From Open Banking to Open Finance to DeFi: The Open Evolution of Finance

Open Banking has moved from regulatory idea to industry reality, driving transformation by enabling secure, permissioned data sharing between financial institutions and third-party fintechs.  In practice, this means banks expose certain data (like account balances or transaction history) through open APIs, but only when you, the customer, give consent. All of a sudden, your personal finance app can pull in your bank data and give you a unified view of your finances, or initiate a payment on your behalf – things that were near impossible in the past without your bank’s direct involvement. This shift turned the traditional model on its head: you own your financial data and can port it to new services at will. Indeed, open banking initiatives explicitly employ “consent-based data portability” tools to improve user access to financial information, empowering customers to unlock value from their data.

The impact has been profound at a macro level. Fintech innovators could, for the first time, build services on top of bank infrastructure without being banks. The result was an explosion of fintech apps offering budgeting, lending, payments, and investment services that leverage multiple banks’ data. Innovation quickened as data silos fell, and consumers benefited from personalized, convenient tools built on aggregated data. Even financial inclusion got a boost – lenders began using alternative data via open banking to underwrite those with thin credit files, and mobile apps brought services to those who were previously underserved.

Crucially, Open Banking was just the opening act. Its success paved the way for Open Finance, a broader vision expanding the open-data concept beyond banks to encompass insurance, investments, pensions, and more. If Open Banking let you share your checking account data, Open Finance imagines sharing all your financial data (consensually, of course) to enable truly holistic services. Need a financial dashboard covering your bank accounts, stock portfolio, pension, and crypto wallet? Open Finance says: why not? Regulators and industry groups are already plotting this next phase.

Now, with that groundwork laid, enter the next player on the stage: Decentralized Finance.

Decentralized Finance: A Primer

If Open Banking opened the gates, DeFi blew them off their hinges. Where open banking and open finance still rely on intemediaries  to participate in data-sharing ecosystems, DeFi seeks to remove as many friction points as possible and replace them with code. In decentralized finance, services like lending, payments, trading, and investing are delivered through smart contracts on public blockchains, rather than through centralized companies. In other words, it’s open access, global, and permissionless by design. 

The philosophical DNA is clearly shared with open banking. Both movements champion user-centricity and access. Just as open banking aimed to give users control over their data and choice of services, DeFi aims to give users control over their assets and financial interactions. 

On a technical level, the underpinnings differ greatly from open banking’s API approach, yet the spirit of openness connects them. Open banking uses open APIs provided by banks to let third parties read data or initiate transactions. DeFi uses open protocols – typically smart contracts on networks like Ethereum – that anyone can interact with or build upon. In fact, one can think of Ethereum smart contracts as public APIs for financial logic. The Ethereum developer docs explicitly note that smart contracts are public and can be thought of as open APIs. This means any developer around the world can write an application that calls a DeFi smart contract (say, a lending protocol), just as easily as they could call a bank’s open API. The permissionless nature of DeFi protocols mirrors the ideals of open banking’s API economy, but with the permissions baked into the tech (open to all by default) rather than into legal agreements. It’s as if the entire world of finance exposed a giant API that anyone can use to build new services.

Unsurprisingly, this has led to an innovation Cambrian explosion in the DeFi space. Developers globally are composing new financial products at a frenetic pace, precisely because the protocols are open and interoperable. We’ve seen decentralized exchanges facilitating billions in daily trading, lending platforms with liquidity pools that algorithmically set interest rates, and synthetic assets and derivatives being spun up by coders with a few clicks.

However, DeFi doesn’t exist in a vacuum separate from the rest of finance. In many ways, it’s extending the trajectory that open banking started.  Yet, DeFi also raises new challenges that open banking didn’t have to fully confront – which we’ll get to when discussing governance and regulation. Before that, let’s delve into the shared principles that tie these movements together, and how they manifest in each domain.

Shared Principles:

Despite their technological differences, Open Banking/Finance and DeFi share a set of core principles that define the “open” in their finance. These principles act as the philosophical bridge between the worlds of bank APIs and blockchain protocols:

