From open banking to open finance

Open Finance allows consumers and businesses to share their financial data with trusted third parties. An extension of Open Banking, this permission-based sharing of data enables a wide range of innovative financial services and products to be developed.

 

The key element of Open Finance is expanded data sharing. Data shared can include banking data, insurance policies and accounting data such as cashflows and debtors. As with open banking, the central requirement for open finance is that the client organisation is fully in control of their data, meaning that they are able to grant or revoke access to their financial data by any of the third parties involved in the Open Finance ecosystem.

 

In addition, there are stringent regulatory requirements in place. These include PSD2, a European Union directive that has been transposed into British law and which is regulated by the Payment Systems Regulator. A revised version of this directive, PSD3, is likely to come into force in 2026 across Europe, and while it isn’t certain that the UK will adopt it, at least some of the new provisions are likely to be taken into law.

 

In practical terms, there is also a need for financial infrastructure to be made interoperable, for example through the use of standardised APIs that allow efficient, rapid and secure data exchange between institutions. This is something that the UK government has already encouraged within its Open Banking initiative.

 

Benefits for businesses

 

Open finance is gradually taking a firm hold of businesses in the UK because it offers a number of clear benefits.

 

It enables accounting services providers to offer real-time accounting and cash flow forecasting, enhancing businesses’ ability to act in an agile fashion. Many accounting software packages can integrate with bank APIs to automate bookkeeping, predict cash shortages or calculate tax liabilities (such as VAT) as they occur. Accounting quality can be improved: Open Finance APIs match incoming or outgoing payments with invoices, reducing manual errors and speeding up analysis, while reducing time costs.

 

Open Finance can also generate easier access to credit, something that is especially important for small businesses. This is because it lets lenders assess risk more accurately. Traditional lenders rely on limited data such as credit history, data which may be insufficient to make a credit decision without demanding a security such as a guarantee against the business owner’s house.

 

In contrast, Open Finance allows real-time cash flow analysis that could strengthen the case for a loan; access to alternative data, such as buy-now-pay-later transactions and e-commerce sales via third-party platforms can further strengthen arguments. Borrowers can even use real-time sales and inventory data to back up a request for extended credit.

 

There are other benefits too. Open Finance makes it far easier to compare banking providers and their costs. For companies trading internationally, the use of real-time transaction data helps finance teams optimise currency exchanges. And fraud can be limited when businesses use AI-powered analysis of data shared over APIs to detect anomalies in real time.

 

Key challenges

 

Open finance is complex, and its development has been long and slow. There are many important considerations, most importantly perhaps financial security, but also personal privacy and practical considerations around efficiency.

 

When business data is shared across the open finance ecosystem, there are naturally competitive concerns. Banks may resist sharing data that benefits rivals, and they may seek data that gives them an advantage while not necessarily benefitting the data owner. Indeed, the issue of data monetisation models – who profits from shared data – is a difficult one.

 

Personal privacy is also important. While the UK’s GDPR imposes requirements on organisations to protect personal data, it is possible that businesses may create new personal data through their analysis of current data. Perhaps more likely is the inadvertent and unauthorised sharing of personal data in complex transactions.

 

And while the main principles are clear – only necessary data should be shared and customers must be able to easily revoke access to their data – systems designed by humans are never perfect. The fact that more data is being shared between more parties will inevitably raise cyber-security risks. Poorly designed or implemented APIs could result in security breaches, while poorly designed ID validation processes could result in account takeovers or fraudulent transactions. The increasing use of deepfakes by criminals make this almost a certainty, unless strong ID solutions such as blockchain-based verification are implemented.

 

There are also some practical concerns that financial services companies must address. One major challenge is interoperability. Open Finance depends on seamless data exchange across a wide ecosystem of very different banks, fintechs and other third-party providers. To achieve this, companies must align on standardised API frameworks – such as those promoted by the Financial Data Exchange in the USA and Open Banking in the UK – and ensure efficient data portability and a satisfactory (fast, accurate, secure) consumer experience.

 

Another key concern is the cost of regulatory compliance. Financial institutions must meet stringent data protection and consumer consent requirements under frameworks such as GDPR or the UK’s FCA guidelines. As well as designing operational processes that guarantee legal compliance, organisations will have to invest in technology for resilient IT and cyber-security: with financial data being shared more broadly, institutions must implement robust encryption, authentication and fraud detection mechanisms. These upfront compliance costs must be weighed against the long-term return on investment anticipated from Open Finance initiatives, including greater operational efficiency, new revenue streams and enhanced customer loyalty.

 

To address these practical issues, and at the same time ensure that customers feel they are being given an efficient and personal service, governance and accountability frameworks must be put in place to define roles and responsibilities between data holders and data recipients and to specify appropriate processes, particularly when disputes or breaches arise.

 

A stronger future for business

 

Open Finance is building a better future for businesses of all sizes. It is reshaping financial services by enabling secure, consent-driven data sharing across banking, assets and insurance. Businesses benefit from better accounting insights and easier access to credit, as well as advantages such as lowered cyber-security risks. Accounting tasks become simpler, more accurate and less expensive to perform.

 

It’s clear that Open Finance will have many benefits. And as technologies such as AI and blockchain become incorporated into Open Finance APIs, then new and innovative benefits such as the early prediction of cashflow crises, the identification of fraudulent transactions before they are completed, and the development of alternative scenarios for strategic planning will be possible.

 

However, there are also considerations such as personal privacy, business confidentiality, data security and regulatory requirements that must be addressed if Open Finance is to be truly beneficial.