Embrace Open Finance and Thrive in the Digital Era

Unlocking the Value of Open Finance

Unlocking the value of open finance ultimately hinges on how newly accessible data is utilized. For many banks, this requires a paradigm shift. Open banking, which is transforming financial systems globally, allows consumers and businesses to share bank-account data securely with other institutions, enabling a broad range of new products and services. More than 70 countries, including the United States, are on this path, with the UK seeing significant growth. In 2024, over one million people in the UK paid their self-assessment tax bills using open banking, up from 140,000 the previous year. This shows the increasing popularity and potential of open finance.

Today, open finance expands on open banking's capabilities, encompassing a wider range of financial products like investments, pensions, and mortgages. Consumer demand for these products is strong, with 90 percent of consumers likely to use open finance-based dashboard applications. This innovation also benefits small and medium-sized enterprises (SMEs) by helping them manage cashflows and connect banking data to cloud accounting packages.

Challenges and Shifts for Banks

Implementing and adapting to open banking and open finance is a mammoth task for banks. As customers gain more control over their financial data and can share it freely, banks must ensure they maintain high security standards. Traditionally, banks built their systems solely to protect customer data without considering interoperability. Now, they need to find a balance between protecting data and allowing it to be shared, which is a major shift in approach.

Taking advantage of open finance requires banks to fundamentally change their data approaches. Many banks operate with legacy, closed-architecture systems that are not designed for easy integration with third parties. Maintaining the status quo requires a significant amount of work, with financial institutions spending up to 65 percent of their IT budgets on maintaining current systems. These legacy platforms and processes hinder agility and prevent banks from meeting evolving customer needs.

Building for the Future with Open Finance

To succeed in the open finance era, banks need to invest in areas typically associated with technology platforms. This includes prioritizing fast, secure, and reliable application programming interface (API) channels for easy data sharing. A great developer experience is also crucial, with banks needing to build easy-to-use software development kits (SDKs) and provide documentation, tools, and community support. Additionally, a commercial model that recognizes the needs of both the bank and potential partners is essential for driving API usage.

As open finance gains momentum, banks will handle a much larger volume of data. By improving their data infrastructures, they can position themselves for success. Open finance also creates new opportunities for banks to become consumers of previously inaccessible datasets, enabling them to offer new product offerings and engage with customers in new ways. For example, it can help address the issue of "thin-file" customers in the UK who have limited credit histories.

Adapting to Open Finance: A Three-Step Process

The possibilities of open finance are vast but can be overwhelming. Banks need to be selective in choosing use cases and customer segments. The first step is screening, where banks understand the new capabilities and data sources available and assess their commercial potential and operational complexity. After building a shortlist, they start building business cases and testing propositions with customers to refine the offering.

During this phase, banks face the challenge of balancing protecting existing business lines with testing transformative products. Pay-by-bank payments, for example, have the potential to cannibalize card payment revenues, but banks must be willing to disrupt their own models. Customer education is also key as people need to understand the benefits of new financial products.

Open finance is an opportunity for banks to engage more deeply with customers and serve them better. By embracing it and evolving their approaches, banks can unlock incredible growth and stay competitive in the digital era.