The concept of Open Finance has gained relevance, and its adoption is growing rapidly as the financial ecosystem expands. But what is it really and what is its reach in an increasingly digitized environment?
Open Finance is an evolution of Open Banking that, in essence, is based on the possibility of exchanging financial data. Open Banking originated in Europe in 2015, specifically in Great Britain, where the British government promoted the creation of the Open Banking Working Group (OBWG) to develop a framework focused on the development of open interface standards like application programing interfaces (APIs) for banking.
An API is a set of rules and protocols that allows different software applications to communicate with each other; they are essential for enabling the integration of different applications and services, making it possible for them to work together and share data.
An essential part of such framework is to share and access financial data that was previously highly restricted. The premise is that, for this to happen, it is essential that the owners of such data – companies, organizations and individuals – give their prior authorization, and the protection of their data is guaranteed.
As more players join the sector, such as Fintechs, tax authorities and other financial institutions, and it ceases to be the exclusive domain of banks, the Open Banking concept expands further to that of Open Finance.
Higher added value
Organizations that provide financial services can share their users’ information in a secure, controlled and encrypted manner, always with their consent. And it is this exchange allows them to add value to their products and services.
At the same time, it promotes competition between new and traditional participants. Open Finance, therefore, reframes business models that have been around for decades to focus on customer experience.
At the same time, Open Finance expands knowledge by enabling access to user’s detailed information about their financial behavior, so OF players can offer innovative products at the right time. These include, for example, better credit conditions, and better management of their payments to settle the most expensive loans.
A better customer experience also results in better conversion rates, while boosting financial inclusion and banking. According to the Inter-American Development Bank (IDB), in Latin America, half of the population (50%) does not currently use financial services.
In Mexico, the 2021 National Financial Inclusion Survey (ENIF) reported that 56.7 million people aged 18 to 70 had at least one formal financial product, such as a savings account, credit line, insurance or retirement funds. This data highlights the potential of Open Finance today and in the future, as well as its impact on financial services.
Transparency and control
In addition to creating new, more profitable products and personalized services, Open Finance gives financial service providers the ability to use infrastructure created by other financial technology (fintech) organizations , which represents an opportunity to save time and money.
It also gives rise to innovative business models. For example, it expands the possibility users have of opening accounts from third-party applications, such as Uber. With this, financial organizations can increase their profitability from contracts made from third-party platforms.
On the other hand, by integrating the use of artificial intelligence (AI) and machine learning, the detection of possible fraud is optimized and the losses that individuals and companies could suffer are prevented.
It should also be noted that Open Finance contributes to the reduction of costs and manual processes, such as retrieving invoices and tax documents and uploading into accounting and business systems, resulting in products and services that are more profitable and have greater reach.
Last but not least, transparency and control for users is increasing. Individuals are able to grant or withdraw the permissions on how financial institutions use their data.
Although Open Finance has been used in many countries for several years, the regulation of it is relatively new, so rules must still be created in line with its evolution and the way in which it is being implemented.
In this sense, Mexico is among the first countries to regulate the Fintech sector and Open Banking. In March 2018, the Mexican Fintech Law was put into effect to regulate Financial Technology Institutions. It includes the obligation to enable APIs for the transparent and secure exchange of information. Secondary laws requiring banks to use APIs to exchange information with other financial institutions are still pending.