An open finance model for the world

Open finance has gained an unstoppable momentum. From its beginnings in Europe, open finance has spread rapidly to the Americas, Australia, India, and my own company’s home market of Indonesia - among others. 

There have been different models to get us to this point. Europe, which claims to be the 'cradle of Open Banking,’ is regulator-led thanks to a progressive regulatory environment – namely the PSD2 initiative and the creation of the UK's Open Banking Standard. The core idea was to encourage greater digital connectivity in financial services by using API gateways. Going beyond the scope of data and services available at your bank, the European regulators anticipated that it would offer consumers numerous benefits: better, faster and more tailored services for financial products, greater choice of suppliers, lower transaction costs, as well as services innovation. The other side of the equation was the opportunity to encourage new startup businesses with the potential for ultra-rapid growth.

The US has taken a more market-led approach and as such is still working out its regulatory framework. The push in the US for open banking was led from the private sector rather than government regulators. The Financial Data Exchange (FDX) organization was formed in 2018 as a non-profit consortium for the fintech and banking communities and now consists of the largest financial institutions as well as aggregators and fintechs. 

Elsewhere, a platform approach has evolved, where a centralized API provider enables interconnectivity between financial institutions and third party providers (TPPs) to create open finance on a national or regional basis.  

Accelerating open finance with or without regulatory support

Much of the world’s population is yet to discover the benefits of open finance. If momentum towards it is lacking from regulators or industry, as it can be in many countries, the platform approach provides a practical, low-cost, and rapid progression.

Indonesia, for example, the world’s fourth largest country by population, has adopted the platform model. The first step was to build relationships and trust between the platform operator and the key financial institutions in the country. This is only likely to be practical if the operator does not seek to compete with or displace the banks by offering services or products directly to end users. Instead it must stay in the background as the trusted platform that develops and hosts the APIs that make open finance possible. This approach is replicable in many other international markets and can transform possibilities, regardless of whether open finance is being led by regulation, driven by market forces, or where neither of those things are happening at the necessary pace and a catalyst is needed. 

In markets where financial infrastructure is still relatively fragmented, businesses are highly enthusiastic about the platform approach . They want the means to launch new services quickly and economically, and to be paid more reliably. And consumers want the convenience, choice and value that open finance offers, particularly among populations that remain underbanked or even unbanked.

Rapid momentum is possible

The pace of change can be very rapid as there is virtually no limit - other than imagination - to the range of products that can be delivered when powered by open finance. In Indonesia, an API platform approach to open banking is enabling a host of tailored and flexible financial products and services, previously the preserve of  larger businesses and / or traditional bank account holders, such as payments and lending services.

Southeast-Asia is a region with a significantly bigger population than the US and Canada combined, or the whole of the EU. It had GDP growth of over 7.5% before Covid hit, compared with 1.7% in the same period for the EU. The proportion of unbanked or underbanked citizens is also much higher than in the EU or North America. 

Open finance has the potential to close that gap more rapidly than would be possible using conventional banking products and distribution channels. It also can give people more control of their financial data, as well as driving inclusion through reaching more people without access to financial services.

Open finance is still very young, but it is already delivering on its potential and pointing the way to many positive benefits for business and consumers in the future. The platform-led approach described here offers a fast, practical route for expansion of open finance to the many hundreds of millions of consumers around the world still waiting for affordable, accessible services, and the thousands of businesses waiting to serve them.