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Open banking vs Open Finance: what are the differences?

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Last editedMay 20236 min read

Open banking is helping to democratise the financial services industry. With the use of application programming interfaces (APIs), third-party access to banking data allowed consumers to connect to a wide range of financial products and services while also regaining control over their financial well-being. 

Now, with the growing wave of open technology, Open Finance has entered the playing field and could result in new developments in the financial market for both consumers and third-party providers. 

What is open banking?

Open banking refers to the exchange of services and data between financial institutions such as banks and third-party providers. 

The rise of open banking

PSD2 is legislation designed to force service providers to improve customer authentication and security processes. Since its introduction in 2018, open banking has been on a steady rise. Consumers were primed and ready for seamless banking connections, and the COVID-19 pandemic catapulted the need for open banking services even further.

In general, open banking means customers can gain access to new financial products and services from regulated third-party providers. This is made possible by banks who built APIs that follow PSD2 standards and third-party providers who get licences to connect to them. The PSD2 regulation mandated banks to provide free access to their API. 

This made it easier for new entrants and third-party providers to gain access to a new market, improve their product offerings, and increase competition. Open banking allows more developers and businesses to build new FinTech services that compete with large retail banks.

Competitive markets are the perfect environment for innovation, which ensures customers' needs are met to the highest level by forcing competitors to offer the best product at the best price. And the list of open banking innovations is endless. From offering ways to reduce debt to facilitating better credit scores, access to open banking data has already resulted in a range of new products and services — Open Finance will take this one step further.

What is Open Finance?

Open Finance is an extension of open banking. To reiterate, open banking 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, 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

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. 

As Open Finance became more viable thanks to FinTech innovations and developments, the UK’s Financial Conduct Authority (FCA) requested input from a variety of sources, including:

  • Consumers

  • Banks and building societies

  • Credit unions and consumer credit firms

  • Electronic money and payments 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 sees 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”.

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 online shopping fans 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.

Open finance benefits

Open Finance is something already in the works. Statements from market regulators, such as the FCA Feedback Statement on Open Finance, recognise its importance and reveal its potential benefits:

  • Improves user experience through tailor-made products and services

  • Allows for wiser financial decisions and better financial management

  • Improves efficiency and productivity for Corporates and SMEs

  • Improves competition among financial services providers, spurring innovation, developing new services, and increasing demand

To further elaborate on its potential benefits, let’s take a look at some specific use cases.

3 potential use cases that make the most out of open finance


The lending industry is one of the most stagnant business sectors in the market. Third-party lenders must evaluate applicants’ risk profiles and financial behaviour to determine their creditworthiness. This is done in a slow, manual and biased manner or by employing algorithms that are often too simplistic in their analysis.

The problem with both of these approaches is that they are prone to human error and do not provide the depth of information necessary to create an accurate customer profile. Simply pulling some numbers from a system does not give you a realistic idea of whether someone can repay their loan. 

Open Finance solves this issue because it allows lenders to access data from different areas of an applicant’s life. From taxes to spending habits, lenders can tap into data and information they previously were oblivious to. 

Enhance consumer financial decision-making

Just as Open Finance helps lenders, it also helps consumers. Open Finance will further evolve personal finance management (PFM) apps and give people with average to low financial literacy the tools they need to make informed decisions. Logging on to their app will be enough to oversee and manage all the financial aspects of their lives.

Cross-industry collaborations

One of open banking’s main advantages is the personalisation of banking products and services. By giving consent to share their data, consumers allow businesses to tailor their offerings based on their specific needs. Open Finance can improve on this. 

Open Finance can allow businesses from different sectors to collaborate and create packaged offerings for their customers. Opening up access to a customer’s financial footprint can create unlimited opportunities, from understanding the interaction between tax, insurance, and loans to develop offers based on real trends and relationships.

How does Open Finance differ from open banking?

While open banking already allows regulated products and services to access transaction data from banks, Open Finance will provide access to a consumer's entire financial footprint.

Open Finance will further level the playing field for the banking industry, as well as provide consumers with an even better customer experience. For the banking industry, Open Finance means even easier entry to the financial consumer ecosystem, with the ability to offer products and services that will attract more deposits, more lenders, and create better, less risky customers. 

In addition, Open Finance will enable wider integration to include non-financial industries, such as healthcare and governance. For customers, Open Finance provides embedded, personalised solutions and also supports financial inclusion.

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 continues, 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. 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.

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 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.

The future of open finance

We are slowly yet steadily entering the era of Open Finance. This won’t happen instantaneously, as there is still a lot to figure out about the regulation and privacy of this idea. But all signs show this is not a matter of if, but a matter of when.

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 85,000 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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