Description: If open finance continues to grow, it could disrupt the global financial data system and reshape the core concepts of banking.
Banks keep persistent records of our financial behaviors, from bill payments to our daily cup of coffee. Now, parts of this vast data repository are being distributed to third parties in what’s being referred to as “open financial data.” This movement is likely to precede a new wave of digital innovation in finance, as well as intense disruption to the industry, with the emerging of a new finance space entrepreneur activities will be looking to fill.
Open financial data is the result of a combination of changes in government regulation and the influences of the market. Forces both inside and outside of the world of finance can now access customers’ accounts to promote new services and products to them (with the customer’s consent, of course). The advantages for customers include more flexibility in their money management to allow for better account transparency and enhanced access to payments with more financial data sources. While open financial data is still very much in its infancy, it has the potential to revolutionize conventions in everything from credit cards, mortgages, business loans, and insurance.
The Rise of Open Financial Data Management
During the pandemic, people adopted new digital behaviors, and this wider push towards online channels has helped accelerate the adoption of open banking practices. Since consumers spend so much of their waking hours online and email retargeting, they’re now much more receptive to non-conventional financial services and products. Priority is now afforded to choice, convenience, and flexibility when choosing financial instruments. Open financial data could leave non-bank businesses in a more powerful position to engage in the financial services industry.
With the acceleration of digital adoption, many businesses in areas such as social media and e-commerce have found their brands leaping in popularity. This presents an opportunity for these businesses to leverage their new visibility by pivoting into providing their customer bases with financial services and products. One such example is Google’s Plex offering with its Google Pay app. Plex offers users physical and virtual payment cards, along with a current account and peer-to-peer payment options. The rise in online activity is offering companies the chance to offer consumers integrated financial services in the context of daily online activities such as online shopping and paying off car notes.
Consumers and Financial Data Companies
As open finance continues to grow in popularity, it could have significant repercussions for the ecosystem of global financial services. Perhaps the biggest potential customer base for open banking will come from the many consumers who are currently unhappy with the uncompetitive services from established banks that are now being challenged by the markets. Previously, these customers may have remained with these banks due to the perceived stress and difficulty of switching from their current providers. However, in the current uncertain landscape of open finance, it’s still far from clear as to who will win and lose from the rise of open financial data.
Many traditional banks promote their services by offering customers the aggregation of all their different financial repositories under one roof. These propositions can generally be divided into two different categories – infrastructure providers and project augmenters. Project augmenters use open finance data to enhance their current services and products, especially those employed by medium and small businesses. These might include cash flow management services that connect to customers’ bank accounts to improve transaction reconciliation.
A Revolution in Lateral Banking
As well as enhancing traditional banking services, open finance systems can allow for the development of secure and reliable options that wouldn’t otherwise be possible, particularly in the field of solutions for personal finance. Account aggregation apps now allow users to manage all their different bank accounts with varying banks through a single interface. Elsewhere, companies like Yolt are using the masses of customer data to diversify their products. The firm lets customers track all their financial activity in insurance, utility payments, pensions, and investments at once. Open finance customer service solutions also look to be offering advantages for small and medium businesses as well, as fintech allow firms to track their financial health and budget for the future, all through a single portal.
Currently, fintech are only dabbling with the kind of financial products that have traditionally provided low returns to the established banks, such as savings and current accounts. Products that generate higher margins like investments and mortgages don’t yet fall within the regulatory purview of open banking. One such regulatory obstacle to this growth is the limits around third-party access to the consumer financial data companies need for the service, especially in Europe. However, countries such as the UK are already looking at changing regulations in favor of more streamlined consent confirmation. This will make it easier to maintain a persistent financial database and put fintech in a much better position to secure and retain new customers in the future.
Will Consumers Bite?
Of course, the success of open finance will ultimately rest on the acceptance of consumers, but there’s good reason to think the public will be receptive to new products and services. Although there’s a general reticence to share personal and financial data, younger and more tech-savvy demographics have been found to be more receptive to the technology.
An even more promising group could be financially stressed consumers. Those struggling to find the time to manage all their financial activity could be those who will most appreciate the convenience and transparency offered by financial data analytics and open banking services. Some in this demographic have also proven very receptive to money management apps that show them how to analyze financial data for budgeting and spending, so a more direct approach to open financial data management wouldn’t be out of the question.
The development of open financial data needs to be closely observed by all parties involved. Much like Google’s map API paved the way for location-based services, so too could an open financial data API herald a new generation of innovation in financial services and products. If finance providers can communicate the advantages of open finance to consumers, banking may well be on the verge of a revolution. Where do you see open banking having the biggest impact on the financial world? Share your thoughts with us in the comments section below.
Emily Moore is an English & programming teacher with a passion for space and blogging. She believes that current exploration should be focused on preserving our planet’s resources. With satellites circling the orbit, it is easier to get relevant data on any environmental changes. This, in turn, should help people quickly address any challenges.