Open banking promises to deepen banks’ relationship with their customers. But different jurisdictions are moving at very different speeds to accept and encourage it.
Average citizens are somewhat in the dark about open banking, although many are already using the first generation of open-banking apps.
The concept of open banking (lowercase) is that banks share information with other financial providers through application programming interfaces (APIs), in order to provide more value-added services.
Muddying the waters, however, the UK mandated creation of Open Banking Ltd. (upper case), a nonprofit to provide a standardized, secure way for licensed startups and other financial providers access to financial information—down to individual consumer transactions—held by Britain’s nine largest banks. Open Banking is live in the UK. The CMA 9—the nine biggest banks in the country—are mandated by the Competition and Markets Authority to share their data securely with approved third parties, in areas including account information and payments, using a statutory set of APIs.
Contrast that with continental Europe, where the EU Second Payment Services Directive (PSD2) applies to all payment-account providers but doesn’t go live until September. With just six months to go, 41% of banks missed a March 14 PSD2 deadline to provide a testing environment, or “sandbox,” for third-party service providers. Gareth Lodge, senior analyst at financial-services technology consultant Celent, says this is partly because the regulator was late in agreeing what the directive meant, which led to a late technical spec while leaving the deadline in place.
“It’s quite complex trying to get it right,” says Lodge. “Even the FAQs show there are more unanswered questions than answered ones about how this is actually going to work in practice.”
Banks are also anxious not to dive into open banking before they know how it will affect their adherence to the EU’s General Data Protection Regulation. “The fines are an eye-watering 4% of global turnover,” Lodge notes. “It’s worth being told off by the regulator [for missing a deadline] rather than getting it wrong, I would imagine.”
Open-banking initiatives are popping up around the world, but take divergent approaches, as each jurisdiction is guided by its own objectives and market conditions. While banks in Europe have been mandated to share customer data (with consent) with nonbanking third parties, many other jurisdictions have chosen to encourage open banking by issuing guidelines and other measures to promote it.
This organic approach is favored in Asia. To date, the Monetary Authority of Singapore and the Association of Banks in Singapore have published an API Playbook to encourage adoption, a route followed by the Hong Kong Monetary Authority. In Japan, the Revised Banking Law specifies that banks should take reasonable steps to develop an open API structure. Banks in New Zealand, meanwhile, have joined forces independent of regulatory influence to pilot open banking practices. In India, a combination of public and private efforts has created India Stack, a series of open APIs to promote financial inclusion and e-commerce. The pace of open banking in China is being set by fintech behemoths Ant Financial and Tencent, which are leveraging open APIs to allow third parties to offer services to their customers.
The US Treasury is talking about open banking, and some institutions in the US and Canada are embracing the underlying principle as it relates to third-party integration. The fragmented state-based nature of banking regulation in the US and aversion to red tape, however, make a federal policy on open banking unlikely.
Mexico, on the other hand, is taking its lead from the UK. But rather than seeing increased competition as the key driver, Mexico is looking to increase financial inclusion. To this end, its new Fintech Law requires open access not just for banking, but for all financial services.
For BBVA, which operates in Europe, Mexico and the US, open banking could create a competitive advantage. “It will be interesting to see how BBVA—as an open-banking market leader—positions itself, as it already operates in the US,” says Christian Ball, head of Retail Banking at GFT UK, an IT solutions provider. “That should give pause for thought to anybody in the US market.”
Celent’s Lodge finds Australia particularly interesting for its approach to building a data ecosystem to support real-time payments. “They’ve been very explicit in saying that the utilities, telcos and banks all have valuable data on consumers to identify them” to root out fraud, he says. “They are working closely together to make this happen,” he adds. “This differs from other jurisdictions like the US, where they’ve got very hung up about who owns the data.”
One country moving rapidly forward is Bahrain, thanks to the central bank’s decision to create a regulatory sandbox and mandate open-banking adoption for Bahraini retail banks. Almoayed Technologies was first to jump into the sandbox, graduating in December 2018 after successfully developing account-aggregation services. Since April 2019, Almoayed has worked in partnership with platform developer Token and the sandbox regulator to prepare Bahraini banks for the advent of open banking.
Almoayed subsidiary Tarabut Gateway has since integrated to 13 banks in Bahrain using a single universal API, and the central bank mandated open-banking regulations countrywide in November, giving banks until the end of June to comply. “Bahrain is known to have the most pioneering and bold regulator historically,” says CEO Abdulla Almoayed. “They have continued that by embracing open banking.”
Although Bahrain’s small size makes it an attractive test bed, Almoayed says that the single universal API that connects to all the country’s banks helps Bahrain circumnavigate standardization issues.
“If I were going to London and I was a developer or a fintech that wanted to integrate, there are a lot of complaints about how the market is so fragmented, with a lot of fragmented APIs. We basically got ahead of the bullet by integrating in a testing environment to more than 17 banks regionally. With a single API, it makes it extremely attractive for developers that want to test their technologies in this part of the world,” says Almoayed.
The attraction of open banking, Ball says, is that it allows banks to aggregate wider data points. “It pivots from product-centricity to customer-centricity,” he says. “Specifically on the credit side, customers don’t really want the products that banks are selling them; they want the things that those products enable them to have. They want a house, not a mortgage.”
As an example, he points to the Valora app being developed by BBVA in Spain to facilitate homebuying. Valora allows BBVA’s customers and noncustomers to find the approximate purchase and sale price of a house, make comparisons with similar properties, and determine the potential impact of the purchase on their finances—all of which helps them choose whether to buy or rent.
“Open banking, combined with other technology investments around cloud and data, will allow banks to rapidly score and return a view of customers in much shorter order than they’ve historically been able to do,” Ball explains. The payoffs for banks are more-streamlined sales processes, cost efficiency and potential revenue streams from services that wouldn’t traditionally be sold by a bank.
“All banks with a current account relationship and the ability to sell life-moment products are well-placed to take advantage of [open banking],” says Ball. “The challenges are related more to whether the banks have the strategic platforms in place, and whether they’ve embraced cloud and data and the insight technology to support it.”
Some functions are required by regulators—namely, to have platforms available for external testing and to go live or face the risk of fines. Celent’s Lodge says banks that offer even more open APIs than mandated will be able to move beyond mere compliance to innovation. Banks thinking beyond mandates include Caixa, BBVA, Nordea and HSBC.
“Banks have something everybody envies: very sticky customers,” says Lodge. “They’ve also got all this data on consumers’ spending habits and their average balances in and out. Using that data gives them a pretty good insight into every life stage and potential priorities.”
Not every bank stands to benefit equally, however, Lodge argues. “The reality is that the big banks now have insight on the customer’s entire life,” Lodge says, “and they have the budget and the skill sets to really do something with it.”