Table of Contents
What is open finance? Open finance vs. open banking—what's the difference?How open finance helps consumers How open finance helps fintechs and banks Key trends impacting open financeOpen banking regulations: Understanding Section 1033 How does Plaid support open finance? Open finance will continue to transform financial services Nearly 9 out of 10 consumers use some type of fintech app, and their reliance on those apps continues to grow due to economic uncertainty. In fact, 55% of people say they are relying on budgeting apps to help them navigate inflation challenges. Consumers securely connect all of those apps to their bank accounts, share their financial data across accounts and platforms, and make better financial decisions.
What’s powering that data connectivity? Enter open finance.
Open finance enables consumers to connect and share data across the entire financial ecosystem, which includes thousands of products and services. Consumers can now choose how they want to use their financial accounts and data for things like payments, budgeting, and investing.
In this article, we’ll explain how open finance works and how it helps consumers. We’ll also touch on ways community banks and credit unions can leverage it to learn more about their customers’ needs and stay compliant with ever-changing financial regulations.
What is open finance?
Open finance allows consumers to securely access, manage, and share their personal financial account data with any financial services provider they want to use, including banks, credit unions, and fintech apps. It also inherently encourages competition in fintech by giving consumers access to more tools.
With open finance, consumers control who they share their financial account information with and what they do with it. It gives them endless options to better meet their financial goals through the thousands of budgeting, investing, lending, and other types of fintech and financial services apps available.
Open finance relies on application programming interfaces (APIs), which connect and share financial data between many different financial accounts and apps. For instance, APIs allow consumers to view their retirement and investment accounts in one place, making it easier to plan for retirement.
Open finance APIs also allow merchants to connect to a payment services platform, like Mollie, to verify accounts quickly instead of waiting for micro-deposits to post. This resulted in a 10% increase in customer conversion across the UK, Germany, and France.
For more information on APIs and how they facilitate open finance, see our article “What is an open banking API?”
Accelerate your open finance journey: Empowering customers with data connectivity
Open finance vs open banking—what's the difference?
Open banking is more narrow in scope than open finance. It can help consumers easily manage and share financial data from banks or credit unions, but the term doesn’t generally apply outside of this. The term ‘open finance’ applies to a broader array of financial services providers beyond banks, like budgeting apps, insurance providers, and trading platforms. Open banking also relies on APIs, sometimes referred to as open banking APIs.
With open finance, consumers can access a wide range of financial services, such as Carvana for car loans, Wave for invoicing, and Prosper for peer-to-peer lending. They can also receive tailored advice and customized product offerings based on their specific financial needs.
US consumers trust fintech services more than ever before, which makes open finance increasingly important. In fact, 13% of American consumers report using six or more financial apps to manage their finances and another 34% use between three and five.
How open finance helps consumers
In the open finance ecosystem, consumers can better leverage the latest financial tools and make more informed decisions about their finances. Fintech apps are data-driven, so they work best when they can analyze a consumer’s entire financial portfolio. With open finance, consumers can safely and securely share their financial data, including salary, spending habits, investment holdings, retirement savings, and debt.
Open finance makes it easier for smaller financial institutions or startup companies to enter the fintech market. This creates more choices, which allows consumers to select the tools that best help them reach their financial goals.
Open finance tools make data sharing safer because APIs eliminate the need for consumers to share their credentials (often usernames and passwords) with third parties. Instead, APIs use anonymized tokens to create connections between apps and accounts so third parties never have access to credentials. This reduces fraud risks—and improves data quality.
Using APIs gets [credentials] out of the marketplace, is more efficient, and delivers better data quality for that customer.
Don Cardinal, Managing Director of Financial Data Exchange
How open finance helps fintechs and banks
For financial institutions, fintechs, and neo banks, open finance protects customer data and privacy by using APIs. APIs not only enable more secure connectivity but also create efficiency gains. When MSU Federal Credit Union implemented API connectivity, connection health (secure, stable connections between bank accounts and apps) increased by 400%, and technical support tickets dropped by 67%.
In an open finance world, consumer-permissioned data flows in two directions: to fintech apps from banks and from fintech apps back to banks. The data-sharing that open finance enables provides insights that both fintech and banks can leverage to create tailored solutions and meet consumer needs.
