One of the most significant new trends that financial institutions are exploring is the rise of Open Finance. This is widely considered to be the next stage in the financial data revolution set in motion by Open Banking.

Open Banking is a concept founded on APIs that mandates banks to share financial information about themselves and their customers with third parties, provided their customers have consented to this. The aim was to improve competition, by allowing start-ups and fintechs to better understand customer profiles, and therefore craft products and services ideally tailored to their needs. The results have been impressive. In March 2022, there were 128 fully regulated firms with Open Banking-enabled products and services available in the UK market. Perhaps more importantly, the Open Banking Implementation Entity (OBIE) reported that most users of Open Banking appliances say it’s “helping them resolve their biggest financial challenges.”

Open Finance is taking this idea one step further. It’s a wider concept which forces not just banks to share data, but also insurers, wallets, pension funds, fintechs, and other financial service providers – essentially taking the principles of Open Banking to a much wider ecosystem. The idea is that the more widespread exchange of data, within a well-regulated and governed environment, will improve innovation. With more data available for analysis and interpretation, regulators hope that traditional actors and newer entrants will devise new or improved products and services that improve the customer experience.

Bringing new benefits

Analysis from McKinsey suggests the impact of Open Finance could be considerable. They have argued that “the boost to the economy from broad adoption of open-data ecosystems could range from about 1 to 1.5 percent of GDP in 2030 in the European Union, the United Kingdom, and the United States, to as much as 4 to 5 percent in India.” McKinsey also believes that “all market participants [will] benefit, be they institutions or consumers.” But what could these positive impacts be?

At its heart, Open Finance aims to democratise financial services. By removing a range of market entry barriers to new players, facilitating greater price transparency and improved price comparisons, Open Finance could greatly improve competition. Building on the success of Open Banking, this new era could see even more choice for consumers, lower prices, and better value. The innovation that Open Finance could encourage, for example in the credit space, could also drive improved financial inclusion.

Just as consumers are set to benefit, financial institutions are, too. For one, lower prices could mean reduced best execution costs in trading. But Open Finance can also add value across the business model, in particular when it comes to operational efficiency. After all, most data is currently still located in physical documents or digital documents in unconnected places. To locate these documents requires a large amount of time-consuming manual work. Open Finance removes the need to do this, cutting costs and making it easier to adopt automation technologies. This could improve efficiency and allow customers to benefit from a faster, more effective service.

With automated solutions also comes better fraud protection. Open Finance provides real-time access to customer data, thereby supporting more advanced techniques to identify fraud and mitigate its risks. Indeed, more data provides more evidence, and more clues of potentially suspicious activity. The result could be that the cost imposed on corporations by fraud – estimated globally to be more than $4.5 trillion each year – comes drastically down.

The same is true of compliance and risk management. By facilitating the adoption of high-quality technology and leveraging the power of connectivity, Open Finance helps streamline the onboarding process. This not only offers a quicker and more seamless customer experience, but helps financial institutions benefit from a more data-driven approach to risk management. When it comes to making credit decisions, Open Finance also allows financial institutions to verify the information their customer has provided – and therefore accurately establish their risk profile. An abundance of data combined with best-in-class technological solutions can help institutions make important decisions with less risk involved.

Automation = efficiency

Open Finance can also add value by making internal business practices much more efficient. When greater amounts of data are more readily available, this means that institutions can analyse customer activities thoroughly. Having interpreted what the data is saying, they can then ensure that employees are working on the most profitable tasks. There’s little point spending large amounts of time monitoring low-risk customers who consistently meet their repayment deadlines. But there is a point in focusing valuable time and resources on those with a higher-risk profile. Managing the workforce in this way, by leveraging the power of open data, promises to significantly improve efficiency and, ultimately, the bottom line.

The power of this new phenomenon all comes down to improved customer knowledge. With Open Finance, financial institutions benefit from a much richer, more contextualised view of each individual’s finances than that previously provided by Open Banking. With good analytics and technology, although subject to strict data privacy regulation, this information can be interpreted in highly useful ways.

More data means institutions can provide better, more personalised services, helping to make the customer experience more enjoyable, seamless, and more efficient. Open Finance has equally positive ramifications for financial institutions themselves. Boosting operational efficiency, creating more efficient compliance procedures, and putting in place more effective risk management practices are just some of the benefits that could be on offer.

We’re only at the beginning of the new Open Finance journey. But there’s every reason to be optimistic about what the future could hold for financial institutions that embrace this new era.

Chrisol Correia is Global Head, Financial Crime Risk Management at Facctum