Open Finance describes the exchange of data and services between financial institutions (e.g., banks and insurance companies) and third-party providers via available and published interfaces, e.g., Open APIs, whereby the exchange can take place in both directions. On the one hand, this includes opening up financial institutions and parts of their data, which currently typically relates to account and deposit information as well as payment transactions, by providing interfaces for trusted external third-party providers such as FinTech companies. On the other hand, financial institutions can also act as recipients of data and services from third-party providers as part of Open Finance.
Alongside Open Finance, Decentralized Finance (DeFi) has increasingly emerged as a trend driven by technological advances in Distributed Ledger Technology (DLT). DeFi describes the merging of the traditional financial industry with DLT to create trustworthy and transparent systems based on protocols that do not require intermediaries like financial institutions. The products and services offered are based on smart contracts, whereby predefined rules are automatically and independently enforced, and all corresponding data is stored by a distributed ledger platform (e.g., blockchain). DeFi solutions can be found in all areas of finance, such as lending, payment, trading, investment management and insurance.
It is worth considering the concepts of Open Finance and Decentralized Finance in an integrated way, as they differ only slightly in reality, pursue similar goals, and are also partly interrelated in their functioning. In general, Open Finance and DeFi represent two different approaches of open ecosystems for the financial sector. The following graphic provides a structured overview of the different concepts and participants in an integrated architecture.