While most consumers experience the use of open banking in completing financial transactions, another fintech innovation known as open finance has come into the fore. Similar to open banking but not limited to consumer bank data, open finance also gives third party providers (TPP) access to a broader scope of financial information using specific application programming interfaces (APIs).

The range of financial information accessed by TPPs under open finance arrangements include financial services like pensions,investments, insurance and other financial products that help consumers expand and manage their financial assets and liabilities in one platform. That is regardless of where consumer assets are kept and located.

By the way and for the benefit of those not familiar with APIs, they are fintech mechanisms that enable communication between the components of two software while using a set of protocols and definitions.

In open finance, an authorised TPP can communicate with the institution managing the financial information of a consumer in connection with the process of availing or buying into a specific financial product or service.

Exactly How Does Open Finance Work?

Since open finance involves sharing of financial data, the first most basic requirement is consumer consent or authorization. The TPP could be a personal financial adviser, or an investment platform like a robo-adviser. TPPs use specific financial data when rendering services to a consumer, such as personalized financial advice, account aggregation, budgeting, investment and lending services.

In order to do so and before any sharing takes place, a TPP must first obtain the explicit permission of a customer through an online interface and API of the financial institution managing the client’s data.

Data portability and interoperability are a must to enable effective communication and efficient transfer of financial data between different authorized TPPs.

Throughout the entire data sharing process, stringent security and privacy protection measures must be implemented to prevent unauthorised access and misuse of client financial data.