The Ultimate Guide to Open Finance

The Ultimate Guide to Open Finance


Efficient and essential for financial services companies because access to data is access to money. Put simply, data drives all businesses today, especially in financial services. Those companies that can access and use data most effectively, offering increased transparency and controls along the way, will be best positioned to lead regardless of any other specific technological innovation that may come our way.

Open finance grew quickly in popularity during the global COVID-19 pandemic, with the market size estimated to reach $43.15 billion by 2026, at 24.4% CAGR, according to Allied Market Research. In addition, the Financial Data Exchange (FDX) has ballooned to nearly 190 members (including MX) and millions of customer accounts, while open finance users in the UK doubled from 18 million in 2019 to 40 million in 2021, according to Juniper Research.

This growth represents a major shift in the industry — a shift that’s likely only to continue as people see the benefits of open finance, from fast and secure payments to more reliable account aggregation, firsthand. In addition, we’re already seeing momentum around how future state infrastructures and regulations are being developed in favor of API-based financial ecosystems. This makes sense, given that consumers are already connecting with various products and services, as shown in data gathered from an original MX survey of 1,000 U.S. consumers.

In this guide, we’ll look at specific open finance use cases.

Connecting Accounts

Key Takeaways

  • Open finance is the system of allowing user-driven access and control of consumer banking and financial accounts through third-party applications. As a result, users will have more control of their data, deciding how they share it and who can access it.
  • Open finance has the potential to reshape the competitive landscape and consumer experience of the banking industry in a variety of use cases, including payments, credit scores, lending, customer acquisition, financial wellness, and more.
  • Open finance will force large, established banks to be more competitive with smaller, newer banks and fintech startups, ideally resulting in lower costs, better technology, and better customer service. 

Use Case #1: Payments

No area in financial services has changed as dramatically in recent years as the payments space. PayPal separated from eBay and, thanks in part to its acquisition of Venmo, reached a valuation of more than $300 billion. Stripe surpassed a valuation of $100 billion, Zelle usage exceeded 392 million transactions in 2021 Q1, and neo-banks such as Chime saw dramatic increases in total users — especially in the wake of a worldwide pandemic that made physical payments even less popular than they had already become.

This is just the beginning of what’s changing within the payments space with the rise of open finance.

Open finance enables financial services companies to connect to financial accounts via application programming interfaces (APIs) and quickly validate and authenticate data from a checking account. To get more specific, companies that implement open finance can use APIs to:

  1. Validate account numbers
  2. Validate account ownership
  3. Validate account balances

Once each item is validated, payments can safely and securely transfer within seconds, instead of the 1-3 days that are generally standard in the United States via ACH transactions.

Securely is a key word here, as 62% of consumers express some hesitancy about connecting their bank accounts — mostly because of issues related to security.

Connect to trusted app

What does all of this mean for banks? More than anything, it means that banks need to evolve.

That said, once consumers understand how secure the process is, the uses for open finance are wide-ranging. Take a landlord, for example, who wants to automate the payment process without pulling money from an account that doesn’t have sufficient funds. With open finance and direct APIs, landlords will be able to validate that an account has sufficient funds before the payment goes through — and the funds will be available within seconds instead of taking days. The same advantages are present for subscription-based products and even in-store payments.

Consider what happened when new entrants to the investing space offered a simpler app experience and no trading fees. Within just a few years, traditional players like TD Ameritrade and Charles Schwab cut their trading fees to compete. Why? Because they could see that keeping the relationship with their customers alive was worth more over the long term.

Banks should consider the same thing when it comes to open finance: Keep the relationship alive. If customers decide that they’re better off using open finance for payments — perhaps because merchants start offering a discount for using such payments — these customers will go where they can use open finance. If this happens, these customers may leave banks, credit unions, and possibly even credit card companies for whoever offers the best real-time experience.

Once the daily relationship is gone, it will be difficult to get back. Customers will sign in to the app that best uses open finance to do their daily spending, and that company that offers that portal will be in the best position to offer new products and services, from loans to savings accounts.

As this shift happens, it will become clearer than ever that those companies (including banks and credit unions) that keep the daily relationship alive will be best suited for winning the future of banking — especially because the future of payments will increasingly center on predictive analytics. This means that companies in a range of industries will access a trove of data that will tell them that a payment is likely to clear based on prior history. Payments backed by predictive analytics will truly be a game-changer that will benefit those companies that lead the way with open finance.

