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Financial institutions are beginning to explore the next stage in the financial data revolution, Open Finance.
Open Banking, an API concept that allows banks to share their own and their customer’s consented financial information to third parties, originally set in motion this revolution. The aim was to improve competition by allowing fintech’s and start-ups to better understand customers and therefore generate tailored services. The results are impressive. By March 2022, there were 128 firms with Open Banking-enabled services in the UK Market. The Open Banking Implementation Entity (OBIE) reported that most users of Open Banking appliances say it’s “helping them resolve their biggest financial challenges.”
Open Finance is a wider concept. It allows not just banks to share data but also insurers, wallets, pension funds, fintech’s and other financial service providers. Regulators hope that this broader exchange and access to data within a governed environment will improve innovation and customer service.
Bringing new benefits
McKinsey suggests that Open Finance could have a considerable impact. They argue that a boost to the economy could range “from about 1 to 1.5 per cent of GDP in 2030 in the European Union, the United Kingdom, and the United States, to as much as 4 to 5 per cent in India.” McKinsey also believes that “all market participants [will] benefit, be they institutions or consumers.” But what could the positive impacts be?
Fundamentally, Open Finance aims to democratise financial services. By providing wider access to the market and transparent pricing, Open Finance allows consumers to have more choices, lower prices, and better value. This new innovative arena could not only encourage competition but advance financial inclusion.
Financial institutions also benefit. Lower prices could mean reduced best execution costs in trading. Additionally, Open Finance reduces the work required for locating unconnected data and attracts automation technologies. This could greatly add value across the business model and improve operational efficiency, allowing for faster customer service.
Open Finance may also reduce fraud as it provides real-time access to more data. The result could be that the cost imposed on corporations by fraud – estimated globally to be more than $4.5 trillion each year – comes drastically down. Additionally, Open Finance could enhance compliance and risk management. Using high-quality technology, connectivity, and data-driven approaches, it can help streamline the onboarding process and accurately verify customers. This can aid institutions in making safer credit decisions.
Automation = efficiency
Furthermore, Open Finance can make internal business practices significantly more efficient. With more available and open data, institutions can focus on customers with higher-risk profiles. This ensures that employees are working on the most profitable tasks.
Summarily, improved customer knowledge is the real power of Open Finance. This permits institutions to provide a more seamless customer experience, as well as generate more effective operations, compliance procedures and risk management. We’re only at the beginning of the new Open Finance journey. But it’s future is no doubt optimistic.
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