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Open finance and open banking explained

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedDec 20222 min read

Open banking has been growing in popularity over the last few years, and now open finance is set to take these FinTech innovations even further.

It’s fair to say that the financial services industry has already been completely changed by open banking, and the advance of open finance is the next natural step in the democratisation of financial services. So what is open finance and how does it differ from open banking?

Let’s find out in our guide to open banking and open finance.

What is open banking?

Open banking refers to third-party payment service and financial service providers being able to access consumer banking information such as payment and transaction data and certain account details. That might sound invasive without context, but the third parties are licensed entities who must abide by strict regulations and each consumer must give express consent before their data and details are accessed.

The data and details accessed by these licensed third parties enable them to provide a wider range of financial products and services to the consumer, while giving the consumer more control over their financial health. This is what the ‘democratisation of financial services’ means, in that more people have more access to more financial products and services.

The data and details shared with the third parties include basic account data such as the account holder’s name and the account type. It also includes the primary currency used with the account, as well as transaction details such as amounts paid out and the merchants being paid from the account.

It is also worth understanding the two things that make open banking possible in the first place, one being API technology and the other being the aforementioned strict regulations.

API technology

API is the acronym for Application Programming Interface. It is a software intermediary that enables two otherwise unconnected applications to communicate and exchange data. There are loads of examples of APIs in our everyday technology, such as the apps on our smartphones. Mobile apps connect to the internet from a device and send data to a server, which then receives and interprets the data before performing the required action and sending it back to the device. The device then interprets the received data and presents it to the user.

Open banking regulations

With all that private data being accessed, regulations need to be strict and transparent. In Europe, where open banking was first pioneered, the principal regulation for electronic payment services is called PSD2 (the second version of the Payment Services Directive), and guarantees consumer protection and security in financial services by way of stronger customer authentication processes like multifactor authentication. In contrast,open banking in Australia is already considered part of the Consumer Data Right, which affords consumers greater power to control their data.

Open banking regulations are also structured to generate competition between providers, as well as encourage the innovation of new and better payment methods.

What is open finance?

The same principles of open banking are used byopen finance but are applied to a consumer’s entire financial footprint. With the consumer’s consent, licensed third-party service providers access financial data related to the likes of investment assets, pensions, tax and insurance. This serves a similar but expanded purpose as it does for open banking, in that the licensed providers are then able to offer consumers tailored services for a wider variety of financial products.

Open finance is not yet regulated to the degree that open banking is, but it is likely coming in the future. Financial authorities around the world are already looking into what regulations can be applied to ensure consumers are fully protected.

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