• Both paradigms put the user in control of their data/assets and who can access them. In open banking, this is explicit – you grant a third-party app permission to retrieve your banking data or make payments on your behalf. In DeFi, user permission takes the form of private keys and cryptographic signatures – nothing moves from your crypto wallet unless you (and only you) cryptographically authorize it. Your ability to “port” your assets is literal: you can move your tokens to another platform or address freely, with no intemediary delaying a transfer. Both Open Finance and DeFi thereby champion the idea that your financial life belongs to you.
• Open systems thrive on different components working together. Open Banking achieved interoperability by establishing common API standards (for example, the UK’s Open Banking Implementation Entity set standard formats for data and secure connections). This means a fintech app can connect to Bank A and Bank B using the same language, instead of bespoke integrations – a plug-and-play finance vision. DeFi, on the other hand, achieves interoperability in a more organic way: protocols built on the same blockchain (say Ethereum) speak the same language by default. A token issued by Protocol X can be accepted as collateral on Protocol Y, and a trade on Uniswap can trigger a loan on Aave, all settled on-chain seamlessly. The composability we’ll discuss shortly is one outcome of this interoperability. The key is that in both cases, barriers between platforms are low.
• Another shared tenet is that openness begets trust and accountability. Open Banking frameworks baked in audit trails, secure authentication, and regulatory oversight to ensure that when you share your data, it’s handled safely. The idea is that secure open access can actually enhance trust by giving customers visibility and choice – and regulators enforced rules to protect against misuse. DeFi takes transparency to an extreme: all transactions are typically recorded on public ledgers, and smart contract code is often open-source and visible to anyone. The rules of the game are transparent, based on code.

These shared principles illustrate why many of us see DeFi not as a competitor to open banking, but as the next logical step on the same journey. That said, before tackling governance, let’s discuss one of the most powerful outcomes of these principles in both open banking and DeFi: composability – the finance equivalent of playing with Lego bricks.

Composability and Modularity

When systems are open and interoperable, they become modular – pieces can be mixed and matched to create new solutions. This is a hallmark of both the Open Banking era and the DeFi era, fueling rapid innovation in each.

Think of Open Banking’s impact, services used to come only in all-in-one bundles. If you didn’t like a particular budgeting interface, tough luck. Open Banking broke those bundles apart. Suddenly, your checking account could be provided by one institution, but a fintech app  could sit on top of it to provide a sleek budgeting tool by pulling in transaction data via API. Maybe another service could use payment initiation APIs to let you pay your utility bills from any of your linked bank accounts without using the clunky bank website. In effect, banking components became plug-and-play modules. One could use Plaid or another aggregator to connect dozens of banks, and build a new financial service that leverages any or all of them. This modularity is what allowed “embedded finance” to take off, non-bank companies embedding financial services into their apps by plugging into open banking rails. It’s also behind the concept of Banking-as-a-Service (BaaS), where banks expose APIs for everything from account opening to credit scoring, letting fintechs compose new banking offerings on-demand.

If Open Banking gave us Lego pieces like accounts, payments, and identity verification via APIs, DeFi supercharged the Lego set with even more pieces and global accessibility. In DeFi, composability is frequently celebrated with the meme of “Money Legos.” Every protocol is a Lego block that can snap onto others. For instance, you could take a stablecoin (a token pegged to USD) from one protocol, deposit it into a lending protocol to earn interest, then take the interest-bearing token you receive and use it as collateral on another platform to borrow something else – all orchestrated automatically One reason it works so seamlessly is the common infrastructure and token standards that ensure compatibility. A developer can stack existing protocols to build a whole new product in days – say a yield aggregator that moves funds between different lending pools to always get the best rate, which itself relies on the Lego blocks of those pools’ smart contracts.

To draw a parallel: open banking’s composability led to mash-ups like personal finance dashboards, multi-bank payment apps, or new credit scoring models using aggregated data. DeFi’s composability has led to mash-ups like flash loans (instant, uncollateralized loans that execute within one transaction by tapping multiple protocols), or automated portfolio managers that weave in decentralized exchanges, lending, and derivatives all at once. It’s telling that even APIs themselves are part of DeFi composability – standard interfaces and developer toolkits exist to connect dApps together, much like open banking standards connect institutions. In both domains, modular design means faster evolution: improvements or new features can be slotted in as new modules, rather than having to overhaul monolithic systems.

Of course, modular systems also bring new risks. In open banking, more moving parts meant more potential points of failure or data breach, which is why secure API standards and authentication (like OAuth and strong customer authentication) were vital. In DeFi, Lego blocks can stack into precarious towers – if one protocol has a bug and fails, it can cascade across others that depended on it. This composability risk has been likened to a house of cards: great when it works, but one weak link (say a stablecoin depegging or a smart contract exploit) can affect many layered applications. Both worlds have had to learn that open innovation must be accompanied by robust risk management. In fintech, that meant compliance checks, uptime requirements for APIs, etc. In DeFi, it means code audits, circuit breakers in protocols, and yes, sometimes emergency centralized intervention when things go awry (which purists might argue defeats the decentralization, but that’s another story).

