What Is Open Finance?

Date Published: Oct 21, 2022
Jim Hughes, editor at OpenCashAdvance.com
Sophia Rodrigez, reviewer at OpenCashAdvance.com
Listen minutes

The concepts of open banking and open finance emerged less than a decade ago. But they’re gaining more and more popularity as countries worldwide are increasingly adopting them into their financial frameworks.

Open banking allows banks to share their customers’ transaction information with third-party sellers through APIs. API stands for Application Programming Interface and allows two different software applications to communicate with each other.

Individual online banking on tabletOpen finance is the next step in open banking and goes beyond the scope of sharing data available at your bank. With the individual’s consent, it allows banks to access and share all your financial information, including taxes, pensions, and insurance. This information can be shared with third parties to personalize consumer services better. 

But how can open finance transform the financial world, and what are its benefits? Are there any laws that govern sharing of individual data with other parties? Read on to find out.

Rules and Regulations

Open banking was first introduced in the UK in 2016. Today, it is partly regulated by Europe’s Payment Services Directive or PSD2. Unlike the UK, the United States does not have a specific regulatory policy for open banking. The closest thing it relies on is the Consumer Financial Protection Bureau’s (CFPB) UST report of 2019. Other countries use different regional frameworks for control and regulation.

As opposed to open banking, there are no legal frameworks that regulate open finance yet. However, this may change soon, as several entities, including the European Commission and the UK’s Financial Conduct Authority (FCA), have vowed to investigate and possibly establish an Open Finance regulatory framework.

Open Banking vs. Open Finance – What’s the Difference?

Although sometimes used interchangeably, these two concepts are different from each other. While open banking lets other organizations access only a limited amount of data about particular customers, open finance provides them with a wider range of information. Ultimately, it stands for the right of the customer to own and share their data with who they want.

To help better understand the difference between these two terms, here’s a brief summary with the key points:


Open Banking

Open Finance

Data Ownership and Control

Banks decide what information to share with third parties.


Customers decide what information to share with third parties.

Rules and Regulations

Governed by the Payment Services Directive or PSD2.

No official legal regulations so far.

API Providers

Provided only through banks.

Other financial organizations can also provide APIs.


No contract required between the API provider and the client.

Contract required between the API provider and the client.

The Benefits of Open Finance

The financial industry can see many benefits from open finance, especially since the industry is traditionally a closed sector. Additionally, a collaboration between financial institutions and third-party organizations can help both businesses and individuals. Below we list some of the benefits that open finance brings to both parties.

Connecting Unbanked Users

There are around 1.7 billion people in the world that don’t use any mainstream financial services. One of the reasons for this is that some marginalized communities don’t have access to financial services. Open finance can eliminate this issue and allow many unbanked users to enter the financial system. Due to the availability of additional data from previous landlords and employment history, it may be easier for these people to prove their creditworthiness and receive financial assistance.

Better Opportunities for Gig Economy Employees

It is estimated that nearly one-third of the U.S. population is employed in the gig economy. These are typically workers employed as:

  • Freelancers
  • Independent contractors
  • Micropreneurs
  • Temporary workers

In some cases, due to their temporary job nature or fluctuating income, gig workers’ financial information may not be fully registered with the government or tax authorities. As a result, banks may not have complete or accurate financial information for these individuals, classifying them as ineligible for some financial services. With open finance, thorough employment information about gig economy workers can be securely shared with financial institutions. Additionally, open finance can provide more detailed financial information aside from income, such as investments, external income, and timely payments. This can lift the limits on many financial services like mortgages and make them available to this segment of the population too.

Centralization of Financial Services

Open finance unites customers’ financial services in a single platform, saving users time and effort when managing their financial data. Similarly, banking institutions will find it easier to optimize their customers’ information if it’s consolidated in one place.

Personalizing Services for Lenders and Consumers

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Open finance extends more opportunities to service providers to better target their marketing offers. For instance, banks or credit organizations can offer credit cards, personal loans, and other products and services based on the consumer’s financial data. This is also a win for customers who save time searching for financial services that they qualify for. Instead, individuals can enjoy the perks of pre-approved credit based on their financial information.

