Today’s consumers use more than four fintech apps on average to manage their financial lives. They securely connect all of those apps with their bank accounts and share their financial data. 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. With open finance, consumers can 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 deliver tailored solutions.
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. 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 connect a budgeting tool that needs spending data, such as Branch, with a financial institution that provides this information such as a bank or credit union.
For more information on financial APIs and how they facilitate open finance, check out our article “What is a financial API?”.
Accelerate your open finance journey: Empowering customers with data connectivity
How do open finance and open banking differ?
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.
US consumers use more financial services than ever before, which makes open finance increasingly important. They reported having an average of 4.1 fintech apps on their phones in 2022, up from 3.7 in 2021.
With open finance, consumers can access a broad range of financial services such as Carvana for car loans, Wave for invoicing, and Prosper for peer-to-peer lending. They can receive tailored advice and customized product offerings based on their specific financial needs.
How open finance helps consumers
In the open finance ecosystem, consumers can leverage the latest financial tools. 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 own financial data including salary, spending habits, investment holdings, and debt.
Open finance tools make data sharing safer because APIs eliminate the need for credential sharing (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.
Using APIs gets [credentials] out of the marketplace, is more efficient, and delivers better data quality for that customer.
How open finance helps fintechs and banks
For financial institutions, fintechs, and neobanks, open finance protects customer data and privacy by using APIs. APIs not only enable more secure connectivity, they 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 fintechs and banks can leverage to create tailored solutions and meet consumer needs.
We're increasingly seeing it being a two-way street, a marketplace where banks share the data, but also use third-party data to create their own products and services that consumers are looking for.
Smaller banks and credit unions may not have the resources to build API connectivity. To better compete, many are seeking partnerships with digital banking 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’ data privacy remains a top priority, with 82% saying that “when I choose to share my financial information with fintech companies, I want to know who is responsible for managing my data.”
Fintech and bank partnerships have increased rapidly. According to a Cornerstone Advisors report, nearly two-thirds of US banks and credit unions entered into at least one fintech partnership between 2019 and 2021 and 35% made an investment in a fintech. An additional 37% planned to partner with or invest in a fintech in the near future.
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.
How rulemaking could impact open finance
The federal government is working on new rules to strengthen consumer financial data rights, which are core to the open finance ecosystem. New rules may require changes to the way consumer data is permissioned and shared.
The easiest way for the industry to effectively make broad-scale changes to open finance technology is to take a unified approach to API protocols, data connectivity standards, and authorization.
Non-profit industry group FDX has helped the industry coalesce around a common, interoperable API standard called FDX API. This API standard helps financial organizations build just one connection to all partner endpoints, including data networks like Plaid and third-party fintech applications.
If rulemaking requires changes to the API standard, FDX can communicate that change and any required updates to the entire open finance community. There are already 42 million consumer accounts connected to the FDX API for data sharing.
→ Need a financial API solution? Core Exchange enables financial institutions to quickly execute Financial Data Exchange (FDX) APIs they can use to connect with Plaid, other aggregators, and organizations.
How does Plaid support open finance?
Plaid offers an entire suite of Open Finance solutions including Core Exchange. Core Exchange simplifies FDX API implementation, helps financial institutions support popular fintech use cases (budgeting, paying bills, and investing) for their customers, and enables API connectivity. By implementing Core Exchange, financial institutions connect to Plaid’s ecosystem of 7,000+ fintech apps through industry-standard APIs.
Permissions Manager is another way that Plaid puts consumers in control of their financial data. Permissions Manager is a no-cost solution that allows financial institutions to give customers visibility and control over their data-sharing connections made through Plaid. With Permissions Manager, banks can build their own consumer permissions portal from within their existing web and mobile experiences, helping them stay at the center of their customers’ financial lives.
Open finance will continue to transform financial services
Open finance is an engine for future innovation and growth in financial services. It encourages banks and fintechs to partner, creating new products and revenue streams. Banks partnering with fintechs 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 still in development.
Open finance presents an opportunity for any large company. Using tools like embedded payments, any enterprise can leverage open finance to become a fintech.