Open Finance will lead to a radically different financial experience for customers and businesses, underpinning embedded finance and enabling pretty much any industry that can benefit from financial data. However, in the near term little will change. The promise is powerful and should offer a positive experience for consumers — presenting more supplier choice, relevant products at the point of need, automated services, and more control of data for better financial outcomes — but there is no guarantee of this.
The long-term transition is to an open data-fuelled economy
Open Finance extends the third-party access principles of Open Banking across a wider set of financial products such as loans, investments, pensions, and mortgages. It is part of a global shift toward more open data and data portability – but with explicit consent around usage. Open Finance will support tighter integration with sectors like retail, healthcare, government, and other industries — as well as broadening the range of third parties that will compete with banks or intermediate financial relationships. However, interoperable Open Finance on a global level is currently unrealistic though; as with Open Banking, Open Finance will be regional, as unlocking the benefits requires a high degree of coordination within the financial industry and beyond.
Open Finance Enables Bilateral Collaboration with Open Data
Open Finance erodes bank’s control – but opens opportunities through collaboration
An Open Finance future will broaden customer choice and democratize access to financial services in two ways: changing the pathway to financial services and enabling financial inclusion through innovation. It will bring the ability to reduce friction through automation, combine real-time insight across multiple sectors, and guide customers to contextualized, personalized outcomes. But be warned – customers will demand a return on their consent to use their data or store their wealth.
Wider data access across a customer’s life will support deeper personalization of actuarial models to revolutionize insurance, rewarding customers who prefer to travel at low-risk times or make efforts to remain healthy. Extending this, data sharing across industries will help risk management and mitigation, enabling transport authorities to identify dangerous roads and junctions, from which mapping services can determine the safest route for travel or the best environmental option.
It will also support financial inclusion, particularly in regions like Africa, Asia, and India. Standard Chartered uses Open Finance data to broker loans for micro- and small businesses in India and enable access to previously unaffordable bank-as-a-service capabilities via its Solv marketplace.
Realizing Open Finance benefits will hinge on two crucial factors.
As with Open Banking, we will see a blend of regulatory and market drivers, but two crucial factors will combine to influence the pace of progress. The region or country and the financial sector determine the pace of change and the scale of the opportunity. Australia started from an Open Data concept with the Consumer Data Right, which launched Open Finance first before focusing on utility and telcos, meanwhile, Europe and the UK have consulted on it, but started with Open Banking. The US regulator is arm’s length, but Americans are already receptive to the capabilities promised by Open Finance.
Aside from mandates and regional variations, some financial sectors – such as unsecured loans and insurance – will migrate to Open Finance more quickly than others. The order is driven by implementation complexity and the level of opportunity inherent within the sector.
The pace of adoption in a region is also influenced by consumer readiness, the technological capabilities within financial services providers, and the supporting infrastructure — such as digital identity, standards, or data sharing infrastructure.
Forrester clients can access Open Finance Will Reshape Financial Services Over The Coming Decade for the detailed framework to see how their sector and region are impacted, prioritise their focus, and understand the building blocks needed to make this a success.
Open Finance Readiness – By Financial Sector
Adoption will take a decade or more
Open Finance marks a fundamental shift in how customers access financial services and how firms deliver them. It is not technology holding us back. As the UK government noted in its paper on smart data, the overriding inhibitor is the lack of a framework to securely access, use, and share data.
Financial services firms must collaborate on the definition of Open Finance and influence regulators, who will invariably catalyse change but could also hinder opportunity.
To drive adoption, Open Finance propositions must offer utility or value to a customer or business – financial services execs should take a leaf out of the Nordic banks’ playbook and seize the initiative, using Open Finance to actively seek innovation for customers. The prize of Open Finance is too large to remain insular, as the health of customers, nations, and regions is predicated on its success.
This article has first been published in the Open Banking and Open Finance Report 2022. Click here to download the report.
About Jacob Morgan
Jacob is a principal analyst in Forrester’s financial services practice. With his research focusing on the future of banking, payments, open finance, and platform business models in financial services, Jacob helps leaders understand and respond to the challenges of digitizing their business strategy.
Forrester is a global research and advisory firm that helps leaders across technology, customer experience, digital, marketing, sales, and product functions use customer obsession to accelerate growth. Through proprietary research, consulting, and events, leaders worldwide are empowered to navigate change and put their customers at the center of their leadership, strategy, and operations.