Open Banking is something more and more people are becoming aware of. However, there is another term that is also being mentioned – Open Finance. Whilst Open Banking and Open Finance are two related concepts that refer to the opening up of financial systems to third-party providers through the use of application programming interfaces (APIs) and other technologies, there are some differences between the two concepts. Here we discuss Open Banking vs Open Finance.
Open Banking
Open Banking typically refers to the sharing or exchange of customer data and payment services between banks and third-party providers (TPPs), such as fintech companies. This allows customers to manage their finances more easily, for example by using a single app to view information about all of their bank accounts in one place or to make payments directly from their account using a third-party app. It also benefits companies as it allows them to deliver more advanced and user-friendly experiences that provide customers value when it comes to their finances.
For example, Open Banking has significantly improved the payment process, making it a more tailored, simple experience for consumers and benefits businesses with a more streamlined payment procedure with no risk of chargebacks or unnecessary fees.
Open Finance
Open Finance, on the other hand, refers to the broader concept of opening up access to a wider range of financial services beyond banking. This includes insurance, investments, pensions and other financial products and services. With the user’s consent, their financial data related to their pensions, investment and wider finances are given to TPPs and result in a more tailored financial service being provided. Open Finance aims to give consumers greater control over their financial data, allowing them to access a wider range of financial products and services that best meet their needs. It is still a relatively new concept and is not yet as widely adopted or regulated as Open Banking.
What Is The Main Difference Between Open Banking And Open Finance?
The main difference between these two concepts is that Open Banking is regulated by a legal framework, whereas Open Finance is yet to be.
Open Banking is typically regulated by government authorities, such as the European Union’s Payment Services Directive 2 (PSD2) which was put into effect back in 2018. Whilst Open Finance is currently not covered by any financial or legal regulations, this may soon be changing and is something both the European Commission and the UK’s Financial Conduct Authority (FCA) are looking into.
In summary, Open Banking focuses on opening up banking systems to third-party providers, while Open Finance is the continuation of this and a broader concept that includes opening up access to a wider range of financial products and services beyond banking. Both are important terms for businesses and individuals alike to be aware of as they both have the potential to transform how we manage our finances and gain better control and transparency over them. They both allow greater competition within the marketplace, provide greater innovation and continue changing the world of finances and banking.
