The Evolving Landscape of Open Finance

Written by Justin Henry, Executive Director, KMMRCE Pay

Banking and finance have seen seismic shifts during the last decade, and the pace of change will only accelerate as consumer demands and digital capabilities continue to expand. Open banking heralded a new era in the way people control their data, giving them more freedom to handle their finances, and the increased competition it created for traditional banks has also led to some major innovations in the industry. Now, as more people continue to reap the rewards of open banking, we’re on the cusp of an even bigger opportunity in the form of open finance.

Where open banking meant better banking solutions, open finance is the natural next step, using APIs to connect a broader range of financial products such as insurance, mortgages, pensions, and credit scores. Open finance gives consumers the power to manage their whole financial lives, as well as opening up crucial avenues to support the unbanked and underserved, promoting financial and social inclusion.

Advantages for all

A report by the McKinsey Global Institute found economies that embrace financial data sharing could see GDP gains of between 1-5% by 2030, with the benefits being felt by both consumers and financial institutions.

On a consumer level, some of the main benefits of a collaborative financial environment include:

-       Accessibility - More individuals and smaller businesses will be able to demonstrate their creditworthiness by making a broader mix of data available, beyond the relatively limited paperwork previously required to apply for products such as loans.

-       Clarity - Connecting the dots between different data sources helps customers gain a clearer picture of their financial status. This allows them to manage their money more effectively, make informed decisions, and take the necessary steps to improve their position.

-       Choice - Open data makes it much easier for a person to compare products and services, uncover innovative solutions, and switch between providers to find the best deals.

Financial institutions can also take advantage of added convenience and transparency:

-       Efficiency – it is far quicker and easier for lenders to assess a person’s suitability when the necessary data is readily available. Open data also facilitates the use of AI and analytics to automate operational processes and gain valuable insights that can be used for new product development.

-       Customisation – When they understand their customers better, financial institutions can tailor their products to build brand loyalty and reach a wider audience.

-       Fraud prevention – the issue of security is complex in open finance. Much of the talk has been around how wider data access can leave individuals vulnerable to data breaches; however, being able to access and share customer data in real-time can help institutions to create more robust fraud prevention strategies.

The pathway to an open financial future

Despite the many benefits, open finance is in the very early stages of its development, meaning hurdles are inevitable. Currently, there is a huge variation in the scope of data standardisation and sharing between different countries, making the economic value harder to realise. The costs and capabilities of securing data in a fully open ecosystem also need to be addressed. Above all, we need more collaboration between stakeholders to overcome such obstacles and minimise the friction points. At KMMRCE Pay, we’re looking forward to being part of the debate and sharing our knowledge to shape one of the most transformative moments in modern finance.