By Michael Anderson, Co-Founder of Framework Ventures
In the aftermath of the Great Financial Crisis (GFC), regulators tightened their belts around the types of financial instruments and industry best practices considered acceptable for banks. One of the causes of the crash was that legacy banks controlled most of the lending industry and consolidated a lot of its consumers’ financial data behind closed doors. Regulators’ response in England was to pass the Payment Services Directive (PSD2), which enabled outside financial technology (fintech) companies to create secure solutions for banks to safely share financial data with consumer consent. PSD2 emphasized open source solutions, which grant public access to the underlying technology. This development has come to be called “open banking.”
At its core, open banking uses open source APIs to securely connect consumers’ financial data across multiple services on the backend in order to display an integrated picture of consumers’ financial health on the frontend. A separate desired outcome for open banking was to increase competition among third-party providers (TPPs) and legacy banks. However, it may have caused the unintended consequence of consolidating financial power. In response to this trend of legacy bank consolidation is something new and egalitarian called “open source finance.”
Open source finance empowers individuals to participate in a novel, open framework of financial governance, where access to assets and financial services extends to anyone with an internet connection. In this new model, opt-in consumer consent is a prerequisite to participation. As such, open source finance can help expand the mission that open banking set out to accomplish.
Historically, large legacy banks and financial institutions have had outsized influence on the financial flexibility of those who bank with them and those who exist outside of the system. While financial inclusion has been a priority for many legacy institutions, the