Unlocking the Potential of Open Finance

Co-Authors: Brett McCoy Zach McLaughlin Vinod Sangana Jared Artz

Introduction

With technology continuing to revolutionize the banking ecosystem, a paradigm shift has occurred in the way customers and financial institutions interact with each other. Financial institutions like banks, payment applications, and asset management companies can now access customers’ data with their consent. Effective use of this data, in compliance with regulations, has opened numerous doors for customers, who now have access to personalized products and services that better suit their needs, improve their financial health, and boost financial inclusion. Banking institutions are able to leverage customers’ data to generate insights that drive business decisions, prevent fraudulent transactions, and improve profit margins by decreasing operating costs while improving product revenue via API access sales and upselling & cross cross-selling financial products and services to more relevant customers.

Cloud computing has been a key driver in this transformation, allowing the use of digital infrastructure and Application Programming Interfaces (APIs) to share data like never before. This has powered the arrival of Open Banking - a system that allows third-party service providers access to customers’ financial data using APIs. By sharing data with partners, financial institutions can tap into new customers and increase their reach through subscription-based bundles. Further, institutions also get access to new information, helping them make better decisions and develop more customer-centric products focused on improving outcomes.

Extending the principles of Open Banking to a comprehensive financial view, including savings, insurance, mortgages, and investments, Open Finance leverages customers’ financial data, with their consent, using APIs to authorize third party providers to initiate financial transactions on their behalf or generate insights to improve outcomes. In 2018, Wells Fargo launched Wells Fargo Gateway, an open API channel, to embed its offline products into its digital offerings. Using its APIs, Wells Fargo can securely aggregate customers’ historical financial data and real-time transactions across 20 different account types to help build personalized budgets and share insights that can improve customers’ financial health. JPMorgan Chase & Co (JPMC) has also partnered with Financial-Tech (Fintech) firm Plaid to enable secure account aggregation within JPMC’s mobile app to give customers a consolidated view of their financial accounts from other banks and Fintech companies. By connecting to Plaid's API, Chase can pull customer data from over 10,000 financial institutions to provide customers with a holistic view of their financial position and share useful insights.

Traditionally, financial institutions used monolithic systems that lacked integration and common data standards, which made it difficult to share data across technical systems. Open Finance, powered by cloud platforms, enables data sharing through standard APIs to provide customers simultaneously greater insights and data ownership . These outcomes enhance a customers’ experience, improves their financial outcomes, and cements institutions as trusted partners and advisors.

Open Finance and its Capabilities – Improving Outcomes for Customers

Open Finance has several potential benefits for customers, ranging from more secure data sharing, personalized products and services, financial inclusion, and increased market choices.

These Open Finance outcomes are enabled by several capabilities that revolutionize the traditional financial system. These capabilities can be broadly categorized into ‘fast’ and ‘slow’ money.

Open Finance and Fast Money

‘Fast’ money refers to financial transactions completed rapidly in short iterations, such as retail transactions and monthly bill payments. Open Finance can improve the personalization of such transactions. For instance, using data from public APIs, financial institutions can obtain an aggregated view of customers’ expenditures across different retail outlets to understand their spending habits. This data can be anonymized and benchmarked against data from customers with similar profiles (e.g., demographics, age, income) to improve financial products’ recommendations for customers, in addition to helping them make better financial decisions. Using machine learning, financial institutions can interpret behaviors and recognize patterns with greater efficiency to identify opportunities that help customers enhance their financial savings. Consequently, this could lead to competitive offerings from financial institutions, thereby improving outcomes across the value chain.

Open Finance can also make payments more secure and simple. By utilizing open APIs, payment providers can offer to process payments in real-time, reduce the number of steps involved in the Know Your Customer (KYC) documentation, and thus eliminate the delays and costs associated with conventional payment methods. For instance, users can log into payment applications using their social media accounts or email provider for secure payments with only a click or swipe. This can help make? transactions secure for customers, who no longer have to share their financial information with third parties.

Open Finance and Slow Money

‘Slow’ money includes financial transactions with multi-year time horizons and includes financial products and services such as life insurance, investments, college savings plan (529), and mortgages. Today, almost 70% of banking customers across 14 countries want their banks to offer them personalized financial advice for their long-term savings . Open Finance platforms can personalize advice for customers to help them manage their monthly payments and boost savings. Using public APIs, digital banks can leverage customers’ external bank data to recommend new financial products that help customers save money on loans, credit cards, overdrafts, and international transfers.

Open Finance also enhances financial inclusion by reducing barriers to entry, enabling access to responsible credit, and encouraging informed financial behavior among customer cohorts that were previously underserved. Using APIs, financial advisors and wealth management organizations can verify their investors’ monetary positions to reduce credit risk and increase the liquidity available to active investors. Further, with Open Finance, customers in underbanked regions such as Africa can access several products like smart loan repayment, automatic savings sweeping, and decentralized Know Your Customer (KYC) - without a smartphone . Accessing customers’ data through APIs, financial institutions can view customers’ salaries, spending habits, tax returns, and other investments in a consolidated manner. With the adoption of Generative Artificial Intelligence (AI), Open Finance can be further enhanced by robo-advisory platforms that provide financial planning services through automated algorithms without any human intervention. Using customers’ data through APIs, robo-advisory platforms can analyze customer financial goals, risk tolerance, and investment activity to build personalized investment portfolios that are completely automated.

