Open banking vs open finance – what’s the difference?
Open banking has been around for a while now, though many still aren’t sure exactly what it’s about. To add to the confusion, open banking has been joined by another trending term – open finance. But what exactly is the difference between the two?
Open banking has been a game-changer for the financial services industry. Now, it’s been joined by another term – open finance.
Open finance is the next step in the open banking journey. It allows banks to gain and share access to all of your financial data.
Open finance will lead to increased competition, better-tailored financial services, and improved overall financial health.
First, let’s recap what open banking actually is: open banking is the exchange of data and services between financial institutions and third-party providers (TPPs). It makes it easier to deliver enhanced capabilities and experiences to the market by allowing access to transaction data.
With the use of open application programming interfaces (APIs), third party providers can build applications and services to bring value to consumers – be it by offering exclusive data-driven insights, streamlining the user experience or simplifying payments.
Open finance goes beyond the scope of data and services available at your bank, covering your entire financial footprint. With your consent, financial data related to pensions, tax, and insurance could all be accessed by a trusted third party. This opens up for better-tailored consumer services, for payments as well as other financial products.
Open finance: rules and regulations
The biggest difference between open banking and open finance is that open banking is partly regulated by a legal framework while open finance isn’t (yet).
As you may know by now, open banking in Europe is partly regulated by PSD2, or the revised payments services directive. This directive, which took effect in 2018, made it possible to open up the financial services industry – and the hope is that future open finance regulations will continue this development.
Open finance, i.e. the access to information regarding your investment assets, pensions, and other types of financial services, is not covered by any financial regulations. But this may soon change. The European Commission and the UK’s Financial Conduct Authority (FCA) are both investigating if there's a need to regulate open finance. The goal is to promote greater financial health through competition and market innovation.
What are the benefits of open finance?
Open banking has democratised and transformed finance as we know it. Open finance is the next step on this journey, and will encourage collaboration between third party providers and the traditionally closed financial industry. Open finance will be good for businesses as well as individuals: consumers will gain easier access to their financial data and learn more about their finances. Access to more information leads to better financial decisions.
With the transparency of open finance, consumers also gain better control over their finances. Open finance is a leg in the journey towards open data, where everyone gets to choose who gains access to their data – financial and other.
Open finance – the next step of open banking
So, in short: open finance is like a continuation of open banking. It’s the next level in the democratisation of finance, and it will finish what open banking started: levelling the playing field so that consumers get better-tailored financial journeys. Businesses gain access to more relevant data, smoother onboarding of new customers, and scalable, future-proof fintech solutions.
Want to dive into the specifics of what’s covered by open banking? Here’s an overview of what counts as a payment account under PSD2. To learn more about the world of open banking and open finance in simple terms, explore our 'open banking 101’ series.
Tink offers a host of open banking solutions that bring benefits to businesses as well as consumers. Take a look at our product page to learn more about what we can help solve.
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