The evolution from Open Banking to Open Finance

Open Finance represents a welcomed extension of Open Banking and allows the exchange of data to occur between a wide range of financial companies.

19 days ago   •   4 min read

By Tun Yong Yap

Having previously explained the concept of Open Finance and its benefits for both consumers and financial companies, we shall now explore its more prevalent counterpart, Open Banking, and find out why Open Finance represents an extension of it.

The idea of Open Banking revolves around banks allowing third-party platforms to access consumer financial data, with consent, and leverage it to provide additional services or perform transactions on behalf of the customer.

The information shared can range from account data such as transaction history and balances to payment data such as bills payment and domestic fund transfers.

The underlying idea governing the idea of Open Banking is that consumers are the owner of their financial data and they should have the ability to consent to the sharing of it, in exchange for access to more personalised financial products that will benefit them.

Limited in scope

However, though the concept of Open Banking is relatively well-understood in Europe, the term remains nascent within Southeast Asia. Regulators across the region are adopting a wait-and-see approach and allowing the free market to dictate the direction of Open Banking, similar to the US.

While the secured exchange of data brought about by Open Banking allows consumers to unlock access to more suitable financial products, its use cases are limited to products offered by the banks (loans, credit cards etc.). Furthermore, Open Banking only involves the sharing of financial data by banks.

However, banks only represent a small, albeit important, part of the financial ecosystem. There are many other financial companies such as personal finance platforms and peer-to-peer (P2P) lending firms, just to name a few.

Therefore, Open Finance represents a welcomed extension of Open Banking and allows the exchange of data to occur between a wide range of financial companies, creating a more holistic and accurate assessment of an individual’s digital financial footprint.

The increased sources of financial data also translate to more use cases where consumers can leverage their data to make more informed decisions and improve their financial wellbeing.

More applications

For example, fintech companies creating personal finance platforms can aggregate the data of their users and present personalised budgeting and saving insights. This enables customers to receive tailored advice that can help them manage their finances better.

Besides, wealth management platforms can access their users’ digital financial footprint to accurately monitor their current investments and better recommend future ones for them.

This mutually beneficial relationship results in consumers being able to make informed data-driven decisions while companies can offer a better experience for their users by offering tailored investment products.

Also, P2P lending firms can make use of the exchanged financial data to conduct more in-depth credit scoring of potential borrowers and access more eligible customers. More than that, with Open Finance facilitating eKYC (electronic know your customer), lending platforms can onboard customers within minutes while reducing identity fraud.

With the consent of users, lending firms can also initiate recurring repayments from customers. This helps customers solve the hassle of tracking deadlines while reducing default risk for companies.

Insurance firms also stand to benefit from Open Finance. With the ability to precisely monitor the financial situation of consumers, they can offer better risk-adjusted insurance policies for customers.

Due to the ability to confidently ascertain the financial wellbeing of potential users, firms can reduce the risk of non-payment and offer more competitive prices for consumers, benefiting both parties.

By aggregating the financial data of consumers, fintech platforms can offer consumers specific products that are tailored to their needs

Closing the financial divide

Apart from increased use cases brought about by Open Finance as compared to Open Banking, the former can change how consumers view their finances.

No longer will financial products such as loans or insurance exist in silos. Instead, with Open Finance, they will be interconnected and hyper-personalised to the needs of a specific user.

Loans that come with affordable repayments, personalised financial advice based on real-time spending habits. These are some of the products Open Finance has enabled fintech companies to build.

Crucially, Open Finance opens doors for consumers to access financial products and services they previously were not eligible for.

A mom running a warung (mom-and-pop shop) in the outskirts of Jakarta would have been ineligible for a loan to fund her children’s’ education due to the absence of a bank account for lending firms to accurately track her credit history.

However, with Open Finance, lending firms can leverage financial data from other fintech platforms (such as the digital payment app she uses to transact with her suppliers) to better understand her transaction and credit history.

With a credit score that is more reflective of her ability to repay, she will stand a better chance of securing the loan that enables her children to further their education, giving them a better shot at improving their overall financial wellbeing.

Now is the time

Open Finance is not a concept written on paper. As we speak, fintech companies across Southeast Asia are embracing it to create better financial products for their consumers.

Apart from giving them an edge over their competitors, they help their users improve their financial wellbeing too, closing the financial divide that has long existed in the region.

At Finantier, we do the hard work of aggregating financial data from a wide range of companies and turning them into actionable insights for fintech companies to build their products on.

With our developer-friendly APIs, companies can easily embed our services on top of their platform and start creating personalised financial products within an afternoon.

If you are a fintech company looking to build financial products for a $300 billion internet economy in Southeast Asia, speak to us today to find out how you can join a growing community of companies who have used Open Finance to create products that customers love.

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