What is Open Finance? Definitions, Benefits, and APIs

The financial industry is on the cusp of a new horizon. Complex and siloed legacy technology infrastructure hinders innovation and prevents consumers from accessing their financial data in a secure and reliable way. Simply put, financial data today is closed off. It’s difficult to access, causing ripples throughout the industry and creating friction in the consumer's money experience.

At MX, we believe the future of our industry means embracing Open Finance. Open Finance begins with secure and reliable access for consumers to share their data with the financial apps and tools they choose to use. This helps break down barriers in today's broken money experience. 

72% of consumers say they would switch their primary bank if it didn’t connect to their favorite financial app.

(Source: MX Research Report — Consumer Trends in Digital and Mobile Banking)

In this post, we will cover:

• What is Open Finance?
• What is Open Banking?
• Open Finance vs. Open Banking
• Data Sharing Today
• Protecting Your Customer’s Data
• Open Finance Terms and Definitions
• Shifting Regulations and Open Finance
• The Benefits of Open Finance
• How MX Supports Open Finance

The State of Open Finance

While Open Finance has been widely adopted in Europe and Australia, North America has its own perspective and regulations for what consumer-permissioned data sharing looks like in the future. As open finance regulations take hold in the U.S., from market-driven to government mandates, we are entering the next phase of secure and open data sharing.

Understanding Open Finance vs. Open Banking

Open Finance is the next step beyond Open Banking, enabling access and sharing of consumer data to even more financial products and services — not just banking.

What is Open Finance?

MX defines Open Finance as the ability to access and act on financial data to build personalized experiences, increase the pace of innovation, and drive industry collaboration. Open Finance enables everyone to access and act on financial data to: 

• Make intelligent decisions through data insights
• Build personalized money experiences 
• Enable new business models 
• Support financial wellness 
• Mitigate fraud and risk

What is Open Banking?

Open Banking is the structured and secure consumer-permissioned sharing of data via open banking APIs between financial service providers. Unlike Open Finance, Open Banking is limited to retail and investment banking. Check out this blog post to understand more about what is Open Banking and see examples. 

Open Finance vs. Open Banking: What is the Difference?

Open Finance is the next step beyond Open Banking, enabling access and sharing of consumer data to even more financial products and services — not just banking. This includes loans, consumer credit, investments, and pensions. It also enables wider integration of financial data with non-financial industries, such as healthcare and government. In Open Finance, consumers grant trusted third parties access to their financial footprint for better experiences and personalized solutions to improve financial wellness.

Want to learn more about Open Finance? View more Open Finance resources.

Financial Data Sharing Today

Today, the majority of financial data sharing is done through screen scraping, which is less secure, limits the visibility of financial institutions to see where their customers share data, and requires consumers to share their usernames and passwords with a third party.

FDATA reported that nearly 90% of data being shared is done by “other technology,” and only 10% is shared using APIs.

Consumer data sharing typically occurs in one of three ways:

1. Screen Scraping or Credential Sharing

Screen scraping or credential sharing require consumers to share their credentials (username and password) with the data recipient to gain access to their data. Screen scraping is less secure than more modern connectivity solutions like open finance APIs and places a heavy technical burden on bank infrastructure, which creates unstable customer experiences as a single point of access.

2. Whitelisted IPs

Whitelisted IPs allow the financial institution to sanction data sharing with specific IP addresses and see who is accessing their consumers’ data. Whitelisted IPs ensure a higher connectivity rate for consumers linking their accounts to valuable third-party apps, creating a more consistent experience.

3. Open Finance APIs

Open finance APIs allow consumers to access their transaction data without the need to share usernames and passwords, and eliminate the technical burden of screen scraping. Direct connections replace credentials with tokens, delivering higher levels of security, faster speeds, and higher connection success rates.

Protecting Your Customer's Financial Data

Of all the benefits that Open Finance provides, the most important is protecting consumer data while giving them control over sharing their financial data. Current data-sharing methods like screen scraping, for example, put a customer at higher risk unless careful security protocols are in place. 

Open Finance helps alleviate security concerns and improves the experience for the consumer by offering:  

• Safe and secure data connections through industry standards provided by FDX 
• Regulations that help protect consumers and ensure they have control over their data
• Fast, reliable access to accurate financial data

This is why leading organizations are on a journey to secure access to open data in a digital ecosystem. Moving from screen scraping to whitelisted IPs to direct open banking API connections and secure, reliable open finance APIs is the best way to protect open data.

