Open Banking - a very global business

To get a better sense of what an Open Banking regime looks like, here's a look at what's happening around the world

The year is coming to a close, with continued unease about data and consent, confusion about strong customer authentication and liability, issues related to security and the regulatory aspects of monitoring banking operations, and discussions about personalisation, customer experience and so on.

In all seriousness, 2019 was supposed to be the one when the 'quiet revolution' took off. 

The key elements of a thriving Open Banking regime

We bring good news. Different jurisdictions worldwide are adopting their own versions Open Banking. At the moment, there are many Open Banking initiatives and they cross several dimensions, including implementation timelines, the scope of services, level of standardisation, and the type of institutions involved. Although there is little data available about what makes a certain regime successful in shaping an Open Banking ecosystem, however, Open Banking is alive and kicking all over the world.

Throughout 2019, INNOPAY and The Paypers have interviewed experts, reviewed legislations, regulatory standards, whitepapers and reports produced by regulators, industry bodies and specialists involved in Open Banking to form an understanding of where UK, Europe, US, Hong Kong, Singapore, Japan, Australia, New Zealand, India, and Mexico are heading, what are the key elements of a thriving Open Banking regime and the extent to which the wave of regulatory, technological, and financial innovation has evolved so far.

INNOPAY has delineated eight building blocks that are essential to any Open Banking regime and paramount in fully understanding the complexity of this regulation. These building blocks – Initiator, Applicability, Standardisation, Scope of services, Timelines, Commercial model, Security and Accessibility, and Third-party licensing – provide a good indication of all dimensions that regimes should consider. For more insights about the key differences in the current Open Banking state of play per region (based on the model of the eight building blocks), best practices identified across the different building blocks and the strategic considerations for regulators, banks, and third parties, check out the recently launched The Paypers Open Banking Report 2019 and the in-depth analysis of the key-decisions for the future ecosystem.

No longer a quiet revolution

Wrapping up the year, the UK and Europe are the pioneers and the frontrunners of Open Banking. In these jurisdictions, regulators have provided the conditions to accelerate migration towards Open Banking through a series of reforms aimed at releasing the financial data of consumers from the banks’ ownership and into the hands of consumers.

The development of the ecosystem (infrastructure, regulatory clarity, third-party providers accreditations, propositional uptake, security etc) has come gradually and is now gaining pace.

Elsewhere, markets push for Open Banking. Singapore, Hong Kong, Japan, New Zealand, India, Australia are at the top of the pack and rank as early adopters.

The adoption of Open Banking has been increasing worldwide with the Australian Parliament passing the Customer Data Right legislation on 1 August 2019. Thereafter, the big four banks in the country were asked to enable the availability of the required financial data for beta testing.

The Australian Government had decided to phase in Open Banking - consumers can direct the major banks to share credit and debit card, deposit and transaction data from July 2020, and mortgage and personal loan data from November 2020. 

In Singapore, the Government is committed to an organic transition towards Open Banking, more than a coercive framework of deadlines. The Monetary Authority of Singapore (MAS) encourages financial institutions to adopt APIs as a key foundation layer for innovation. Along these lines, together with the Association of Banks in Singapore, MAS launched a Finance-as-a-Service API Playbook. With the Finance-as-a-Service API Playbook, banks have a common guide to identify and develop APIs.

In Hong Kong, the monetary authority released a report on open APIs, a first step for the development of the ecosystem, with recommendations on standards and protocols, as well as an implementation schedule. In Japan, government and industry are collaborating on a commitment set by Prime Minister Abe for at least 80 banks to establish open APIs by 2020. Amendments to Japan’s Banking Act in June 2018 established requirements for partnerships between fintech payment operators and financial institutions, aiming to formalize registration rules, standards, and the development of open API systems by June 2020. This focuses initial open API requirements on the payment industry, as part of a broader push to increase the role of non-cash payments in Japan.

South Korea, Bahrain, Brazil, Mexico, Malaysia, Canada, and Thailand are chasing closely behind as fast followers.

