Dmitry Dolgorukov is the Co-Founder and CRO of HES Fintech, a leader in providing financial institutions with intelligent lending platforms.
First, there was open banking — a considerable step forward in democratizing the financial services industry. With third-party access to banking via application programming interfaces (APIs), consumers were able to connect with a broader range of financial products and take greater control over their financial future.
Now, the wave of open technology is building. Following the growth of open banking, the evolution of open finance could deliver an exciting new development in the financial world for both consumers and providers.
What is open finance?
Previously, all financial matters were handled in a one-stop-shop — a bank. Not only did they hold the key to all financial business decisions (for example, whether a loan was approved), but they often also had a limited range of financial products they could physically offer.
Open finance is based on data-sharing principles that can empower banks to offer a broader range of possibilities to their clients that are suited specifically to their needs. Meanwhile, for consumers, this opens up a world of financial possibilities. With open finance, consumers could potentially access more effective:
• Private mortgages.
• Savings systems.
• Pension funds.
• Insurance.
• Credit.
• Investments.
Essentially, it can empower consumers to take control and do more with their money. Banks can collaborate with various providers to deliver a wider variety of services based on consumer data.
What does open finance look like in practice?
Open finance might seem like an expansive concept. Here’s how I would narrow it down. Perhaps you’ve recently opened your banking app and noticed some new features in there for adding accounts from other banks to help you monitor all your accounts at once, or you added your bank account to your investing app to see how much you can invest this month. This is open finance.
It has a range of potential uses for consumers and financial institutions. For example:
• Utility comparison: You can discover better deals from other providers and find out how to save on your current payments.
• Recurring bills: If you use direct debits, you may be able to save or combine payments. Alternatively, you can see how much you’re paying on subscriptions and other services.
• Make payments directly: Payment initiation services allow consumers to make direct payments from bank accounts without a credit or debit card. This can simplify payments for consumers and ensure businesses are paid faster.
• Dashboards for lending: Lenders can use dashboards to offer more competitive services at better rates. In addition, they might be able to lower the risk of lending with more comprehensive information.
Is open finance dangerous?
While concerns regarding data protection shouldn’t be dismissed offhand, it’s vital to remember that when you’re implementing open finance systems, security should come first. Companies seeking to capitalize on open finance should first ensure that the products and services they offer meet the highest security standards — especially when it comes to data protection.
Through API technology, a company can access and draw information from bank accounts that could help determine the correct financial products to offer a customer. But at the same time, banks need to make sure that their data remains safe.
In addition, there are concerns about bias; open finance may mean closed doors for some, particularly those who find themselves less able to access banking services in general.
As of 2017, the World Bank estimated that there were 1.7 billion adults worldwide who were unbanked. In the U.S. alone, the Federal Reserve reported that 6% of the population was unbanked in 2018, and an additional 16% were underbanked. Some fear that these groups’ lack of credit or banking history could work against them when it comes to open banking, as the data would show an unfair bias against them.
The Path To Fairer Finance
That said, I believe open finance can mean fairer finance if it’s implemented correctly. If organizations take appropriate steps to lower the risk of bias by ensuring their artificial intelligence software is correctly built to take those with a less-than-ideal financial background into account and develop risk-management strategies that correlate to market reality, the results they deliver could be fairer for all.
Open finance should allow consumers to choose the data they share, decide how they engage with their finances and deliver unparalleled access to products and services that they may not have otherwise had access to.
In addition, open finance should build transparency. No longer should consumers be left wondering if there’s a better deal out there. Instead, open finance can lay it bare and help users decide if their current financial package is working for them.
What’s next in open finance?
Although I believe the future is incredibly exciting for open finance, all of the necessary mechanisms aren’t in place yet to unleash its full capacity. Currently, in the U.K., open banking is limited in scope. While organizations like the FCA are leading discussions about further progress in the space, the pace seems to be slow and steady. Australia is in a similar position, which many say is due to red tape and the high cost of becoming accredited to receive consumer data.
Meanwhile, the situation in the U.S. is a little different. The open finance initiative is driven largely by the Financial Data Exchange, which created “a consortium of providers around a common standard for secure access to financial data." I’ve noticed that industry leaders in the U.S. seem determined to create a more comprehensive model. This could allow greater access to a wider range of products and services in the coming years and could make the U.S. a pioneer in the sector.
For fintech providers thinking about how to integrate their products with open finance in mind, it’s vital to first understand how the technology can benefit the client while ensuring data security. Second, think about how you can integrate it seamlessly into your current services.
There’s still much work to do, but all in all, I believe what we’re currently observing is an exciting development in the world of finance and one I hope will only continue to grow.
