Open Finance: An Alternative to Traditional Financial Services

What is Open Finance?

*Updated November 2020*

Lending

Lending is an extremely important part of any economy. With effective lending, economies can increase their gross domestic production because capital is allocated to those who aim to spend it productively. This in turn can boost economic output. Today, banks most commonly act as a bridge between those willing to lend surplus money to earn interest, and those wanting to borrow it to spend productively.

Exchanges

New open finance applications are aggregating liquidity outside traditional distribution networks. Popular decentralized digital asset exchanges (DEXs) such as Uniswap and Balancer use smart contracts to facilitate trading and build market depth.

Derivatives

Derivatives provide stability to financial market participants. At their core, derivatives are used to transfer risk from one party to another. One party wants to hedge their risk, the other wants to be exposed to risk. The hedging party will neither lose nor gain during the derivative contract, while the party exposed to risk stands to lose or gain.

Forecasting

Financial analysts make a living from their market predictions, and company performance & valuation analysis. They typically deploy complex models to derive their forecasts. However, these models can suffer from inefficiencies such as failing to integrate the newest information, overreacting to existing information, or failing to report on time. All of these inefficiencies combine to make analysts’ predictions unreliable. Is it possible to develop more accurate financial forecasts?

Data Collection

We rely on data to make decisions. Today, we have data aggregators that take unstructured data and structure it for users to review in the course of their decision-making. Generally speaking, a centralized party, such as the reporter or data feed, certifies that the information is truthful as it is made available.

Final Thoughts

Adoption of Open Finance applications is underway. But by any measure, we are still early in the movement. We encourage those in the financial services industry to prototype open finance applications. It’s never too early to get started.

Source: Raconteur — Big banks must adapt to the digital age or die.

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