Open Finance vs Open Banking: What are the challenges for the financial sector?

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In the era of digitalization and rapid innovation, financial services are undergoing an unprecedented transformation marked by the emergence of two new technologies: Open Finance and Open Banking.

For merchants like you, understanding the nuances between Open Finance and Open Banking is imperative to grasp the ins and outs of managing your company’s financial services.

If these terms are unfamiliar to you (yet) or if you want to learn more, this article is for you! Indeed, we will start by defining these two key concepts and then delve into their impacts on the financial sector and your business.

Let’s begin by focusing on the challenges of these two revolutions for you.

Open Banking: The Genesis of Financial Data Sharing?

A bit of history to kick things off: the concept of Open Banking has its roots in the second Payment Services Directive (PSD2) launched in 2018. PSD2 imposed a strict framework for opening up banking data, historically held by incumbent banks, to third-party actors with the customer’s consent, through computer programming tools called APIs.

Since this regulation, traditional banks have started sharing their data, giving rise to numerous innovative financial services and fostering competition. As a precursor to Open Finance, Open Banking has democratized the role of third-party payment service providers (PSPs) by changing how they interact with incumbent banks to access crucial customer data, all while providing them with legitimacy in the financial market.

It’s essential to note that the sharing of data in Open Banking is done within a strict and reliable framework to ensure transaction security, regardless of the financial actor involved.

Open Banking: What are the Impacts on Financial Services?

To understand the impact on financial services, one must consider the actors most affected by this new concept: the incumbent banks. For these institutions, the impact has indeed been twofold:

  1. The obligation to share customer data, which they historically monopolized, forcing them to rethink their operational and business models.
  2. The emergence of new opportunities and partnerships with innovative actors at the heart of fintech, creating a more dynamic financial ecosystem.

On the other hand, you, as a merchant, have also been affected by Open Banking. You now have more choices in terms of financial institutions to manage your payment services, with innovative solutions focused on user experience and security, such as SlimPay 😃.

Thanks to this new era of Open Banking, new actors have leveraged the opening of banking data to offer innovative services that can enable you to provide subscription solutions by capitalizing on the wealth of data now available.

Open Banking has primarily impacted the opening of banking services data, paving the way for an even greater revolution: Open Finance.

Open Finance: A New Revolution in Progress?

While Open Banking opened and democratized the sharing of banking data, Open Finance, as the name suggests, involves opening up this data beyond traditional banking activities. Open Finance refers to the opening of data for a wide range of financial services, including insurance, credit, investments, and more, extending beyond the scope of Open Banking.

Derived from ongoing technological advancements and regulations like PSD3, whose implementation is forthcoming, Open Finance aims to create a more open and interconnected financial ecosystem among different actors with standardized APIs.

It’s worth noting that customers also have increasing demands for holistic financial management, encompassing both traditional banking and financial services. Open Finance is poised to address these various factors.

If you had to remember one thing: the main distinction between these two concepts lies in the scope of their impacts; Open Banking focuses on banking data, while Open Finance encompasses financial data.

From a regulatory perspective, Open Finance builds upon the foundations laid by Open Banking, as outlined by various regulators. For you, as a merchant, this means the possibility of seeing new actors develop solutions to address both your banking and financial challenges.

There are numerous opportunities for innovation, but they will come with significant challenges related to data management, regulations, transaction security, and, most importantly, the fundamental customer experience.

So, what are the challenges for financial services?

The challenges of this emerging revolution, supported by the European Commission and underway throughout Europe, are multi-faceted:

  1. Promoting synergy among various financial services: Driven by regulators, Open Finance aims to include new actors beyond historical financial institutions.
  2. Fostering innovation: With the integration of new actors and continuous digitalization, Open Finance opens the door to the creation of innovative services.
  3. Enhancing user experience: Consumers demand seamless, easy-to-understand, and personalized customer journeys.

For you, as a merchant, understanding these challenges will enable you to offer your customers a comprehensive experience and utilize the appropriate solution to meet your objectives.

Now, let’s look at the challenges of these two new technologies.

And what about the challenges for merchants?

For you, the combination of Open Banking and Open Finance presents significant opportunities. You might not realize it in your day-to-day operations, but the new banking services stemming from Open Banking have likely already had a positive impact on your business.

Here are some examples to illustrate how these developments can impact your payment methods:

  • If you use a dedicated solution to manage recurring payments for your subscriptions: Often, new actors rely on Open Banking and APIs provided by banks to offer a smoother customer journey. This is precisely what we offer at SlimPay.
  • Perhaps you have encountered payment defaults on your subscriptions. In such cases, have you considered providing your customers with a payment link to facilitate fund transfers? If so, know that this fund recovery principle is also based on Open Banking. In most cases, APIs are used to connect with financial institutions.
  • Lastly, a more encompassing example: if you have tried to reduce the time your employees spend on administrative tasks related to payment processes, it’s highly likely that the solution you’re using, albeit unknowingly, relies on APIs and, therefore, Open Banking. These innovative and useful services can simplify your daily operations and improve your company’s financial management for banking services.

Now, imagine if you could take advantage of these new services across all your financial flows, including banking and broader financial services such as insurance and investments. This would allow you to combine different financial services that are currently quite separate, all while responding to your customers’ increasing demands for transparency and personalization.

After reading these lines, we hope that these two concepts are a bit clearer for you, along with the associated challenges. To sum it up, where Open Banking opened doors for many new players in payment accounts, Open Finance is also opening the doors to democratizing the use of data for all financial services (insurance, investments, loans, etc.).

With these two revolutions, we are undoubtedly witnessing a significant transformation of the financial sector, with ongoing considerations related to PSD3.

In conclusion, for you, as a merchant, this isn’t just another trend; it’s undoubtedly the beginning of new opportunities to optimize your company’s costs and, who knows, better manage your subscriptions while meeting your customers’ growing demands for transparency and personalization.