broad range of financial products and services that go beyond traditional banking. These include:

Investment Products: Services that allow users to manage their investment portfolios, including stocks, bonds, and other securities.

Insurance Services: Platforms that enable users to browse and manage insurance policies, including life, health, and property insurance.

Pensions: Services that help users manage their retirement savings and pension plans.

Consumer Credit: Products that include personal loans, credit cards, and other forms of credit that can be managed through open finance platforms.

Payment Services: This includes not only PIS but also digital wallets, peer-to-peer payment platforms, and other innovative payment solutions.

Explanation of Regulatory Terms and Concepts

Regulatory terms and concepts are critical in ensuring that open finance operates within a secure and compliant framework:

PSD2 (Payment Services Directive 2): This EU directive requires banks to open up their data to authorized TPPs, laying the groundwork for open banking and by extension, open finance.

Open Banking Regulation: In the UK, this set of standards governs TPPs and mandates their registration with the Financial Conduct Authority (FCA).

Financial Conduct Authority (FCA): The regulatory body in the UK responsible for overseeing financial services firms and ensuring their compliance with laws and regulations.

Data Portability: The principle that allows customers to own their financial data and transfer it between different service providers.

Data Protection and Privacy Regulations: These include the General Data Protection Regulation (GDPR) in the EU, which governs the use and sharing of personal data.

Understanding these terms and definitions is crucial for anyone involved in the open finance ecosystem, from service providers to consumers. They facilitate communication across the industry and ensure that all parties are aware of their rights and responsibilities in this new financial landscape.

Recap

Open finance is not just the evolution of open banking. It is a pivot towards democratized finance, with data ownership, security and innovation driving a more inclusive and transparent financial world. As open finance grows, it will unlock new possibilities for customers and companies alike, fostering a more connected and empowered society.