Nonetheless, the benefits of composability have outweighed the risks sufficiently that the trend is irreversible.

This brings us to how the establishment is reacting and adapting. If DeFi is the wild West of open finance, how do governance and regulation evolve to handle this new frontier? And how are incumbent institutions responding, possibly by integrating these innovations?

Governance and Regulation:

When open banking emerged, it didn’t do so in a regulatory void – quite the opposite. It was largely born from regulation (e.g., the EU’s PSD2, the UK’s CMA order) and came with governance structures to coordinate banks and fintechs. Regulators mandated APIs, set rules for consent, and established bodies to standardize technology and operational protocols. The result was a relatively orderly (if at times grudging) transition to openness, with clear accountability: if a fintech misuses data, it can lose its license; if a bank fails to provide APIs reliably, it can be reprimanded by regulators

DeFi, by contrast, emerged in a regulatory gray area, often deliberately aiming to bypass these systems. Anonymous developers, global userbases, no central company to hold onto – it’s been a challenge for regulators to even define what to regulate, let alone how. But as DeFi grows in impact, regulators and governments are having to grapple with it. The big question has been: Can you regulate decentralized code? Or do you instead regulate the touchpoints where decentralized and traditional systems meet (like fiat on-ramps, stablecoin issuers, or major developers)? This debate is very much ongoing.

The concept of “embedded regulation” is fascinating: imagine regulations (like KYC/AML rules, or risk limits) coded into smart contracts, so that compliance is automatically enforced on-chain rather than through after-the-fact audits. It’s a bit like how open banking built certain requirements (like strong customer authentication) into the technical standards. DeFi might push that idea further, decentralizing not just finance but maybe also parts of regulation – for instance, decentralized identity solutions could allow users to prove compliance without every DeFi app needing to perform its own checks. We’re not there yet, but experiments are underway.

To that end, regulators aren’t sitting idle. They are beginning to draft rules specific to crypto and DeFi. The EU’s MiCA (Markets in Crypto-Assets) regulation is one broad example, though it largely sidesteps fully decentralized scenarios for now. Some jurisdictions, like Singapore and Switzerland, are actively exploring how to allow DeFi innovation in a controlled sandbox. The need for adaptation of regulations is clear. Traditional rules assume identifiable intermediaries that regulators can hold responsible (banks, brokers, etc.). DeFi blows up that assumption by decentralizing the function across many players or hiding it in code. Regulators might thus focus on new choke points: for example, developers who have admin keys to protocols, or centralized websites/interface that most users rely on (even if the backend is decentralized, many users access DeFi through a handful of web interfaces). Another approach is focusing on outcomes rather than entities: ensure consumers get necessary disclosures, risk warnings, perhaps even some insurance fund in case of hacks, regardless of the platform. Some have floated the idea of rating agencies or auditors for smart contracts to give users and regulators confidence in these systems.

On the governance internal to DeFi, there’s an ongoing evolution to improve decentralized decision-making – from introducing quorum rules, to experimenting with quadratic voting (to reduce the influence of whales), to delegating to expert committees (kind of reintroducing centralization for efficiency, interestingly). It’s a space of active innovation.

Convergence and the Road Ahead

What we’re witnessing now is a convergence of the two once-separate open finance tracks. The fintech open banking world and the blockchain DeFi world are increasingly aware of each other and even collaborating. Fintech companies that built on open banking rails are now exploring how they can integrate crypto assets or DeFi yields. Conversely, crypto platforms are looking at how to onboard users more easily (perhaps using open banking payments for fiat on-ramps and even how to bring real-world assets on-chain in a compliant way. The lines are blurring: is a crypto savings app with a banking license still DeFi, or is it Open Finance 2.0? Perhaps these labels will matter less as the concepts intermix.

A balanced outlook acknowledges that traditional finance and decentralized finance will likely coexist and even complement each other. Banks and big fintechs are adopting some DeFi technologies under the hood to improve efficiency (e.g., using blockchain for settlement), while DeFi platforms are discovering that some integration with TradFi (like fiat ramps or regulatory compliance features) can open the floodgates for more users. The end state might be a financial services ecosystem where open APIs and permissionless protocols work hand-in-hand.

What gives me confidence is that the genies released by Open Banking and DeFi cannot be put back in the bottle. Consumers now expect portability and choice; developers expect open platforms to build on. Even regulators, initially caught off guard, are adapting – some are even leveraging the same technologies (for example, exploring supervisory nodes on blockchains, or using APIs for real-time data reporting) to keep up. The financial industry has been cracked open, and a lot of light is coming in.