Open Finance: A New Era of Financial Inclusion

Open finance is revolutionizing the way we think about money and access to financial services. With open finance, individuals can more easily manage their financial lives, make informed decisions, and achieve financial stability.

By providing open access to financial data and services, open finance is breaking down traditional barriers to financial inclusion. This means that more people can now participate in the financial system, regardless of their income level or credit history.

One key aspect of open finance is the use of APIs, or application programming interfaces, to connect financial institutions and fintech companies. This allows for seamless data sharing and enables new services to be built on top of existing financial infrastructure.

Open finance is a game-changer for consumers, allowing them to securely access, manage, and share their personal financial account data with any financial services provider they want to use.

With open finance, you're in control of who gets to see your financial information and what they can do with it. This gives you endless options to better meet your financial goals through thousands of budgeting, investing, lending, and other types of fintech and financial services apps available.

Open finance relies on application programming interfaces, or APIs, which connect and share financial data between many different financial accounts and apps. These APIs are the key to making open finance work.

APIs allow you to view all your financial accounts in one place, making it easier to plan for retirement or track your spending. For example, you can see your retirement and investment accounts together, giving you a clear picture of your financial situation.

By using APIs, merchants can also connect to a payment services platform, like Mollie, to verify accounts quickly. This has resulted in a 10% increase in customer conversion across the UK, Germany, and France.

The concept of open finance was first explored in 2003 as part of the open innovation movement. This movement was promoted by Henry Chesbrough, who saw the potential for innovation through collaboration and sharing of ideas.

The early 2000s saw a surge in interest in accessing data, particularly with the advent of internet banking and online technology. This led to attempts by technology companies to aggregate account data.

The European Parliament adopted a revised Payment Services Directive, known as PSD2, in 2015. This regulation promoted the development and use of innovative online and mobile payments through open banking.

The concept of open banking was first explored in 2003 as part of the open innovation movement promoted by Henry Chesbrough.

The advent of internet banking and online technology in the early 2000s sparked interest in accessing data, leading to account aggregation attempts by technology companies.

In the 2010s, open banking was linked to shifts in attitudes towards data ownership, with regulations like GDPR and the open data movement gaining traction.

The first regulatory move to open banking came in 2015 with the European Parliament's adoption of the revised Payment Services Directive, known as PSD2.

This new directive aimed to promote innovative online and mobile payments through open banking, introducing new services, definitions, and obligations for market participants.

Banks were initially slow to agree to sharing data due to technical and security concerns, as well as worries about new competition.

Between 2015 and 2021, several countries enacted laws and regulations forcing traditional banks to provide API access to customer data.

Data has evolved significantly, especially in the finance industry. The concept of open finance has led to the inclusion of data from multiple sources beyond traditional banking.

This evolution is driven by the need for innovation and inclusivity in financial services. New sources of data from digital players, fintechs, and even utility providers like electricity companies are being leveraged to enhance people's financial lives.

According to Tory Jackson, Head of Business Development and Strategy, Latin America at Galileo, "Whether that’s someone paying a power bill monthly or phone or water, that’s a transaction being made. And that data can be leveraged in many ways to enhance people’s financial lives in terms of having access to new services."

The internet banking and online technology of the early 2000s sparked interest in accessing data, with account aggregation attempts by technology companies. This led to the development of open banking, which is now linked to shifts in attitudes towards data ownership, illustrated by regulations like GDPR and the open data movement.

Latin America has a rich history that spans thousands of years, dating back to the ancient Mayans and Aztecs, who built sophisticated cities and developed a complex system of writing.

The Mayans were known for their advanced knowledge of astronomy and mathematics, which they used to create accurate calendars and predict celestial events.

The Aztecs, on the other hand, were skilled engineers who built massive temples and pyramids, including the famous Templo Mayor in Mexico City.

One of the most significant events in Latin American history was the Spanish conquest, which began in the 16th century and had a profound impact on the region's culture, politics, and economy.

The conquest led to the decline of the indigenous civilizations and the imposition of European customs and traditions, but it also facilitated the spread of Christianity and the development of a unique blend of cultures.

