How open source finance can expand open banking’s mission
- The latest Findex data from the World Bank shows close to one-third of adults – 1.7 billion people worldwide – are unbanked and do not have access to traditional financial services
- Several community-led innovations in the form of protocols have garnered attention from mainstream investors and raised more than US$8.5 billion in just a matter of months
Stripped to its bare bones, open banking involves the use of open-source APIs to securely connect consumers’ financial data across several services on the backend. This helps to present a fully integrated picture of consumers’ financial health on the frontend. Another desired outcome of open banking was to increase competition among legacy banks and third-party providers. What was hoped to create a more level playing field, however, has instead caused legacy banks to consolidate their financial power.
This trend in popularity has now seen a rise in what has been deemed new and equal, namely, “open source finance.” Open source finance looks set to expand on the mission of open banking and what it originally set out to do, by empowering individuals to immerse themselves in an open framework of financial governance, where anyone with an internet connection has access to assets and financial services. All that is needed for participation in this new model, however, is consent from the consumer.
Large legacy banks and financial institutions have notoriously been reluctant in adopting open-source technology. Due to factors such as security and legal risks, not to mention its relative newness having been around for merely 2 years, the use of open APIs in financial service institutions has often been plagued by these myths.
That said, open-source finance has held huge appeal and provides a solid alternative. According to the latest Findex data from the World Bank, close to one-third of adults – 1.7 billion people worldwide – are unbanked and do not have access to traditional financial services. What’s more, large legacy banks and financial institutions have historically had immense influence in the financial flexibility over those who bank with them, and while financial inclusion has been said to be a priority, the barriers for entry to many legacy institutions remain high.
Similar to open banking, open-source finance claims to once again level the playing field by providing access to a growing range of financial instruments to banked, unbanked, and underserved communities worldwide. Due to consent being a necessity for participation, however, many believe that the way third-party consent is managed actually presented banks and credit unions with an opportunity to maintain customer loyalty and to build their position of trust.
Following in the steps of bitcoin as a prime example, open-source finance allows users to participate, share, and modify both the trading mechanism and assets traded in a decentralized manner. The replacement of centralized entities to govern exchanges thus lowers traditional barriers to entry like account funding minimums.
Due to more access to risk-on investments, highly successful community-led innovations have already been seen taking place, with protocols like Yearn Finance, Compound, Chainlink, Synthetix, and SushiSwap creating accessible financial instruments like automated market making and credit default swaps in an open-source manner. These entities have quickly proven their worth with rapid speeds in innovation and participation, having garnered the attention of mainstream investors and raised more than US$8.5 billion in just a matter of months.
In addition, the onset of the COVID-19 pandemic has also made digital essential as the primary means of conducting banking business. “The pandemic has made financial institutions realize that the future of the industry is not going to be dependent on in-person interactions, and so financial institutions must have more and faster digital connectivity and more data availability to serve their customers,” adds Dewitt.
What has once traditionally taken years of centralized, strategic planning, is now seeming to manifest before our eyes with actual assets. The relatively new online grassroots community has been quick to transform itself into an exciting hotbed for the development of open-source finance, and we can expect to see improvements in the technology’s scope and scalability to roll out more financial tools.
Where open banking provided huge strides in competitive innovation by demonstrating business benefits in terms of lower costs, increased efficiency, improved customer insights, better retention, and new markets, recent developments in open source finance stand to boost the cultural shift further away from traditional means.
The acute refinement of open source technology could yet see more collaboration and vitally, more options in products and services for consumers. While the future offers greater possibilities and the increased universal adoption over the next few years, it will probably be those that move first to embrace open source finance that is best placed to reap the rewards.
25 September 2023
25 September 2023
22 September 2023