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Open Finance vs. DeFi Finance - The Difference

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Jack Bauer
May 11, 2021 07:17
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From the products we buy online, games we play on our smartphones to the subway we take, the digital transformation has transformed the way we live and work. Over the last few years, a vast number of fintech startups have emerged, leveraging technology to create ground-breaking solutions for the finance, investment, and lending sectors. Fintech has made it easy and convenient for people to invest, make payments, and even get a loan. 

Moreover, fintech solutions also help financial institutions in providing their new and existing customers increased access to their products and services and take their business to the new height of success. 

Two such fintech technologies are open finance and DeFi finance. Though both are expanding speedily, they are not alike and have some major differences. 

Open Finance

Open finance refers to the act of sharing financial data with third-party providers with the help of application programming interface API. Through the use of integrative protocols, financial institutions can fetch the financial data of consumers from a third party or simply fintech companies provide financial institutions with secure access to financial data. 

Financial technology companies are creating innovative solutions to improve the accessibility and convenience of financial services. Today, fintech is creating state-of-the-art APIs to share more in-depth data across a broader range of financial products and services. Open finance can help financial institutions to gain access to a wider range of financial products and services, determine borrowers’ creditworthiness, offer customized loan products and make informed lending decisions. 

Digitization in the financial services sector has changed the way we interact with our banks and manage our finances. Gone are the days when you had to go to your local bank to open a bank account, apply for a loan, or withdraw money from your savings account. 

Open finance plays a major in data collection. It helps in seamless integration between financial institutions and third-party fintech companies with the help of APIs. An API is a set of codes and protocols that defines the interaction between multiple software applications. To enable open finance, an API acts as secure conduct between bank systems and third-party solutions. 

Both financial institutions and consumers can be benefited from open finance. The robust network of banks and third parties can provide transparency and convenience. Currently, lenders use historical data to assess their borrowers’ creditworthiness. Without the ability to access the data, the overall lending process is usually time-consuming and vulnerable to human error. 

Open finance provides lenders with real-time and accurate financial data and thus they can get a better understanding of a consumers’ financial situation. By analyzing consumer data efficiently and securely, lenders can offer personalized products and services to potential borrowers. Moreover, this raw data can be fed through MI and AI to extract more in-depth insights. 

DeFi Finance

Also known as decentralized finance, DeFi finance can be defined as products and services built on public blockchains. In DeFi finance, blockchain technology is used to manage financial transactions. In the DeFi service-based platforms, financial products are available on a public decentralized blockchain network making them available to anyone to use without any middleman like banks and brokerages. 

Today, almost every aspect of finance is managed by centralized systems, operating by government bodies. DeFi challenges this financial system by removing middlemen and gatekeepers and empowering lenders, banks and traders via peer-to-peer exchanges. 

Though decentralized finance is at the beginning stage of its evolution, it will transform the finance industry in the coming times. Today DeFi is used in traditional financial transitions, decentralized exchanges, e-wallets, flash loans, non-funding tokens, stable coins, yield harvesting, and more. 

Final Thoughts

Despite both open finance and DeFi are growing rapidly, they work independently and offer profoundly various visions for banking and finance. Open finance boosts convenience and streamlines the banking system, whereas DeFi concerns itself basically with advanced resources and creating financial products and services for the new crypto-economy.

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Jack Bauer
May 11, 2021 07:17
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