Payments backed by predictive analytics will truly be a game changer that will benefit those companies that lead the way with open finance.

Use Case #2: Credit Scores

A majority of Americans say they experience financial hardship at least occasionally, and roughly 22% of Americans, or 50 million US adults, don’t even have FICO credit scores. 

These numbers represent an enormous opportunity to bring these individuals from the outskirts of the financial system to a place of long-term financial strength — bringing returns for financial services companies that know how to act on the opportunity.

One way to do this is to optimize and augment the credit-approval process via open finance, in the vein of Experian Boost. By using tokenized, credential-free API connections, financial services companies aggregate bank account and transaction data from a variety of sources, enabling financial services companies to get a fuller understanding, when combined with credit reports, of who is creditworthy and who isn’t.

These insights can help the unbanked take consistent steps toward becoming creditworthy. For example, Chime uses transaction history over time to gradually help people build their credit without initially checking their credit. This concept can be amplified even further by aggregating a wide range of account types via open finance, so a company can see total spending in all of a user’s accounts, getting a far clearer picture of each person’s total financial picture.

Financial services companies that access these insights will be well on their way to edge out the competition with this large market segment. As JB Orecchia, CEO at SavvyMoney says, “There’s a direct correlation between consumers starting to track their credit, do financial literacy courses, budget, etcetera, and financial improvement. And you can start to get ahead of the score and take a risk on those folks because they’re going in the right direction.” He adds that there is power in gathering transaction data alongside traditional credit score information. He says, “I think there’s an opportunity to combine that information and to really get a more comprehensive picture of that consumer.”

The key for financial services companies is to lean into innovation. For instance, in our Open Finance Fridays series, Jacob Kossof, Head of Model Risk Management & Validation at Regions Bank, says that there are “interesting ways to do credit approvals for thin-file people” with open finance. Because of this and many other reasons, he sees open finance as an urgent priority for financial institutions. “We believe that a bank will be at risk if it’s not adapting,” he says. “For instance, if your bank doesn’t have remote deposit capture for checks and your competitors do, you’re going to be worse off. We in risk management recognize both the risks of implementing new initiatives such as open finance and the risks of not implementing new initiatives. Adaptability is really key here.”

With more effective adaptability built with open finance APIs, the possibility to help customers enter the banking system increases. This gives people opportunities they’ve previously never had and opens up new revenue streams for financial services companies that act boldly.

“We believe that a bank will be at risk if it’s not adapting.”

- Jacob Kossof, Head of Model Risk Management & Validation at Regions Bank

Use Case #3: Credit Cards

The global COVID-19 pandemic changed the credit card market. According to Experian, total revolving credit card debt in the United States fell from a high of nearly $1.1 trillion in 2019 to $950 billion in early 2021, and the balance on credit cards dropped from an average of $6,629 at the end of 2019 to $5,897 at the end of 2020. See the graph from below for details.

Revolving Debt

These trends have made some financial institutions nervous, as they indicate decreased card income.

What’s driving the trend? Among many things, there’s the matter of consumers receiving stimulus funds and using those funds to pay down their credit card debt. Then there’s also the rise of a buy now, pay later (BNPL) approach to shopping, which has exploded in popularity and is expected to skyrocket by 47% over the next year. 

To explore this second point in-depth, consider that the European fintech company Klarna raised $639M at a $45.6B valuation to enter the U.S. market and further promote their BNPL approach to banking. Klarna enables consumers to split payments over the course of several weeks, changing the way they view credit. After all, when consumers pay over six weeks with no interest, they’re no longer using their credit card as much as they once did. 

Given the rapid growth of this BNPL approach, it’s time for banks to take note and invent new approaches of their own. 

Open finance can help with this.

One option is to use open finance to offer an alternative to buy now, pay later — one that helps consumers consolidate their current credit card debt into a series of set payments. With the insights available from tokenized, credential-free account connections, banks can get the insights they need to create fixed tranches and allow consumers to choose the amount, rate, and payment schedule they want, offering clarity about the total payout. Financial institutions that offer this level of service, enable their customers to take a customized approach to pay off debt.

Use Case #4: Financial Wellness

Two-thirds of Americans say they experience financial hardship at least occasionally, with 19% saying they experience it somewhat regularly and 15% saying they experience it almost constantly, according to an MX survey of 1,000 U.S. consumers. 

