What is open finance and how does it differ from open banking?

Open finance is the next step in the evolution of open banking. By bringing the benefits of open banking to a broader array of financial products, open finance will give consumers and businesses greater control and visibility of their economic lives. 

In fact, discussions about its future are already underway in Europe and the UK. The European Commission has just wrapped up a public consultation on open finance. Recognising that a person’s financial life is not limited to their payment account, the EU is looking at how to expand the principles of open banking in other areas as well. A legislative initiative may follow in 2023.

But while open finance is set to build on open banking, the two terms don’t necessarily mean the same thing. There are a few key regulatory and commercial differences that distinguish the two concepts. So what is open finance, and how will it affect you?

What is open finance?

As with open banking, open finance seeks to put control of financial data back in the hands of customers. Both concepts operate on the idea that account holders should determine who can access their information and make payments on their behalf. 

However, open finance expands significantly on the scope of open banking. Specifically, it could allow third parties to access a broader range of customer data from savings accounts, investments, pensions, mortgages, insurance and much more. In turn, that data can be used to create more personalised and intuitive financial products.

In practice, open finance could help realise the full potential of open banking. For example, it could make account aggregation far more comprehensive, bringing a customer’s current account, savings and investment information into one interface. Open finance could also allow for automatic transfers between savings and investment accounts. 

Application programming interfaces (APIs) will play a key role in making this happen. They enable regulated third parties to connect with financial institutions safely and securely. APIs are already the basis of open banking in Europe, and a strong open finance framework should rely on them as well.

Open finance vs open banking

While open banking and open finance may rely on the same underlying principles and share many similarities, there are a few key differences that set them apart.

In Europe, open banking came into law as part of the Revised Payment Services Directive (PSD2). Under PSD2, financial institutions in EU member states must allow regulated companies — known as third party providers (TPPs) — to access a customer’s account data and initiate payments if the customer provides their consent. 

PSD2 forms the backbone of Europe’s open banking ecosystem. However, its scope is limited to payment accounts. Financial products such as savings, investments, mortgages and pensions all fall outside its parameters. As a result, banks and other providers aren’t required to give TPPs access to data related to these products. 

Without this information, the scope of open banking is limited. Open finance can bring open banking principles to a greater array of financial products, creating more value for consumers and businesses. 

What are the benefits of open finance?

Open finance will not only drive further competition and innovation in the financial sector, but it’ll also give consumers greater access to and control over their financial data. This is beneficial for a number of reasons, including but not limited to:

• More visibility: open banking already allows customers to view all of their bank account balances in one dashboard. Open finance could take things a step further, allowing consumers to see everything from their ISA and pension to their investments and mortgage in one place, giving them a far more holistic view of their financial health.

• Greater personalisation: by drawing from a deeper pool of data, open finance products can learn more about a customer’s goals and spending habits. They can then use this information to provide tailored offers and services. In the same way that open banking allows a finance app to give personalised savings advice, for example, open finance could allow a lender to offer a mortgage based on a customer’s exact needs, or suggest switching to a new bank with more suitable account offerings. 

• Automatic transfers: with open banking, TPPs can initiate fund transfers between payment accounts. This allows customers to make payments directly from their bank accounts and to set up automated payments. Open finance would bring this feature to other financial products. For example, a consumer could automatically move money each month from a savings account into an investment account, or set up smart recurring payments to pay off their mortgage.

What could open finance look like in the UK and Europe?

By expanding on PSD2 and extending open banking principles to more financial products, open finance could be here much faster than you may think. 

Efforts are already underway in both the UK and Europe. The UK government is preparing a Smart Data initiative which will be the basis of open finance, while the European Commission’s call for views on how to make open finance a reality just ended. A European open finance framework is expected to arrive in the first half of 2023.

Ideally, these initiatives would build on the foundations laid by PSD2 and open banking. This would include enshrining customers’ right to access their accounts through third parties, allowing TPPs to both read data and initiate payments, and mandating the use of APIs to facilitate data retrieval and payments.

If you want to know more about TrueLayer’s thoughts on accelerating open finance in the UK and Europe, check out our article on the topic.

How will open finance affect consumers and businesses?

Open finance will enhance open banking’s benefits to both businesses and consumers. Not only will it give customers more power over their data, but it will also lead to new innovations in finance and payments. 

As with open banking, consumers will be able to determine how much and for how long a third party provider can access their account. Under open banking, TPPs can only read data and initiate payments with the account holder’s consent.

Customers can revoke that permission at any time, and they can also limit how much information they share. In short, open banking lets customers decide what happens with their financial data, and open finance will continue that trend.

They’re not the only ones who stand to gain, either. Open finance will give businesses more in-depth data from their customers. This will make everything from personalisation to compliance far easier and more effective.

With open finance, the future of open banking is well on its way. Are you prepared?

Want to know more about open finance? Check out our three strategies to accelerating open finance in the UK.