Open Finance Terms and Definitions

MX adheres to FDX specifications and standards. In order to maintain clarity and continuity, we use their terminology in our definitions.

Data Providers: The entities that hold End Users’ Financial Account Information, including, without limitation to, banks, credit unions, and brokerages. 

Data Recipients: Service companies, applications (financial apps), financial institutions, products, and services where End Users (on their own or through their End User Delegates) manage or act on their finances, whether actively managing their finances (such as moving money or applying for credit) or passively doing so (such as garnering recommendations or insights).

Intermediaries: These are the intermediaries that facilitate financial data access, transit, storage, and/or permissioning on behalf of data recipients or end users, also commonly referred to as “Data Aggregators.” In some cases, intermediaries do not have a direct relationship with the end user. The data may be passed through without modification or normalized in line with permitted objectives (e.g., parsed for readability or used to confirm other data). Data Aggregators should not be misidentified with parties who do not obtain end users’ consent but gather data, sometimes referred to as Data Brokers or Data Harvesters.

Shifting Regulations and Open Finance 

Open Finance is being driven heavily by the market and consumer expectations but regulations will ultimately shape the best practices and standards for consumer data sharing. 

Consumer Financial Protection Bureau

In 2021, the White House issued an executive order that pressed the Consumer Financial Protection Bureau (CFPB) to finalize rulemaking on Section 1033 of the Dodd-Frank Act, the legal basis for Open Banking and Open Finance. The CFPB shared an advance notice of proposed rulemaking in late 2020 to guide how it might most efficiently and effectively develop regulations to implement Section 1033 of the Dodd-Frank Act, which provides for consumer rights to access financial records. Next steps include a SBREFA panel to elicit feedback from a panel of small businesses on potential impacts of proposed regulation.

At the same time, the CFPB recently announced it will use a 2010 legal authority to supervise non-bank companies that “pose risk” to consumers in an effort to “level the playing field” between banks and nonbanks. Supervisory determinations will likely focus on individual neobanks, ‘Buy Now, Pay Later’ companies, ‘super-apps’, and big tech.

Office of the Comptroller of the Currency (OCC)

In 2020, the OCC released new risk management guidance on third-party relationships, specifically called out screen scraping. The guidance calls on supervised banks to conduct governance over aggregators who employ credential-based scraping to collect customer data regardless of whether or not the aggregator has a contractual relationship with the bank.

Bottom line: As the finance industry awaits the codification of consumer data rights through Section 1033 rulemaking, banks and nonbanks have an imperative — competitive and regulatory — to lay groundwork for secure, consumer-permissioned data sharing now.

The Benefits of Open Finance  

Open Finance puts the consumer in control of their data, and open data is the key to improving consumer outcomes. It means that companies, financial and otherwise, can build and offer solutions that help them understand and manage their financial lives better. And, it provides a foundation that gives consumers and financial providers better access, visibility, and control into who has access to financial data.

Benefits for Consumers 

With the freedom and flexibility that Open Finance enables, consumers have more choice and control over the data they share and how they engage with their finances. And, they gain unparalleled access to a broader range of products and services. It also allows consumers to more easily connect their various financial accounts and data together into a single view — enabling a more seamless money experience. 

Benefits for Financial Institutions

Open Finance enables a more secure way for financial institutions to allow consumers to share their financial data with financial apps and other third parties — and a more complete picture of their customer’s finances. As a result, financial institutions can collaborate with various providers to deliver a wider variety of services to their customers based on consumer data, uncovering new business models and innovations.

Benefits for Fintechs

With secure and reliable connections powered by open finance APIs, fintechs can deliver products uniquely designed to meet consumer needs. Fintechs and other third parties gain a broader and more accurate basis upon which to create consumer-centered financial technologies outside of the financial institution.

Want to learn more? Read the Ultimate Guide to Open Finance.

How MX Supports Open Finance

MX provides the most trusted and reliable open finance APIs to unlock the value of financial data. Our current offerings include:

Connectivity

Securely connect to and verify consumer financial data.

Data

Make financial data actionable with context, cleansing, and categorization.

Experience

Deliver personalized digital and mobile money experiences that drive growth.