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Open Finance Explained

Open finance is an extension of open banking, which is a financial services and fintech term that refers to regulated websites and apps that can access transaction data from bank accounts and payment services. Open finance is the next step and involves the use of open APIs that enable third-party developers to build applications and services for a wide variety of financial institutions.

These financial institutions include mortgages, savings, pensions, insurance and consumer credit. If a consumer agrees, then their entire ‘financial footprint’ can be handled by trusted third-party APIs (Application Programming Interfaces), which are software intermediaries that allow two applications to communicate.

Open finance will enable customers to consent to these third-party providers accessing their payment account information, or making online payments on their behalf.

From open banking to open finance

As open finance became more viable thanks to fintech innovations and developments, the UK’s Financial Conduct Authority (FCA) published a call for input from a variety of sources, including:

  • Consumers

  • Banks and building societies

  • Credit unions and consumer credit firms

  • Electronic money and payment institutions

  • Financial advisers

  • Fintech businesses and innovators

  • Insurance companies

  • Investment managers

  • Pension providers

  • Mortgage lenders.

Believing that open finance will open up a much wider range of financial products and services to consumers and businesses, the FCA said it is an opportunity to “build on the conceptual framework of open banking and allow consumers and SMEs to access and share their data with third party providers who can then use that data to develop innovative products and services which meet their needs today and in the future”.

How open finance should work

The FCA has laid out how their vision of open finance will work for both consumers and businesses.

Firstly, both consumers and businesses will have the power to grant access to their financial data to trusted third-party providers. In return, this provides them with access to a wider range of financial services and products.

In effect it should also give consumers and businesses greater control over their data, enabling them to engage more flexibly with their finances.

The FCA also believes that open finance services will be a significant driver of fintech innovation and ultimately further benefit consumers by providing a broader range of products and services that are more tailored to their individual requirements. The eventual widespread use of new open finance products and services should also help improve the financial health of consumers and businesses across the UK.

Open finance in practice

So far all so theoretical, but there are indeed many ways open finance will benefit the average ordinary person as well as small business owners.

One excellent benefit will be enhanced utility comparisons. Open finance APIs will allow businesses and consumers to seek out and discover better deals from other providers, as well as other ways to minimise or reduce current payments.

Open finance will also have an effect on direct debit payments, allowing direct debit users to save or combine payments. They will also be able to monitor exactly how much is being paid on their subscriptions and similar services.

An exciting development for fans of online shopping is the payment initiation services that open finance will provide. They will allow online shoppers to make direct payments from their bank accounts without entering their credit or debit card details each time. This also has huge potential for business-to-business payments.

 Lenders can also use open finance technology to create dashboards that offer more competitive services at better rates. It is also possible that they will be able to increase their ability to lend by lowering the risks involved thanks to more detailed information.

We can help

If you’re interested in finding out more about open finance, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.

Over 70,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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