In January 2019, the BNM (Bank Negara Malaysia) released its Policy Document on Publishing Open Data using Open API (the Policy Document), which set out the BNM's guidance on the development and publication of Open Application Programming Interface (Open API) for open data by financial institutions. The BNM aims to encourage open banking through the use of Open API, which enables third-party developers to access data without needing to establish a business relationship with financial institutions. While not mandatory, financial institutions are encouraged to adopt Open Data API Specifications recommended by the Open API Implementation Groups for credit card, SME loans and motor insurance products.

In Mexico, implementation is not expected until the secondary dispositions of the fintech law are due in March 2020. Implementation will likely take place in phases, with the first phase requiring a regulatory sandbox to test Open APIs. Regardless, Mexico’s embrace of Open Banking pushes its fintech sector further ahead of most other countries in Latin America.

Meanwhile, Switzerland, Indonesia, and China have also initiated moves towards Open Banking. However, adoption remains limited. Much of this willingness to embrace Open Banking in China is attributed to the high levels of mobile and internet services penetration across the country, spurring the creation of direct banking offerings. According to Regulation Asia, China’s private sector firms have been allowing third parties to offer their financial services via Open APIs thereby incentivising regulators to consider a framework to govern Open Banking.

At the earliest stage of development are the US, Chile, Nigeria, Kenya, and Rwanda. Though some of these markets may seem well established, advanced and competitive, the absence of any real momentum in terms of Open Banking regulatory frameworks or common standards means they still have a long way to go. Speaking at the annual Future of Financial Services in August 2019, Westpac NZ’s Director of Open Banking, Matthew Haigh, said the industry-led approach adopted by New Zealand’s Open Banking authority, Payments NZ, has more in common with China’s Open Banking regime than the pioneering efforts of the UK.

Rwanda, on the other hand, modelled its approach on the European Union’s PSD2. The legislation makes provisions for new types of payments providers (such as payments initiation service providers), and the creation of a regulatory sandbox where controlled testing of new finance products or services take place. 

The Open Banking regulation in Rwanda covers individual consumers and small businesses and addresses data sharing and data portability with a view to encouraging innovation, efficiency, new products development and new players. As in the UK and Europe, informed customer consent is required.

Interestingly, the fintech boom and massive financial inclusion has already started in Rwanda (they estimate that already 90–95% of population has already an access to financial services). What is more interesting is that it’s not driven by banks or payment companies. Fintech development in Rwanda is driven by telcos. Therefore, it is critical that Rwandan legislation and policy should apply to and require participation by telecommunications companies and mobile banking providers in addition to traditional banks.

Vision 2020 is the Rwandan government’s long-term strategy for the country’s development and growth – and one of the core pillars driving the transformation of Rwanda into a knowledge-based and service-oriented country is inclusion. Rwanda’s Vision 2020 aims for 70% financial inclusion by 2017 and 90% by 2020.

Lastly, Taiwan, Philippines and Vietnam have at the moment other priorities to settle such as financial inclusion and digitalisation before they can embark on their Open Banking journeys. No guidelines are expected to be issued before 2019 to 2020.

Eye towards the future

Open Banking is happening and there’s a lot at stake for banks, fintechs, governments, consumers. 

No doubt, security must be top of mind. APIs represent a target for bad actors and opening more APIs to third parties increases the potential for cyber attacks. In fact, Gartner predicts by 2022, API abuses will be the most frequented attack vector resulting in data breaches for enterprise web applications.

In addition to security, greater consumer awareness is a must, especially if end users could be educated about their rights and responsibilities around safeguarding private data. Consumers must be aware of the benefits that Open Banking can potentially bring, the new value proposition and what Open Banking as an entire concept of opening the data and the entire financial ecosystem can bring to the customers.

In 2020 and beyond, the focus should be on new offerings, especially new bank offerings for SME customers – a segment with many diverse and complex needs that make it difficult to serve them very profitably – and better lending offerings. 

Thanks for reading this year, we look forward to what 2020 has to offer and to provide you with interesting scoops on how Open Banking will evolve, and, more interestingly, start actively impacting our day-to-day lives.