Open Finance - exploring the benefits beyond Open Banking

Charles Kelton

by , Team PensionBee

at PensionBee

24 June 2022 /  

June 2022

Woman holds bank card while doing online banking on a tablet computer

Since its inception financial institutions have been using Open Banking to make it easier for their customers to manage their financial lives. However, despite the work that’s been done in this area over the last few years there’s still much confusion over what Open Banking actually is. At the same time, innovation in financial technology continues to move forward, extending the core idea of Open Banking to a new concept, Open Finance.

At PensionBee, we believe Open Finance has the ability to revolutionise consumers’ financial wellbeing in a way that goes beyond what even Open Banking has done so far, with pensions being a crucial part of innovation. So, as Open Finance starts to pick up speed, let’s take a look at what it is, the ways it differs from Open Banking and how it can empower consumers’ financial decision-making.

What is Open Banking?

Open Banking was launched in 2018 and over the last four years has amassed 6 million people who use Open Banking services with uptake increasing year on year.

The goal of Open Banking is to allow third-party payment providers (TPPs) to connect to both banks and customer banking data to provide new financial services made available through mobile apps and websites. The technology gives consumers access to new financial products and services, deeper insights into their financial situation and enables them to transact financial data more quickly and easily.

Having recognised the tangible benefits Open Banking offers customers, we were early adopters of this technological innovation. In 2018, we became the first pension provider to enable their customers to see their live pension balance alongside their live current account balance after partnering with some of the UK’s most popular money management apps. For example, You may have come across mobile financial service apps like Starling Bank or Emma both of which provide this feature.

Open Banking is a secure method of connecting each of the key stakeholders together to exchange financial data. As a consumer, you decide with whom and for how long to share your data. The software and security systems involved use bank-level security, meaning Open Banking applications are essentially as secure as using online banking, which you may already be using. It’s regulated in the UK by The FCA, which authorises third-party payment providers (TPPs) to access customer account information from the account providers.

What is Open Finance and what benefits does it bring?

Open Finance operates on the same essential idea as Open Banking; it aims to connect financial account holders with customer account information through a third-party provider with a user’s consent. However, where it differs from Open Banking is that it extends to a much broader range of financial apps such as mortgages, insurance, pensions and many more. The core benefits of developing Open Finance apps are the same as those offered by Open Banking but with unique use cases.

Some of the benefits of Open Finance would include:

1. Greater financial transparency for consumers and lenders

Consumers would have greater insights into their overall financial health. Opening up the range of financial apps would give savers a more detailed picture of their complete financial situation. For example, enabling consumers to access an app that could build their credit score by drawing on data from more of their financial accounts and not just the data held by their bank.

2. Access to more financial products

Consumers could potentially have access to a huge range of new financial products and services or greatly improve existing ones. For example, new apps could exist that automatically switch savers to a lending or insurance product that better suits their particular circumstances.

3. Empowered to make better financial decisions

With access to more of their financial data, customers could make better informed financial decisions to improve their financial health and work towards their financial goals. In addition, customers would gain greater control of their financial data by being able to decide what parts of it and with which companies they choose to share that information.

What are the challenges for Open Finance?

1. Consumer awareness

Though the uptake of Open Banking has been steadily growing since 2018, there have been some criticisms that adoption should really have been much faster and more widespread than it currently is. Open Finance faces similar challenges in building consumer awareness.

2. Regulation

At the time of writing this article, the core difference between Open Banking and Open Finance is that Open Finance is not regulated whereas Open Banking already operates under an established regulatory framework. This means that there is a large number of financial service providers whose data is unable to be accessed in the way banking provider information currently can be. However, the FCA is assessing the opportunity to develop Open Finance, having initially put out a Call for Input. The response to this initial request for feedback showed that Open Finance could provide similar benefits to consumers in the same way that Open Banking has so far seen.

What comes next for Open Finance?

The banking industry is but one slice of the wider financial services industry. Open Finance is the next natural step in extending the concept of Open Banking to a much broader range of financial products and services, including pensions. The potential to improve savers’ overall financial wellbeing is huge. However, there is much work to be done to get it off the ground, starting with regulations, standardisation of the technology and the creation of new use cases to showcase the benefits it can offer.

We’re excited to see what the future holds for Open Finance generally and the innovations this could bring to the pensions industry to further consumers’, insights, decision making and ultimately, their financial wellbeing.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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