How Open Finance Works

Broadly, Open Finance operates through the participation of 3 major players:

1. Customers, who store their data with banks and other financial institutions

2. The Account Service Provider (ASP), which are banks and other financial institutions that store customer data

3. The Third-Party Providers (TPP), which includes Fintech apps and other Account Service Providers that gather customer data from ASPs and analyze them to produce insights.

By leveraging their internal systems and infrastructure, Account Service Providers can securely access and aggregate customer data across various financial products and services. This aggregated data can then be utilized across different offerings within the organization to gain insights into customer behavior, preferences, and financial needs. Using these insights, Account Service Providers can develop personalized and tailored solutions that improve customers’ financial health. This data can also be shared with authorized Third-Party Providers (TPPs), who can also be Account Service Providers, further expanding the range of value-added services, like financial management tools and personalized recommendations available to customers. For instance, consider an Automated Financial Advice Application from a Third-Party Provider that utilizes APIs offered by Account Service Providers to access customer data. The application uses AI and advanced analytics to aggregate and analyze the data, and then compares it with available options in the market. It then identifies better mortgage deals and suggests improvements in savings allocations. With customer consent, the Third-Party Provider initiates transactions on the customer's behalf, such as making additional mortgage payments or increasing retirement savings. Finally, the Third-Party Providers shares this information with the Account Service Providers via APIs, to update the customer’s financial history, which can be used subsequently by other Third-Party Providers and financial institutions.

Open Finance Powered by Cloud

In a recent article, we described How Cloud is Powering the Fintech Revolution . The digital layer powering Fintech firms is driven by cloud platforms, and further enables Open Finance. This layer provides scalable and flexible storage, facilitates advanced data processing and analytics, and enables seamless integration between financial systems and APIs. For instance, leading Fintech companies leverage cloud-based infrastructure to build robust APIs that seamlessly connect financial systems, enabling real-time data exchange and integration. Financial institutions can leverage cloud-based data lakes and machine learning algorithms to analyze vast amounts of customer data to detect patterns and trends that inform personalized recommendations and risk assessments.

In Asia, a government-owned bank, leverages Google Cloud Platform’s (GCP) Cloud Apigee API Management Platform to effectively manage and optimize its APIs within the GCP ecosystem . Previously the bank’s public APIs were hosted on its private data centers, which were difficult to manage, secure and monetize. Apigee has made it easier to manage these APIs’ development, deployment, and maintenance. Consequently, while it earlier took the institution up to 6 months to onboard a new partner, this is now possible within an hour on the institution’s developer portal where partners can browse through open APIs and build products. The institution also used GCP’s Cloud Vision API to integrate with the Government’s identity database, to automatically verify the identities of new customers and assess their credit scores. With these innovations, the institution was able to realize an additional $50 million in revenue by monetizing more than 50 open APIs that enabled credit scoring, business assessments and risk management.

Making Open Finance Secure

Digital banking has been gaining popularity, and as of 2022, 78% of adults in the United States preferred to bank via mobile or web applications. This raises concerns and questions regarding data sharing and data security, while giving customers the freedom and flexibility to control their data and finances. Enabling Open Finance, requires establishing a regulatory framework, implementing open APIs and data standards, obtaining consumer consent, ensuring strong security measures, and monitoring compliance all while encouraging innovation.

In the USA, the Open Finance initiative is led by Financial Data Exchange (FDX), a non-profit organization that aims to unify leading financial institutions by recommending frameworks that simplify financial transactions and make them more secure. FDX has created a consortium of financial providers around a common standard for secure access to financial data. In Europe, the Revised Payment Services Directive (PSD2) requires banks to provide secure access to customer data through open APIs. The United Kingdom’s (UK) Open Banking Initiative mandates large banks to share data with authorized third parties. Although the US lacks a comprehensive federal framework, the Consumer Financial Protection Bureau (CFPB) explores rulemaking under the Dodd-Frank Act's Section 1033. Regulations and frameworks such as these can be very beneficial for the entire Open Finance ecosystem by promoting secure data sharing, fostering competition, and driving innovation. As institutions enable Open Finance, they should explore recommendations across different geographies, governing bodies, and supporting non-profits to maintain compliant while driving innovation across the financial ecosystem.

Conclusion

In a recent study involving 758 financial professionals and banks, 85% of respondents believed that Open Finance had a positive impact on the industry and made it more collaborative . In the UK alone, Open Finance use cases have more than doubled between 2020 and 2022, with more than 33 million API calls logged per day in July 2022. By 2025, 25% of all insurance transactions which involve new ecosystem partners will need open and public APIs . Open Finance is transforming how financial services are provided, and will be a positive disruptive force for customers, financial services institutions, and third-party providers – by boosting collaboration among financial service providers and increasing the number of options available to consumers; leading to the development of more personalized products and services; and enhancing financial inclusion by improving access for previously unserved customers.

APIs are key in unlocking value across the financial services value chain, and cloud computing has been instrumental in driving publicly available APIs, and the backing scalable infrastructure, which power Open Finance. For financial services institutions to leverage the full potential of Open Finance, it is vital for governments and financial institutions to come together and draft frameworks and regulations that help improve security across the Open Finance value chain.

To further explore how Open Finance and APIs can unlock the potential across your financial ecosystem, please reach out to Amit Anand , Digital Banking Leader, or Brett McCoy , Banking Cloud Leader.