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Difference Between Open Banking and Open Finance: A Complete Guide

Difference between Open Banking and Open Finance

Understanding the difference between Open Banking and Open Finance is crucial as organizations across all industries are competing to create the best customer experience. The banking services and fintech industry is no different. As banking applications have earned a higher share of client transactions, the requirement to exceed customer expectations has never been greater. This is precisely where open banking comes into play.

Fintech businesses and banks aspire to achieve just that with easy-to-use and frictionless digital services across many touchpoints. Banks and payment industry participants are working to maximise the benefits they bring in establishing customer-centric solutions.

This has caused the popularity of open banking APIs to increase. Banks are embracing open banking APIs to retain and grow their customer base. Concurrently, third-party institutions are personalising their offerings, services, and goods via APIs.

What is Open Banking API?

Open Banking API stands for “application programme interface,” and it grants third-party providers of financial services access to various types of financial data.

Banks and other financial institutions make use of them to enhance the customer banking experience. In addition to this, it assists in the creation of new revenue streams by providing more contextual services and bringing together the power of customer insights with advancements in fintech.

The necessity of the digital interchange of financial data is increasingly being recognised by national authorities and regulatory bodies in the financial industry. The information can be acquired with the customer’s permission and then used in the system to eliminate inefficiencies.

It has the capability of giving rise to new product and service opportunities. These data are being put to use in the process of designing and developing digital applications that will be making payments both quicker and simpler.

Rise of Open Banking API

The rise of Open Banking and API is due to three significant Factors:

1. Increasing customer demands

Increasing client expectations are the primary driver of innovation in the banking industry. Customers seek convenience and round-the-clock client service.
But it doesn’t just end there, does it?
True innovation involves offering solutions at every stage of the user’s journey. Moreover, it is about ensuring a flawless transactional experience.

Customers are willing to provide personal information for a personalised experience. In reality, delivering genuine value in exchange for client information can boost customer loyalty and confidence. Intriguingly, 48% of customers want banks to give product information specific to their app/website activity.

Additionally, buyers look for accessibility and according to surveys conducted by PwC, 15% of banking consumers prefer mobile banking.

On these apps, users anticipate a comprehensive selection of banking and financial services. These services might range from fully-automated dashboards to real-time status notifications on transactions.

2. Competitions posed by Fintech

It is widely acknowledged that fintech companies cannot function without banks. In actuality, fintech companies serve as facilitators. Utilizing technology, they enhance financial services. Nonetheless, as technology advances, customer expectations will inevitably arise. Consider the case of corporate rewards.

Corporate banking solutions have bulk payment processes in place. However, they are obsolete and unfriendly to customers. Corporate banking solutions may involve in-person bank visits and offline procedures. In addition, there are technological restrictions, such as incompatibility with contemporary browsers or support for only Excel file uploads.

In contrast, fintech payout services offer customer-centric solutions. They provide rapid activation, fully online KYC, an API for complete automation, as well as numerous other services.

This competition between fintech companies and banks has also contributed to the development of open banking and API. Now, banks want to modernise their products because doing so could help them attract more customers.

3. Increasing regulatory pressure

Government regulation varies significantly among regions. Governments in several nations, including the United Kingdom and China, want to foster competition and innovation. Additionally, they intend to make client data accessible to third parties.

Some prime examples would include

  • The Payment Services Directive (PSD2) is a European electronic payment regulation. In the EU, regulations are enforced in the form of accords.
  • The Competition and Markets Authority (CMA) in the United Kingdom is compelling the country’s top banks to embrace open banking API.

Benefits of Open Banking

With Open Banking, customers and bank owners may reap the benefits of Online Banking. The following are a few of them:

1. Helping customers in their operations

Open banking makes it easier for clients to acquire answers and services adapted to their specific needs, hence facilitating their operations. Since a huge variety of APIs already exists and continues to grow, everything has become simpler. You only require access to technology. Reduced time is spent and operations are automated.

2. Centralisation of services

With open banking, banks regain complete authority over the many services that customers require, including advising, loans, transfers, and financing. Thus, everything is conducted with more transparency and centralised administration.

3. Increase in the financial market

Open Banking APIs and services will become more diverse as more clients join the platform. Thus, there will be different options tailored to the demands of each individual.

Open Finance – the next step of Open Banking

Open finance has revolutionised and democratised the financial system as we know it. Open finance is the next stage on this path and will foster collaboration between third-party suppliers and the previously closed financial sector.
Open finance will benefit both firms and individuals. Consumers will have easier access to their financial data and will gain financial knowledge as more information facilitates smarter financial decisions.
With the transparency of open finance, customers get greater financial control. Open finance is a step on the path to open data, in which everyone has control over who has the access to their data, financial and otherwise.
Open finance is similar to open banking. It’s the next step in the democratic transformation of finance, and it will complete what open banking began: levelling the playing field so that customers receive more personalised financial experiences. Businesses gain access to more useful data, streamlined customer onboarding, and scalable, future-proof fintech solutions.

Difference between Open Banking vs Open Finance

Open Banking
Open Finance
API providers
Banks alone are API providers
Other financial institutions may also offer APIs.
Data ownership and management
The bank determines which information is to be revealed.
Customers determine which information to disclose.
Legal regulation
PSD2 and the Payment Services Directive govern open banking to a large extent.
Open finance currently lacks legal regulation.
Open banking does not mandate an agreement between an API provider and a customer.
Open finance necessitates an agreement between an API supplier and a customer.