How can financial services companies help these people build financial strength?

With this ability, financial services companies genuinely help people with their financial strength. After all, if you have a partial dataset, you might incorrectly nudge an individual who is buried in credit card debt to aggressively invest in their 401(k) account, hurting their financial strength in the process. Or you might suggest that an individual put money in a savings account when in reality, they should be getting a match on their 401(k).

The key to helping people reach financial strength lies in having the ability to see your customers’ full financial picture. Only once you have that view can you provide automated financial guidance at each step. 

You might help your customers earn more money by connecting them to on-demand jobs, based on their 

exact financial needs, in the vein of apps such as Stoovo and Steady. Or you might help customers automate their spending habits and display their spend-to-income ratio, pointing out ways they can cut non-essential costs.

Open finance enables the possibility of bringing all of a person’s financial accounts — checking, savings, loans, investments, etc. — together in one place.

The key, then, is to couple a financial management app with automated financial guidance that’s individualized for the needs of each customer. Of course, this is only possible with data that has been cleansed, categorized, and augmented — allowing algorithms and end users to instantly understand how much is being spent and where. Without enhanced data, automated financial guidance based on personalized needs is a non-starter. 

You might also implement an automated “slide to save” product that nudges customers on track bit by bit toward true financial strength. To illustrate: at the beginning of the COVID-19 pandemic, BECU identified a segment of its members who did not have automatic savings set up and likely needed help finding ways to save money. To address this, BECU implemented a Quick Save feature in their mobile app, which allows members to easily transfer funds to their savings account by using the ‘slide to save’ panel on their dashboard. By making the act of saving as simple as a swipe, BECU helped its members build a savings habit. To date, Quick Save has helped members transfer more than $1.5 million into savings accounts.

More than anything, the key is to create an experience that’s engaging and delightful, so your customers have an incentive to keep coming back to your digital offerings. If you can show customers that you’re invested in their long-term interests, you can spark the motivation they need to stay committed to their financial goals.

But all of this only scratches the surface of what’s possible with the right approach to helping customers reach financial strength. With open finance connections, financial services companies can also help with lending, long-term financial planning, insurance, investments, and automated debt guidance. To give one more example: Open finance allows you to provide a holistic picture of a customer’s debt situation and give automated insights for a detailed pay-off strategy to systematically pay down credit cards, student loans, auto loans, mortgages, and more. In short, open finance enables debt dashboards and more — all to empower financial strength. 

Conclusion: Open Finance Is the Future

As open finance evolves by extending into additional use cases such as taxes, insurance, investments, and beyond, it will change the way the industry works.

It’s no wonder then that Accenture says, “Banks with a vision for open banking beyond regulatory compliance will be able to deliver the experience their customers expect and thrive in a new competitive and collaborative landscape that includes new players like fintechs, big techs and non-financial-services.” When your team thrives in this new environment, you will bring in new revenue streams that equate to a powerful competitive advantage.

Major players in the industry are already moving in this direction, setting the standard for what’s to come. As Jane Barratt, Chief Advocacy Officer at MX says, “Global banks like Citi and BBVA are using APIs as a commercial strategy. They’re exploring what they can do to build out revenue streams and better customer experiences on top of their APIs. I think that’s where the industry is going, and you’ll hear a lot about embedded finance and banking as a service, which is the natural progression of having a more robust modern architecture.”

Embedded finance and banking as a service (BaaS) truly represent the future of banking, as financial activity continues to expand beyond traditional financial institutions to be interwoven with companies in a range of industries. Just as software as a service (SaaS) allows people to use applications via the cloud instead of buying software and installing it on their computers, banking as a service is a plug-and-play model that lets financial services companies, retail companies, and consumers pick and choose which aspects of open finance they want in their lives. In this way, open finance APIs serve as building blocks that power opportunities that people are only beginning to explore today, including a range of non-traditional card-issuing platforms (including a rewards-driven debit card for Uber drivers), goals-based payroll products, non-traditional lending platforms, and so much more.

It all comes back to the idea of truly advocating for your customers’ financial health — and reaping the long-term benefits of extended customer loyalty. By enabling customer-permissioned data sharing via open finance, you allow for a range of use cases, including those cited above. In the process you set yourself up to mutually benefit your customers and your institution as well.

Request a demo to learn more about how you can leverage secure, open finance API connections to power these use cases.