The Transformation of Financial Services: Embracing Open Finance
In just five years, financial services have undergone a remarkable transformation. A worker in Spain sending money home to Manila no longer needs to endure hefty remittance fees, and low-income individuals in the United States can now access banking services tailored to their needs. This shift is largely due to the rise of fintech, technological advancements, and increased industry collaboration. The landscape of finance today is more relevant and personalised, catering to individual needs with unprecedented efficiency.
The Impact of Open Finance
Open finance is revolutionising the industry by fostering collaboration, innovation, and inclusivity. According to Finastra’s “Financial Services State of the Nation Survey 2023,” nearly half of the global institutions see open finance as essential, with 85 per cent agreeing that it enhances collaboration and yields positive impacts.
Unpacking Open Finance
Open finance hinges on three core concepts: platformification, finance for good, and banking in context. These elements are reshaping the financial landscape:
Platformification: This concept has unbundled financial services, allowing nonbank entities to innovate and compete. Platforms such as Shopify and PayPal now offer short-term working capital finance and buy-now-pay-later options, demonstrating how platformification drives new service models.
Finance for Good: This advancement is making finance more accessible and inclusive, leveraging cloud technology to create ecosystems that benefit underbanked segments and promote diversity in financial services.
Banking in Context: Financial solutions are increasingly integrated into everyday transactions, providing contextual and tailored services at the decision-making point.
Enabling New Financial Ecosystems
Open finance fosters new financial ecosystems by leveraging technology to create diversified revenue streams, enhance operational efficiency, and improve customer satisfaction. Composable banking tailors financial services to specific customer needs, facilitating wider access to banking services through models like Banking as a Service (BaaS) and embedded finance.
Driving Sustainable Decision-Making
Open finance supports sustainable decision-making by connecting capital with impactful initiatives. Access to third-party environmental, social, and governance (ESG) data via OpenAPIs helps institutions comply with regulations, understand risks, and foster sustainable growth. It also promotes impact investing, directing funds towards green initiatives and supporting a low-carbon economy.
Digital infrastructures enable AI-led credit decision-making based on real-time data, allowing banks to serve more micro, small, and medium-sized enterprises (MSMEs) and offer sustainability-linked products. This approach reduces onboarding costs and enhances the inclusivity of global commerce.
Supporting Positive Societal Change
Open finance is a catalyst for societal transformation, bridging financial gaps, and promoting economic empowerment. By maximising digitisation and connected ecosystems, financial services become more democratised, reaching unbanked and underbanked populations and reducing the cost to serve (CTS). This fosters economic development by enabling small businesses to access point-of-sale loans and enhancing employment opportunities.
Maximising the Value of Open Finance
Several accelerators are driving the growth of open finance:
Composable Banking: Enables institutions to create flexible, customer-centric solutions by reassembling banking services to meet specific needs.
Embedded Finance: Integrates financial services into everyday activities, enhancing user experiences and opening new revenue streams.
Banking as a Service (BaaS): Provides infrastructure for companies to integrate financial services into nonbanking platforms.
Generative AI (GenAI): Enhances decision-making, communication, onboarding, ESG performance, fraud management, and personalisation of financial services.
The Future of Financial Services
Open finance, supported by these accelerators, is revolutionising financial services. It streamlines payments, regulatory compliance, lending decisions, and Treasury services, resulting in increased efficiency, transparency, and societal benefits. As institutions continue to innovate and collaborate, the potential of open finance to create a more inclusive, efficient, and dynamic financial ecosystem is limitless.