Types of Banks

1. Central Banks

Regarding banks, the central bank is in charge. Central banks control the money supply in a country or a group of countries. They monitor commercial banks, determine interest rates, and regulate currency flow.
Moreover, central banks implement a government’s monetary policy objectives, such as battling deflation or preventing price fluctuations. In difficult economic circumstances, they can lend money if necessary to prevent the monetary system from imploding. The United States’ central bank is the Federal Reserve System. The European Central Bank controls economic activity in the 28 eurozone countries.


Difference between Open Banking and Open Finance

2. Retail Banks

When you think of a bank, you likely see a retail bank. Retail banks provide the general public with many financial products and services, including bank accounts, loans, credit cards, and insurance. In rare instances, they can also open bank accounts and provide loans to small enterprises.
Customers can access traditional, brick-and-mortar retail banks in person, online, and via mobile devices. Others offer their tools and accounts exclusively online or via mobile applications.

3. Commercial Banks

Although there are varieties of commercial banks that assist consumers, commercial banks generally focus on assisting businesses. Large and small businesses can turn to commercial banks if they need to open a checking or savings account, borrow money, gain access to credit, or transfer payments to companies operating in international markets.

4. Shadow Banks

The shadow banking system consists of financial institutions that are not subject to the same stringent laws and regulations as normal banks. Similar to conventionally regulated banks, shadow banks deal with credit and various assets. Instead of using money supplied by the central bank, they obtain funding through borrowing, interacting with investors, or generating their funds.
The two types of shadow banks are money market funds and hedge funds. Recently, they have been a topic of dispute for a large number of individuals. Many people believe that the less-regulated shadow banking industry contributed to the mortgage crisis that preceded the Great Recession.

5. Investment Banks

The obligations of investment firms such as Morgan Stanley and Goldman Sachs are extensive. They handle the trading of stocks, bonds, and other securities between firms and investors, on the one hand. On the other hand, they may concentrate their efforts on advising individuals and businesses in need of financial advice, reorganising organisations through mergers and acquisitions, managing investment portfolios, and raising funds for specific enterprises and the federal government.

6. Cooperative Banks

Banks can be either retail or commercial cooperatives. The characteristic that distinguishes them from other entities in the financial system is that they are often local or community-based groups whose members participate in business management decisions. They are democratically governed and provide loans and bank accounts, among other services. In the United States, they often take the form of credit unions, despite their global prevalence.

7. Credit Unions

Like banks, credit unions extend loans, offer savings and checking accounts, and satisfy other consumer and company financial needs. The distinction is that banks are for-profit businesses and credit unions are not. Credit unions are governed by their members, who base their decisions on the advice of elected board members.
Typically, credit unions only serve members of a specific group, such as residents of the same area, low-income community members, or military personnel. Two solid reasons to consider opening an account with a credit union are that they typically charge lesser fees and offer lower loan rates.

8. Savings and Loan Associations

Savings and loan associations are not technically banks. They are financial institutions that primarily use deposited savings to create mortgages, refinance loans, and other house loans that their customers can use to construct or remodel homes.

What led to the growth of Open Banking in API?

Now, various individuals may have different definitions of open banking API. However, to comprehend open banking API’s essence, we must comprehend its expansion.

Two primary factors are driving the expansion of Open Banking and API.

1. Open Banking API growth driven by regulation

It is well-known that the financial and banking industry is one of the most severely regulated businesses.
Nevertheless, the majority of financial organisations feel that opening up banking data will stimulate innovation in the financial sector. This will improve the consumer experience and make financial services and products more accessible.
In some nations, financial institutions (such as PSD2) have implemented regulations, and banks must comply with them to conduct business. This is the primary factor driving the expansion of open banking and API in Mexico, Australia, and the United Kingdom.

2. Market forces have helped Open Banking API grow

In many markets, competition is driving banks to join the open banking bandwagon. In many locations, banks cannot deliver the same level of customer service as fintech companies. Therefore, banks have little alternative but to work with other financial institutions to reach a larger audience. In addition, it is crucial if they wish to deliver happiness to their existing clients.

Let’s consider some usage examples to better grasp this notion.

A bank may opt to develop an app for consumer convenience. However, by doing so, they can only reach a limited customer base. Due to security concerns, they cannot allow customers of other banks to use/access their app. In addition, they are unable to collaborate with other banks to develop a unified solution because of industrial rivalries.
In contrast, a fintech player is not subject to such obligations. In reality, they can create solutions that are accepted by a variety of institutions and gain access to a vastly expanded consumer base.


There is considerable disagreement regarding the competitiveness between banks and fintech companies.
The danger to the traditional banking business model has been demonstrated to be valid.
However, the benefits of collaboration between banks and third parties are significantly greater. Legacy banks that embrace open banking and API have the opportunity to generate new revenue streams. In addition, new fintech businesses can leverage the bank’s client base and experience.
Consequently, banks will have the chance to excel at the user interface and customer relationship management.
It will be fascinating to observe the new technology developments in open banking APIs and how banks adopt this transition.


1. What is the difference between Open Banking and Open Finance?

Ans: The most significant distinction between open banking and open finance is that open banking is somewhat governed by a legal framework, but open finance is not (yet).

2. Is Open Banking API functioning in India?

Ans: The expansion of open banking and API in India is largely attributable to market forces. In India, the transfer of any personal consumer data is highly regulated. There are relevant agreements between the consumer, the AA, and the providers of financial information.

3. What are the three banking API types?

Ans: There are three API types in Banking; Private APIs, Partner APIs and Open APIs.

4. What are the different types of banks?

Ans: Various types of banks function in India namely, Central Banks, Retail Banks, Commercial Banks, etc.

5. Is Open Finance legally regulated?

Ans: No. Open finance currently lacks legal regulation.

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