Open Banking has been hailed as a game-changer for the payments industry, offering customers more control over their financial data through new and innovative products and services. However, the path to a fully operational, safe, and secure Open Banking ecosystem is often far from smooth.
The roadblocks preventing Open Banking success fall into two main categories: political/regulatory and operational. Political and regulatory challenges can range from unclear regulatory frameworks or competing governance agendas to digital transformation being low on an election manifesto.
The operational and implementation challenges can extend from regulatory overdesign to the incompatibility of legacy technology systems with new API standards.
Looking at political challenges, defining the regulation itself is one of the most significant barriers to Open Banking adoption globally. In Latin America, several markets have been waiting some time for secondary regulation to be published and, until this happens, progress is limited.
In Europe, an underlying reason why Open Banking penetration is fragmented, and adoption is perhaps lower than initially hoped, is due to the absence of a clear and consistent regulatory framework. This has led to different interpretations of the rules and standards negatively impacting processes and costs. The lack of clarity has also made it difficult for fintechs and banks to commit to Open Banking initiatives, fearing regulatory change may negatively impact their investments.
Another major challenge is the presence of multiple regulators with overlapping responsibilities. In the UK for instance, there are three regulators with a stake in Open Banking regulation: the Competition and Markets Authority (CMA), the Financial Conduct Authority (FCA), and the Payment Systems Regulator (PSR). All three organisations must agree before moving forward with any change to Open Banking regulation which takes time. Regulatory alignment is also a factor in many other countries where financial, data protection, and competition regulators overlap but their goals may not always match.
Election cycles can introduce political uncertainty, and upcoming elections may delay progress as political priorities shift. This makes it difficult for regulators and the industry to work towards long-term goals. Election outcomes can bring in new governments that may reverse or delay reforms, adding to the uncertainty.
Ecosystem participants themselves can also slow progress. Traditional financial institutions (FIs) may see Open Banking as a threat to their business model and therefore lobby to either slow down or modify regulations. Incumbent banks may fear that giving fintechs access to customer data will dilute their control over established relationships resulting in regulatory frameworks favouring FIs, placing a heavier burden on fintechs trying to enter the market.
In addition to the above, operational and technical challenges also come into play. These comprise overly complex compliance requirements, a lack of regulatory resources, a reluctance by FIs to fully embrace Open Banking, and difficulties in building trust among stakeholders.
While regulations like PSD2 in Europe were designed to protect consumers and foster competition, some measures, such as Strong Customer Authentication (SCA), have limited the customer experience. Regulators should be cautious of unintended consequences of regulatory overdesign such as suppressing innovation. Fintechs need to learn how to position their services to attract customers and FIs need to understand how they can benefit from using Open Banking.
For Open Banking to thrive, regulators must have sufficient capability and capacity to deliver Open Banking throughout its lifecycle including policy formation, workflow processes design, education, stakeholder relations, and project management. This is all determined by the role(s) played by the regulator but, unless adequately managed, it can become a bottleneck slowing down the development of the ecosystem.
Many FIs are not yet ready to embrace Open Banking. Implementing the necessary infrastructure to support API-driven financial services requires significant investment. Banks must overhaul their legacy systems which can be costly and complex.
This reluctance slows the adoption of Open Banking, as banks either delay their investment in the necessary technology or implement minimal regulatory requirements rather than fully embracing the potential of Open Banking.
One of the biggest challenges in implementing Open Banking is fostering trust amongst participants which is critical for its success. Participants must feel confident that they can identify each other and seamlessly, safely, and securely interact. Trust framework technology and central directory services are the foundations of a successful open ecosystem. Deploying central technology infrastructure like the Konsentus Open Trust Platform ensures a secure ecosystem is seamlessly created, managed, and maintained with participants able to exchange data and funds.
While Open Banking holds immense potential, its implementation is hindered by regulatory and operational challenges. Overcoming these barriers is crucial for Open Banking to reach its full potential enabling a more inclusive, innovative but competitive financial landscape.
This editorial piece was first published in The Paypers' Open Finance Report 2024, the latest comprehensive market overview and analysis focusing on the key players and products within the Open Banking and Open Finance ecosystem. Download the full report to discover more insightful content.
Mike Woods is the CEO and co-founder of Konsentus, a global provider of specialist advisory services and technology solutions to support the national implementation of Open Banking and Open Finance ecosystems. Previously an Executive Director at NatWest Bank, Mike has enjoyed a leadership career spanning retail, banking, and technology.
Konsentus provides advisory and technology services to support the national implementation of open ecosystems. We have a proven track record in understanding individual regulatory and market requirements to take a country seamlessly from Open Finance concept and vision to market-wide implementation. Konsentus has been at the forefront of delivering trust framework technology to banks and service providers since 2018 and counts many of the largest global financial institutions as clients.
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