Access to Greater Data Volume

An open data-sharing model opens many doors for banks, insurance companies, and fintech organizations to collect a vast amount of data about their customers. Gathering Big Data can help these companies to:

  • Anticipate consumers’ needs. Financial organizations can analyze consumers’ spending habits to target them for their next possible purchase. For example, suppose they notice that a given customer has recently spent money on a driving school. In that case, they can capture their attention by sending personalized ads about car loans, hoping that the user would be interested in purchasing a car.
  • Do credit allocation. Transparent data information can aid credit organizations in identifying applicants’ creditworthiness more accurately. Banks would also have the ability to share consumers’ financial information and credit history among themselves to see a clearer picture of borrowers.
  • Perform consumer behavior analysis. Financial organizations can better target their clients with personalized ads and offers by analyzing consumer buying behaviors. This usually leads to higher customer lifetime value and boosts cross-sales of additional products and services of interest.

The customers’ right to share their data with banks and third-party organizations lies at the core of open finance. And implementing open finance through APIs imposes stronger authentication mechanisms and security for users’ financial data.

Driving Financial Data Automation

Finally, open finance drives automation, which helps financial service providers, particularly lending institutions, make better data-driven decisions. Most banks and credit providers already implement automation practices, but open finance can allow them to lift decision-making to higher viability.

For instance, thanks to data automation, loan providers can accept or reject loan applications immediately by being informed about the borrower’s current financial situation.

Open Finance Challenges

Individual using fingerprint to confirm paymentDespite its full potential, open finance is still not widely used because of several challenges and shortcomings. These challenges mostly come from its new nature and lack of proven data security. The following are the main challenges that currently restrain open data-sharing models from becoming a widespread practice worldwide:

Skepticism of Customers

The most prominent concern of both individuals and companies is the lack of legal regulation of open finance. Zopa reports that 63% of people have never heard of open banking or open finance. Additionally, 26% of people that already use open banking wouldn’t trust companies with their financial information.

As the pioneer in the development of open banking, the United Kingdom regulates this field according to the Payment Services Directive or PSD2. The country also has over 325 regulated providers powered by open banking.

When it comes to the U.S., open banking is safely practiced with the help of the Financial Data Exchange. This is a consortium of financial companies that vow to share data securely between its members to make data-driven decisions. However, this field still lacks legal regulation in the United States, leaving it somewhat ambiguous to companies and consumers.

Until authorities establish clearly formulated legal regulations, companies and customers should keep up with compliance and ethical considerations about data sharing to avoid financial and reputational harm.

Data Safety

Last but not least, people worry about the safety of their information. According to the same research by Zopa, 30% of customers are uncomfortable sharing their financial data with companies because of data security reasons.

Indeed, consolidating financial and sensitive information in one place makes it more susceptible to fraud or hacker attacks. This is why companies utilizing open finance prioritize the need for more robust security measures to protect against hackers and breaches. 

Real-World Applications of Open Finance

Mortgage broker and homeowner shaking hands

While some people are still skeptical about open finance, several companies have witnessed growth and stronger customer relationships after implementing open banking and finance. According to Janine Hart, the CEO of Innovate Finance: “Open banking exists to improve outcomes for consumers, so we must focus on this. The vision of open banking as a tool to give customers more power and access to smarter, more tailored financial products is a very positive one.”

Here are some real-life use cases of open finance around the world:

Personal and Business Financial Management (PMF and BFM)

These tools use customers’ personal account data to help them manage their finances better. Through PFM and BFM’s financial management frameworks, customers can identify more saving opportunities, compare different financial products and services based on their capabilities, and receive customized deals based on their spending habits.

Mortgage Brokerage

Buying a house is probably one of the largest investments, and much of the process is currently paper-based, which can cause even more hurdles. Open finance eliminates this obstacle by allowing electronic data sharing between lenders and sellers, largely automates the purchase process, and allows customers to correct any information that may wrongly affect their credit scores.

Sharing In-Vehicle Data

Open finance also extends to non-financial uses. The European Commission proposed sharing data on a car’s performance, which can help third-party dealers offer personalized insurance packages and maintenance based on each vehicle’s needs.

Sum Up

In the evolution of open banking, open finance is the latest trend that aims to democratize the financial industry. We saw what open banking is, how it’s different from open finance, and listed some of the benefits and challenges of these spheres. While open finance is a promising financial framework that can revolutionize relationships between companies and customers, we wait to see how it will develop into a legally defined and generally trusted practice.

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Ana-Maria Sanders, author at OpenLoans
Lead Writer
Ana-Maria Sanders is a highly-regarded writer with over a decade of expertise in the personal finance sphere, specializing in loans and credit cards.
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