From Open Banking to Open Finance and beyond: The Paypers' Vlad Macovei explores how data sharing evolution, regulatory impacts, and global perspectives shape the financial landscape.
Beginning with PSD2’s emergence on the financial stage, Open Banking allowed TPPs to use customer-allowed data to develop better financial products related to bank accounts, transactions, and payments. As Europe stands in front of new regulations that aim to introduce Open Finance to European consumers, the new financial services paradigm will extend beyond traditional banking services. Service providers will access new consumer data pools, such as those created from investments, insurance, lending, and other financial instruments.
Open Banking allows customers to safely share some of their personal finance data, including account details, transaction history, etc., with specific, authorised third parties. This sharing is typically facilitated through Application Programming Interfaces (APIs). Open Banking is mandated and, at the same time, ‘limited’ to:
account aggregation (third parties gather customer data from multiple accounts into one single platform);
payment initiation (customers allow third parties to connect to their banks; third parties can authorise payments directly from the customers’ bank accounts).
Open Finance encompasses a more extensive range of financial data, allowing individuals and businesses to share information related to investments, insurance policies, loans, and other financial products and services. Open Finance aims to create a more interconnected financial ecosystem by facilitating the seamless flow of data between different financial service providers. This can lead to more holistic financial management and personalised services.
By opening access to a broader set of financial data, Open Finance encourages innovation and collaboration among traditional financial institutions, fintech companies, and other players in the financial services sector. This collaboration can result in the development of new, integrated, and customer-centric financial solutions.
The goal of Open Finance is to improve the overall customer experience by providing individuals and businesses with more control over their financial data. This increased control allows for better financial decision-making and the ability to seamlessly leverage various financial services.
While Open Finance is alive and thriving in places like Brazil, for the European customer Open Finance is an initiative still in the works. The main difference between the two regions is that Europe is a continent comprised of multiple countries and cultures, thus harder to align to a single standard. Regulators are currently trying to do just that via new legislation and initiatives such as: reviewing PSD2 and working on PSD3, PSR, FIDA, SPAA, and eIDAS 2.0. While separate in nature and scope, they all work together in making Open Finance a reality while also hinting at the next step: Open Data.
While Open Banking and Open Finance are specific to the financial sector, the principles of openness, transparency, and data sharing are fundamental to both. Open Data, on the other hand, extends these principles to a wider range of information, including non-financial data. Open Data, as a broader concept, includes information beyond the financial sector. It encompasses data from various industries, government agencies, scientific research, and more.
Open Data's core objective is fostering transparency, collaboration, and innovation through the unrestricted availability of diverse datasets to the public. Initiatives in Open Data aspire to facilitate the creation of novel applications, research endeavors, and insights spanning various domains.
In the evolution of these concepts, it's plausible that the principles of open data will continue to influence and shape how data is shared and utilized across various sectors, including finance. The trends toward openness, interoperability, and collaboration are likely to persist, fostering a more connected and innovative environment for both financial and non-financial data. However, the specific trajectory and development of open data will depend on regulatory frameworks, technological advancements, and societal attitudes toward data sharing in the future.
Countries like Australia and Brazil, drawing inspiration from the European Open Banking model, have chosen distinct paths in opening up their financial data. Their approaches serve as compelling examples of the transformative potential of open data sharing, warranting closer examination by other regions.
Australia:
In contrast to Europe's Open Banking introduced through PSD2, Australia adopted the Consumer Data Right (CDR) legislation.
While the European framework focused on enabling third-party account aggregation and payment initiation, Australian regulators opted for a more extensive scope of data sharing across the entire economy.
Consequently, Australia, starting in 2022, has expanded beyond Open Banking to include Open Energy and Open Insurance sectors, facilitating the sharing of consumer data across diverse industries and progressing towards the overarching vision of Open Everything.
Brazil:
Brazil is currently in the final stages of implementing Open Finance, deviating from the European Open Banking model.
Collaborating with industry representatives, Brazil's central bank chose a phased launch approach for Open Finance, demonstrating a departure from the European model.
Despite recent government pressure, Brazil's rapid expansion of Open Finance has showcased its potential to revolutionize financial services. Within less than two years of its launch, the Open Finance ecosystem in Brazil reported over 27 million customers and 41 million accounts actively participating as of September 2023.
From the inception of PSD2 and the era of Open Banking, the financial sector is now embarking on a transformative journey towards Open Finance. As Europe navigates new regulations for broader data sharing, the shift encompasses investments, insurance, and beyond. Open Data emerges as the next frontier, transcending industry boundaries for transparency and collaboration. Inspired by European models, countries like Australia and Brazil showcase unique paths. Australia's Consumer Data Right legislation expands to Open Energy and Open Insurance, while Brazil's phased Open Finance launch reports rapid expansion. This trajectory signifies a paradigm shift towards an era we term ‘Open Everything.’
This editorial piece was first published in the Open Finance Report 2023. We encourage you to download the report and find out the latest trends and developments in the world of Open Banking and Open Finance, as the road to Open Data continues.
Vlad is a Senior Editor at The Paypers, working on the Banking & Fintech team. He uses his research, content, and people skills for all activities revolving around Open Banking, Open Finance, Embedded Finance, and more. Vlad has a degree in Biology and Molecular Genetics and an extensive background in creative writing. You can reach out to him on LinkedIn or email.
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