By Sandra Bruderer (ERNI Switzerland)
In recent years, the financial sector has undergone significant transformations driven by digitalisation. Notably, the concept of open banking has gained increasing importance. However, open banking is merely the beginning. As this concept evolves, so too does the broader concept of open finance. But what exactly do these terms mean, and what implications do they have for the future of the financial market?
What is open banking?
Open banking refers to an innovative approach in banking where banks and other financial institutions share their data with authorised third parties. This typically occurs through standardised interfaces (APIs). With explicit consent, customers can provide their financial data for use by these third parties.
Benefits of open banking
The advantages are clear: customers gain access to a wider range of financial services tailored to their individual needs. Banks no longer need to act as exclusive providers of financial products, but instead open the market to innovative solutions.
Innovation through third parties: Developers can create new apps and services that extend beyond traditional banking, such as budgeting tools, personalised financial advice, and new payment methods.
Increased competitiveness: Open banking enables smaller financial service providers to offer innovative products that can compete with larger banks.
Developments in Switzerland
Switzerland has thus far adopted a market-oriented and voluntary implementation of open banking, in contrast to the EU, where open banking is regulated by the PSD2 directive. And here you can see some examples:
- Hypothekarbank Lenzburg: This bank has pioneered open banking in Switzerland with its open API platform, Finstar, allowing third parties access to its systems.
- Swissquote: Provides a PSD2-compliant open banking API that enables regulated financial institutions, fintechs and service providers to access account information and initiate payments.
In addition to individual banks, Switzerland has platforms that serve as intermediaries between financial institutions and third parties:
- bLink by SIX: An open banking platform that efficiently and securely connects financial institutions with software or service providers through standardised APIs.
- Open Business Hub by Swisscom: Acts as a central integration platform for business API ecosystems, facilitating the networking of applications and service partners using standardised open banking APIs.
These developments promote the integration of financial services and support the creation of innovative solutions within the Swiss financial sector.
Open finance: An extension of open banking
Open finance represents the next step in the evolution of open banking. While open banking initially focused on payment transactions and bank accounts, open finance extends far beyond this scope. It encompasses all financial products and services available in the digital realm: loans, insurance, pensions, investments and even cryptocurrencies.
Within the framework of open finance, not only banks but also insurers, lenders, asset managers and fintechs can access customer information and offer tailored financial solutions. However, customers always retain control over their data and decide with whom they share it.
Challenges and risks
Despite the numerous advantages that open banking and open finance offer, the challenges must not be overlooked. The security and protection of customer data are paramount. The exchange of sensitive financial information must be safeguarded by advanced security mechanisms to prevent misuse or cyberattacks.
Another issue is the fragmentation of the regulatory landscape. Different countries have varying regulations and standards, which can create uncertainties for providers and customers alike. An international harmonisation of regulations would be desirable to further accelerate the development of open finance.
The future of open banking and open finance
The development of open banking and open finance is still in its infancy, but the potential is enormous. The increasing prevalence of digital payment methods, advancements in Artificial Intelligence (AI) and Machine Learning (ML), and the growth of fintech companies continually open new opportunities. In the long term, open finance could revolutionise the financial world, paving the way for more personalised, transparent and customer-friendly financial services.
In the future, open banking and open finance could not only democratise access to financial services but also transform the entire structure of the financial market. The establishment of new business models and greater involvement of non-bank entities in the financial sector could challenge traditional banking and potentially steer it in an entirely new direction.
Conclusion
Open banking and open finance are on track to fundamentally change the financial landscape. Open banking lays the groundwork for connecting bank data and services with third parties, while open finance extends this connectivity across the entire financial market. Customers stand to benefit from increased choice, improved service and tailored financial solutions. However, to fully realise these potentials, security considerations and unified regulation must remain a priority.
Our expert team in banking is ready to assist you in digitising your banking processes, providing consultation and subsequently implementing your use cases. With our expertise in Swiss Software Engineering, we ensure high-quality, reliable solutions tailored to your needs.
To gain a deeper understanding of how these concepts interconnect, we encourage you to read our previous article on Embedded finance – Seamlessly integrated financial services. This article explores how the integration of financial services into non-financial products is reshaping customer experiences and driving innovation in the financial sector.
