Over the past few years, Open Banking and FinTech are developing solutions for customers, to transform the way of interaction among them. Every provider uses open banking to offer products and services that must be regulated by the financial conduct authority (FCA) or European equivalent.
Europe might reasonably claim to be the origin of Open Banking - after all, PSD2 (Payment Services Directive) and the UK's Open Banking Standard established open banking. But, if you look around now, open banking initiatives are rising everywhere. It is not just a matter of replicating the European approach elsewhere. Jurisdictions adapt their approaches to Open Banking, reflect their markets and policy objectives, and develop cross-industry approaches beyond financial services. FinTech companies recognized the gap within the banking sector and have started leveraging advanced analytics, consumer data, and digital technology to fundamentally revolutionize the industry.
Open Banking Approaches Outside the EU
There are several Open Banking initiatives. They cross several dimensions that include implementation timelines, the type of institutions, third parties, the range of products and services. They all fall significantly into one of two categories:
Many countries like India, Singapore, South Korea, and Japan do not currently have formal or compulsory Open Banking regimes. But policymakers are offering a range of measures to promote and stimulate the take-up of data sharing frameworks in the banking sector.
- The US has picked a market-led approach. They did without any material government initiatives to support the development of Open Banking products and services.
- In Singapore, MAS (Monetary Authority of Singapore) and The Association of Banks have published an API Playbook to support communication and data exchange between FinTechs and banks.
- In Japan, the FSA (Financial Services Agency) has established an authorisation process for Trans-Pacific Partnerships (TPPs), and introduced an obligation for banks to publish their Open APIs policies. They also encouraged banks to contract with at least one TPP by 2020.
Outside the EU, two major jurisdictions have chosen a regulatory-driven approach:
Australia and Hong Kong.
Australia introduced reciprocity in the Open Banking review, which formed the basis for the CDR. The review noted that a system in which all eligible entities participate fully as both data recipients and holders would be more dynamic and vibrant. Now the CDR and the review support the principle that an authorized data recipient in a designated sector should also be compelled to provide equivalent data.
- In 2018, the Hong Kong Monetary Authority issued an Open API Framework. They set a four-phase approach for banks to implement Open APIs that starts with information sharing on products and services and ends with sharing transactional information and payments initiation services. Contrary to the EU approach, however, they will restrict access to those TPPs with which they choose to collaborate, while banks will be required to develop APIs.
- As we all know, Australia stands out for its scale of ambition and innovative approach. Similar to other Open Banking initiatives, the CDR (Consumer Data Right Act), which is currently being finalized, will permit users to share their data with authorized third parties they opt for. However, the primary difference is that the CDR is a data policy initiative and not a financial services one. CDR is the first Open Banking legislation to introduce the concept of reciprocity. While it will apply to banks first, afterwards, the CDR will apply to the energy and telecommunication sectors, and ultimately, CDR could be applied to any sector.
Open Banking On The Rise
There are many trends that have enabled the rapid shift and acceptance of open banking in the FinTech space. These trends include:
1. Evolving Customer Expectations
The Amazon Effect has drastically changed users' expectations regarding speed, convenience, and accessibility. The ongoing digitization of all industries, especially FinTech, has only been increased by the existing COVID-19 environment. The Amazon Effect is the disruption to conventional physical retail locations caused by the increase in online shopping.
Amazon Effect means the impact created by the digital marketplace or online eCommerce on the traditional retailers business model resulting from the change in users' expectations, shopping patterns, and the industry's competitive panorama.
2. Prevalence of FinTechs
COVID-19 has been very damaging for many businesses, especially for small companies and their workers. Still, tragedy is excellent at uncovering opportunity, and in this scenario, the opportunity lies mostly in the FinTech industry.
Therefore, Technology companies that want to simplify and provide greater transparency in financial services are constantly emerging. For providing all these leverages in FinTech app development is very necessary. Best example for this is Robinhood’s remarkable growth.
3. Shifting Regulatory Environment
The landmark Payment Services Directive (PSD2) legislation in Europe has required banks to share lawful consumer financial data with non-banks. The innovation and competition inspired by this directive have been imitated worldwide.
What Are The Risks for Open Banking?
While open banking benefits and value is evident for all parties in the financial services ecosystem, technology advancements do not come without risks. A recent PEW survey revealed that 70% of U.S. adults believe their personal information is less secure now than five years ago.
Thus, there are some notable and legal concerns around financial privacy and how consumer data is used and monetized. There are also insignificant risks and costs banks will incur due to the increasing ubiquity of open banking. Banks must have the infrastructure and skills to identify partner API vulnerabilities and assure that these third parties are acting in the best interest of their customers.
However, the one thing all can agree on is that open banking has permanently changed the financial services landscape. There are many compelling arguments for personalization and convenience. For both the arguments, open banking can provide threats, security, and data privacy concerns which may not have previously existed without it.
The open banking era shows the value of joining secure infrastructure with buyer trust and privacy. The banking platform empowers your financial institution to modernize your user experience, optimize your growth, and streamline workflows.