Today, Latin America is a vibrant and diverse region, home to a wide range of cultures, languages, and traditions.

Open finance is transforming the financial landscape, and its benefits are numerous. It's estimated that nearly 9 out of 10 consumers use some type of fintech app, and their reliance on those apps continues to grow due to economic uncertainty.

Consumers are increasingly comfortable sharing their financial data with fintech companies, with 79% of consumers comfortable opening accounts with fintech companies, compared to 87% with large, national banks.

Open finance enables consumers to connect and share data across the entire financial ecosystem, which includes thousands of products and services. This allows consumers to choose how they want to use their financial accounts and data for things like payments, budgeting, and investing.

The benefits of open finance are numerous, including access to more services, faster and safer transactions, and personalized financial products and services. For instance, open finance allows e-commerce businesses to strengthen their security systems, offer more flexible checkout options, and enhance customers' overall shopping experience.

Here are some of the key benefits of open finance:

Open finance also enables consumers to safely and securely share their financial data, including salary, spending habits, investment holdings, retirement savings, and debt. This makes it easier for consumers to make more informed decisions about their finances and reach their financial goals.

With open finance, consumers can understand their financial options better, manage their expenses, savings, and investments, and enjoy faster transactions. This could lead to more rapid consumer adoption of fintech products like real-time bank payments, BNPL, or fintech services that are still in development.

In New Zealand, Payments NZ supervises the payment system and expects the main banks to be ready by 2024 to implement open banking.

This development shows that open finance is gaining traction and becoming more mainstream.

The implementation of open banking in New Zealand is a significant step towards achieving open finance, where financial data and services are easily accessible and shareable with authorized parties.

In May 2023, Payments NZ said the main banks will be ready by 2024 to implement open banking.

This means that by 2024, New Zealand's payment system will have undergone significant changes, allowing for greater access to financial data and services.

The payment system in New Zealand is supervised by Payments NZ, which plays a crucial role in ensuring its smooth operation.

The main banks in New Zealand are working towards implementing open banking by 2024, as mandated by Payments NZ.

The European Union has taken significant steps to promote innovative online and mobile payments through open banking. In October 2015, the European Parliament adopted the revised Payment Services Directive, known as PSD2.

This directive introduced new services, definitions, and obligations for market participants, with the goal of promoting the development and use of innovative online and mobile payments. The PSD2 provisions came into force on 13 September 2019.

The European Commission announced the commencement of the review procedure of the Directive more than two years after its entry into force. The review aimed to assess the effectiveness of PSD2 and identify areas for improvement.

The European Commission submitted a call for advice to the European Banking Authority (EBA) on 18 October 2021. The EBA responded with its advice on 23 June 2022. Amendments to the Directive were planned for the fourth quarter of 2022.

The SEPA API Access Scheme initiative was launched by the ERPB, a strategic advisory body at the European Central Bank. The initiative aimed to define the principles of cooperation between entities participating in it and standardize methods for implementing selected services based on APIs, billing systems, and payment systems.

The proposed scheme would allow credit institutions to monetize value-added services, premium services, or extended services based on rules adopted in the scheme. These rules and general assumptions would be discussed with the relevant Directorates-General of the European Commission.

The Berlin Group established a new task force, the openFinance API Framework, on 26 October 2020. This task force focused on standardizing value-added services that credit institutions may make available to eligible third parties based on bilateral agreements or potential new payment schemes.

Here are some standardization initiatives in the European Union:

Understanding Section 1033 is crucial for data providers to ensure compliance with open banking regulations. Section 1033 of the Dodd-Frank Act was released on October 22, 2024, and requires data providers to support API-based data sharing.

Data providers must ensure consumer-authorized access to data through secure and reliable APIs. These APIs must comply with industry standards and achieve at least a 99.5% response success rate.

Clear documentation and contact resources for API access and support are also required. This ensures that data providers can provide assistance to consumers and third parties.

To comply with Section 1033, data providers must enable access to consumer data when a third party has been authorized. They must also maintain records of these authorizations.

Here are the key requirements for data providers to comply with Section 1033:

Plaid offers efficient compliance tools to help data providers meet these requirements without additional resources.