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Open Finance vs Open Banking

GoCardless
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Last editedJun 20222 min read

Phrases such as open banking and open finance are often used without the time being taken to explain exactly what they are and how they could impact on the people making use of financial products. Here at GoCardless we believe in providing our customers with as much information as possible, and in working at the cutting edge of what is available to make their financial lives easier. That’s why we’re happy to explain the difference between open banking and open finance, and set out the benefits which we’re able to offer thanks to the power of these developments.

Open banking

Open banking refers to the exchange of services and data between financial institutions such as banks and third party providers. Here at GoCardless we’ve utilised the power of open banking to build solutions known as Verified Mandates and Instant Bank Pay. These are tools designed and built to deal with the problems, respectively, of verifying the ownership of an account and making instant payments. We understand that, for merchants eager to remove as much friction as possible from the purchasing process, these are processes which can often introduce delay and therefore reduce the chances of a sale going through. By using the power of open banking alongside our existing GoCardless payment platform, merchants are able to send links to customers which, once clicked on, facilitate instant payments. Confirmation that the payment has been made is also instant, meaning that transactions flow as smoothly and as quickly as possible for both parties.

Open banking works by using the application programme interfaces (APIs) of banks to verify information within accounts – such as the identity of the account holder – and move payments from one account to another. This opens up flexible instant payment options to a much wider range of people and at a much lower cost than the traditional option of using payment cards. Merchants working with GoCardless can tap into the power of open banking safe in the knowledge that they are supported by the global reach and security infrastructure which underpins all of our payment methods.

From open banking to open finance

Beyond the world of payment methods, open finance makes it possible for a trusted third party to access wider financial data, such as tax, insurance and pensions. This access to data will make it easier for financial institutions to offer products and services which have been individually tailored to meet the requirements of a specific customer. The biggest difference between open banking and open finance is that, at the time of writing, open banking is subject to much stricter regulation than open finance. Open banking across Europe, for example, is covered by the directive PSD2, which came into force in 2018. This created the regulatory framework which made it possible to open up banking in a safe and secure manner, and it is hoped that the same principle of openness will soon extend to the wider financial product marketplace. As this process happens it can be safely assumed that the authorities overseeing such areas – such as the FCA in the UK – will develop the regulations needed to safeguard consumers.    

The competitive market which is created by innovations such as open banking and open finance is the perfect engine for driving innovation. We believe that the services offered to merchants by GoCardless offer a perfect example of this kind of innovation, making it easier than ever for businesses of any kind to operate in a truly global marketplace and satisfy the desire of consumers for instant solutions and purchases. 

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