Tools like Plaid's Permissions Manager let fintech apps see every customer connection, receive real-time notifications, and track authorizations.
"Permissions Manager gives us a holistic view of our members’ connections via Plaid. Having a tool that confirms the status of account connections helps us rule out errors and streamline how we provide solutions."
-Chelsea Potter, AVP of Digital Design & Support, MSU Federal Credit Union
Smaller banks and credit unions may not have the resources to build API connectivity. To better compete, many are seeking partnerships with core providers, including Jack Henry, Q2, and Project Finance, to help their customers connect to the open finance ecosystem. These providers enable a seamless user experience, manage risk, and comply with the latest regulations.
Key trends impacting open finance
Several trends are impacting open finance technology and the services it supports.
Consumers’ trust in fintech continues to grow, and consumer comfort in opening accounts is diversifying. While 87% of consumers are comfortable opening accounts with large, national banks, fintech companies now boast a 79% comfort level, indicating a narrowing trust gap.
Regulations are increasingly important. To be successful, open finance relies on regulations that formalize consumer's right to access and share their financial data. The final release of rule 1033 is a step forward, but additional legislation may create compliance obligations for fintech apps that need to be prepared for.
Plaid is building the technology needed to implement API-based data connectivity for open finance on a wider scale. We’re helping financial organizations brainstorm potential use cases, identify technical requirements, and map out an implementation process to join the open finance ecosystem.
Open banking regulations: Understanding Section 1033
Section 1033 of the Dodd-Frank Act was released on October 22, 2024, and requires data providers to support API-based data sharing. Essentially, it further formalizes consumers’ right to access and share their financial data. The regulations have just been released, and our understanding of them may change over time. As of today, the rules include:
Developer Interfaces & APIs: Data providers must ensure consumer-authorized access to data through secure and reliable APIs. APIs must comply with industry standards and achieve at least a 99.5% response success rate. Providers must also offer clear documentation and contact resources for API access and support.
Authorization & Record Keeping: When a consumer grants data access to a third party, the provider must enable this access, maintain records of authorizations, and optionally allow consumers to revoke permissions.
Third-Party Onboarding: To ensure they meet data providers' access requirements, third parties must submit company information and prove adequate data security.
Plaid offers efficient compliance tools to help data providers comply with these requirements without the need for additional resources. As a leading network for open finance, Plaid is committed to advancing secure API technology. Our goal is to create solutions that align with the ecosystem as a whole and with the Financial Data Exchange (FDX) standards, as we anticipate FDX specifications will be accepted as an open banking API standard.
How does Plaid support open finance and open finance APIs?
Plaid offers a suite of Open Finance solutions designed to help fintech companies grow faster and stay compliant with industry changes. Using tools like our Core Exchange and Permissions Manager, you can simplify compliance, automate monitoring, and lighten your customer support load all in one place.
Core Exchange
Core Exchange streamlines the implementation of FDX APIs, making it easier for financial institutions to connect to Plaid’s ecosystem of over 7,000 fintech apps. The platform offers clear documentation, real-time FDX integration checks, and end-to-end account linking tests, with support from Plaid’s FDX experts at each stage.
Permissions Manager
Permissions Manager empowers consumers by giving them control and visibility over their data-sharing connections through Plaid. This no-cost solution enables financial institutions to build a fully integrated consent portal, putting customers at the center of their financial lives. With real-time notifications, robust monitoring tools, and easy-to-use dashboards, Permissions Manager simplifies compliance—making it a seamless solution for the next era of open finance.
Open finance will continue to transform financial services
Open finance is an engine for future innovation and growth in the financial sector. It encourages banks and fintech apps to partner, creating new products and revenue streams. With Plaid, these organizations can reduce risk, improve onboarding, and convert more customers. Expect to see new fintech products that take advantage of open finance innovation, including income share agreements and new crypto services.
Consumer behavior will evolve as open finance technology and the user experience improve. Consumers will enjoy faster, safer, and easier ways to connect, make payments, send funds, and manage their finances. This could lead to more rapid consumer adoption of fintech products like real-time bank payments, BNPL, or fintech services that are still in development.