Over the past few years, open banking has gained significant traction worldwide, from the UK and Singapore to Europe and Malaysia. While each market has adopted varying approaches to integrate this new banking standard, many are now exploring advanced applications such as open finance to enhance how lenders operate. These innovations, when correctly implemented, can empower institutions to gain a significant competitive advantage.

What is Open Finance?

Open finance builds upon the concept of open banking by taking customer consent-based data sharing a step further. Instead of focusing solely on banking data collected through branches or digital channels, open finance aggregates all aspects of a customer’s financial life—from credit usage and card transactions to insurance premiums—into a single portal.

This broader sharing of data is a game-changer, especially for lenders. Currently, credit scoring models rely on data from credit rating agencies and big banks, which limits their accuracy and increases turnaround times. These inefficiencies often cost lenders substantial revenue. Open finance addresses this issue by providing lenders with access to a much wider array of customer data, enabling them to make better-informed, quicker decisions.

Key Benefits of Open Finance

Open finance offers numerous advantages for everyone involved in the financial ecosystem, creating a fully data-driven approach to lending. Some of the most significant benefits include:

1. New Credit Scoring Models

With access to a broader spectrum of customer data, lenders can develop alternative credit scoring algorithms. These models would not only incorporate traditional credit scores from agencies like Experian and TransUnion but also factor in a customer’s complete financial history. This allows lenders to make more accurate underwriting decisions faster, ultimately increasing profitability.

2. Faster Loan Approvals

As a result of better data, lenders can speed up the decision-making process, reducing the time it takes to approve loans. Furthermore, by optimizing internal processes and reducing paperwork, lenders can offer a smoother, more efficient experience for their customers.

3. Personalized Lending Products

Today’s borrowers increasingly expect products tailored to their specific needs. With open finance, lenders can harness more data to create highly personalized offerings. This not only leads to higher conversion rates but also improves customer loyalty, as personalized experiences foster a stronger connection between the lender and the borrower.

4. Healthier Market Competition

Open finance levels the playing field between large financial institutions and smaller fintechs or startups. By making detailed financial data available to all players, open finance encourages innovation and competition, driving down interest rates and offering better terms to consumers. This benefits customers with more competitive rates and loan options.

5. Improved Risk Management

One of the most critical challenges for lenders is managing risk, particularly non-performing assets (NPAs). With access to a comprehensive view of a borrower’s financial behavior, lenders can more accurately assess creditworthiness, leading to fewer defaults. This, in turn, results in a healthier loan portfolio and additional revenue streams from more reliable customers.

Challenges in Implementing Open Finance

While the benefits of open finance are clear, its adoption is not without challenges. To fully capitalize on its potential, financial institutions must overcome several hurdles:

1. Consumer Distrust

According to research by Zopa, over 63% of consumers are unfamiliar with open finance, and 26% are uncomfortable with institutions accessing their financial data. A study by YouGov also found that only 44% of respondents in APAC trust digital-only banks, compared to 73% for traditional banks. This widespread skepticism means that building consumer trust is one of the biggest challenges in implementing open finance.

2. Data Security Concerns

Aggregating all a customer’s financial data into one platform raises significant security concerns. Zopa’s research revealed that 20% of customers are hesitant to embrace open banking due to fears about data protection. To address these concerns, institutions can pursue certifications like ISO 27001, which ensures that the organization has the appropriate security measures in place to protect sensitive data.

3. Lack of Regulatory Oversight

While many countries have started drafting policies for open banking, regulatory frameworks for open finance are still in their infancy, particularly in developing nations like Malaysia and Indonesia. In the absence of strong government oversight, institutions may struggle with self-regulation, which is risky given the sensitive nature of the data being collected and analyzed.

Moving Forward: Leading the Change

Open finance is still in its early stages, and institutions that adopt it early have the opportunity to become leaders in the space. By partnering with technology providers, these early adopters can overcome the existing challenges by implementing solutions such as ISO 27001 certification to improve data security. Furthermore, these partnerships allow them to collaborate on resolving future issues and capitalize on the potential of open finance to drive financial inclusion.

By embracing open finance, institutions not only gain a competitive edge but also contribute to a more inclusive and innovative financial ecosystem.