Welcome to the New Era of Open Finance in Banking

Senthil Ravindran, EVP & Head of Digital & Cloud Transformation – EMEA

After years of near stagnant technology adoption, the banking and financial services industry is in the middle of a radical evolution. The latest example of this is open finance which is giving consumers access to critical services and while introducing much-needed competition to the industry.

To best understand open finance, we should look at its beginnings. It began in the UK with a study conducted by the Competition and Markets Authority (CMA). The effort focused on the nine largest banks in the region and here’s what it found– these companies had in essence “cornered the market” subsequently didn’t have to exert much effort to acquire new customers. Naturally, this left their smaller competitors as well as the more nascent businesses on the outside, with little hope to succeed.

CMA wisely took action, requiring these nine to give licensed banking and financial startups access to their data which introduced a competitive element that was sorely missing. It also launched what is now known as open banking, the precursor to open finance. Open banking is a protected way of sharing customers’ financial information with third-party providers.

Open finance differs from open banking because it ties in businesses from outside the financial sector. This includes insurance companies, utility providers, retailers, and more. One group that stands to benefit from open banking is the unbanked, those people who do not have an account at a financial institution or through a mobile money provider.

According to the National Survey of Unbanked and Underbanked Households by the Federal Deposit Insurance Corporation (FDIC),  6% of U.S. households, or a total of 14.1 million American adults, are unbanked. In countries like the Philippines, that percentage is more than 40%.

Another beneficiary of open finance is those working on the growing gig economy. We’ve seen steady growth in gig economy workers who value flexibility but, due to the lack of a stable income, face challenges when it comes to applying for loans and accessing other key financial services.

At the core of open finance are application programming interfaces (APIs) which connect these institutions to other businesses. This includes third parties such as FinTech services (e.g. digital wallets) to insurance companies and the others I touched on earlier. With the consumer’s consent, these businesses can access customer data. This can be anything from mortgages, retirement accounts to bills, payroll data, savings accounts, and much more. By bringing all these insights together, they gain a clear view of a whole set of potential customers to who they can present new products and services too that are relevant to their needs.

While the idea of being serviced in such a personalized manner is exciting to many consumers, it can also invoke great fear. Specifically when it comes to the security of their information. This is why new security standards are so vital. There includes mutual authentication over transport layer security (mTLS), OpenID Connect, and many others.

As I touched on earlier, open finance began in the U.K. where it is continuing to take shape with help from the government and other organizations like the Financial Conduct Authority (FCA). The FCA working to help establish some common standards and roadmaps around open finance.

In parallel to these U.K. efforts, open finance has caught the attention of other counties where officials have recognized the value it brings to consumers who need access to new services which could have a significant impact on the gross domestic product (GDP)—EY Global estimate that delivering broader access to banking, savings and lending products could boost GDP by up to 14% in large emerging countries such as India and up to 30% in frontier economies such as Kenya.

When done right it’s hard to find a downside to open finance. The key to its growth and success rests in everyone’s ability to embrace this new open arms approach while remaining committed to keeping all this data safe and sound.

About the Author

Senthil Ravindran

EVP & Head of Digital & Cloud Transformation – EMEA

Senthilkumar Ravindran is Executive Vice President and Global Head of xLabs at Virtusa Corp. He brings close to 20 years of unparalleled experience in Architecture Design, Business Consulting, Delivery Management and Solutions Sales. After working with Top Tier BFSI clients, Senthil has acquired a deep understanding of fintech disruptors and accelerators from both technological and business model standpoints. He holds an Engineer’s Degree, Electrical & Electronics from the Shanmugha Arts, Science, Technology and Research Academy in India.