#Openbanking is a concept discussed and detailed in our previous article. It is revolutionizing financial institutions by definitively adapting them to the new digital era and empowering end users to control their data.
What is Open Finance?
One of the essential features of this new type of data exchange is that it can work in several directions: whether users share the information they store in their banking institutions with other digital platforms or vice versa.
In the market, the information we can share is not necessarily limited to banking data.
#openfinance goes a step beyond open banking. Financial data, regardless of where it comes from, can be shared with multiple entities and platforms through APIs, which encourages the development of new products and services.
Examples of Entities Participating in Open Finance
In an economy where Open Finance is implemented, the ability to share data is not limited only to banking entities. Still, it is now possible to share financial data from digital actors such as:
· Tax Authorities
· Collaborative economy platforms (GIG Economy)
· Insurance Companies
· Fintechs
· Investment and Pension Funds
· Payroll service providers
· Among others…
Impact of Open Finance
A more inclusive financial system can be created by allowing a broader range of financial information to flow more easily and securely between the different digital platforms and applications that people use every day to manage their finances.
As a CB Insights post sums up: “As open banking moves beyond the data realm of retail banking to open finance more broadly, more and more areas of consumer and business financial services – from credit assessments and lending to taxes and payroll – will experience the same transformation currently being seen in retail banking and payments.”
Open Finance and regulatory issues to consider
Data Protection and Privacy
One of the most significant regulatory challenges in the Open Finance space is protecting personal data and user privacy. The collection, storage, and sharing of sensitive financial data must comply with strict privacy regulations, such as GDPR in Europe or data privacy laws in other regions. Establishing robust security measures and precise consent mechanisms is crucial to ensure that users have control over their data.
Interoperability and Standards
The lack of common standards and interoperability between different systems and financial service providers can hinder the successful implementation of Open Finance. The various stakeholders, regulators, and authorities must work with the industry to establish technical and data standards that allow for the safe and efficient transfer of information between different platforms and financial service providers.
Cyber Security and Fraud
The risk of cyberattacks and fraud increases with the opening up of financial systems and data through Open Finance. Regulators must implement robust cybersecurity measures and set precise requirements for user authentication, data encryption, and detection of suspicious activity.
Transparency and Disclosure
Users should have access to clear and transparent information about how their financial data is collected, used, and shared in the context of Open Finance. Regulators should require financial institutions and service providers to clearly and fully disclose their data collection and use practices and any potential risks associated with participation in Open Finance platforms.
Responsibility and Compliance
Financial institutions and service providers must comply with several regulations and legal standards in the field of Open Finance, including licensing requirements, regulatory compliance, money laundering, and terrorist financing. Regulators must closely monitor compliance with these regulations and take disciplinary action against those who fail to comply with the established standards.
Future Perspective of Open Finance
Continuous Innovation
Open Finance is expected to remain a key driver of innovation in the financial sector in the coming years. With the opening of data and interoperability between different financial services, new opportunities will open up for developing creative and disruptive solutions that improve customer experience and promote financial inclusion.
Adoption of Emerging Technologies
Open Finance is expected to benefit from the adoption of emerging technologies such as blockchain, artificial intelligence, and advanced data analytics. These technologies can boost security, efficiency, and transparency in the exchange of financial data and facilitate the creation of new business models and innovative services.
Tokenization of Assets
Asset tokenization, i.e., the digital representation of physical or financial assets in the form of tokens on a blockchain, could significantly impact Open Finance. Tokenization can facilitate the trading, exchange, and management of a wide range of financial assets, from stocks and bonds to real estate and artwork, potentially opening up new investment and financing opportunities.
Greater Collaboration and an Expanded Ecosystem
Open Finance is expected to foster greater collaboration between players in the financial ecosystem, including traditional banks, fintechs, regulators, and consumers. As Open Finance adoption grows, we will likely see greater integration between different financial services and increased cooperation in developing interoperable and customer-centric solutions.
Open Banking and Open Finance are concepts that are here to stay.
In many countries, regulations are moving very slowly or not at all. However, this has not prevented Open Banking services from being provided in many places worldwide.
In a world where more and more businesses are run by digital platforms and services, sharing financial information of any kind through APIs that facilitate the flow of data is becoming increasingly imperative. This is why the adoption of an API-based transformation has become essential.
At WAU, we have experience implementing API-based systems and platforms based on Open Banking and Open Finance. If you would like to know more about this or need support for your projects, do not hesitate to contact us.
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