Global Open Banking – What is Fuelling the Phenomenon?
Although “open banking” has a simple enough phrase construction, its meaning is still open for interpretation. Rather like new phrases I learned in Cape Town like “just now”, “now now” or “load shedding”, the combination of words don’t necessarily mean what you think they do.
Nevertheless, open banking is now a widely adopted global phenomenon. It is based on a pretty universally understood principle of allowing customers to access their data and services at their banks via Third-Party Provider (TPP) companies. This open access is subject to appropriate consent from customers, and dependent on appropriate certification, registration and behaviour of those TPPs within the rules of a wide ecosystem of financial services providers. Such rules will depend on local regulators, or get defined mutually within member-based schemes.
These rules and definitions are sometimes cited as unwelcome, new regulations. Particularly by long-established banks who already face unenviable compliance workloads, and may be forgiven for seeking better clarity on their definitions and obligations within open banking.
But waiting for such clarity may be missing the spirit of open banking. The drive seems to be driven more by policy-makers seeking better economic outcomes rather than regulators expanding their compliance regimes. The most common fuel around the world has been gentle “policy nudge” rather than more combustible regulatory enforcement.
A unifying global trend across open banking has been the desire by governments for modernisation of financial services to keep pace with inevitable new demand and new behaviours in populations and businesses that work in digital and mobile first economies.
This spirit of seeking better outcomes and outputs provides opportunities not just for new challengers, fintechs and TPPs. It’s an opportunity for all players in Financial Services, including long-established banks.
International Twists on Open Banking
Several speakers at the Cape Town Open Payments Conference discussed varying forms of open banking implementation around the world, categorised typically by highly regulated at one end of the scale, to regulation-free, market-driven at the other. I see extra nuances at the regulated end of that spectrum, based on the degree of proscribed and prescribed guidelines provided by policy makers and regulators.
For many observers, Europe represents an extreme edge of regulated open banking, thanks to the creation of the revised Payments Services Directive (PSD2) and its associated regulatory standards which were implemented in law by each of the European Union countries. The aims of PSD2 were to create a more competitive, integrated market for electronic payments within the EU, leading to secure, effective and modern services for EU payments systems users. Whilst being highly proscriptive in its definitions of banks and TPPs, the resulting implementation of PSD2 was never particularly prescriptive. So technical standards, protocols and rulebooks were left to markets to decide, resulting in wide interpretations on how to proceed.
By contrast, the UK model was both proscriptive and prescriptive. The Competition and Markets Authority (CMA) imposed an obligation on nine of the largest Financial Institutions to implement a UK open banking scheme, leading to very specific standards, including versioned API definitions. This led to a homogeneous, ordered and competitive marketplace for new market entrants – typically TPPs that took advantage of the standard connectivity options.
The difference in success between UK and EU seems to be stark – by the end of 2020 the UK had nearly 200 registered TPPs whereas the most successful of the EU countries, Germany, had registered less than 40. But the narrative of success needs a fair dose of salt to be properly digested. Debate rages now in the UK about whether UK open banking has had any success whatsoever. This sounds harsh until it is measured against the original purpose of the UK CMA regulator, which was to create more competition, which would be measured by higher levels of account switching (i.e. users closing down one bank account and setting up another at a different bank instead). Despite the large number of new TPP-based services, and a healthy number of brand new banks created over the last decade, the needle on the account switching dial in the UK has barely moved.
And despite the apparent alignment on standard APIs for payment initiation and data access in the UK, the customer experience is far from homogeneous. Processes for consent, approval and authentication are varied and confusing. Much work still needs to be done to create customer-centric applications, where consumers are able to manage their own preferred interactions via some form of personalised digital agent. Most banks understandably still control their own proprietary authentication systems, requiring customers to exit a TPP app to login with the bank before resuming in the TPP app. This is not exactly an ideal user experience.
So looking towards the UK and Europe for open banking travel guidance may not be the best route to success. Perhaps other markets have learned to avoid the mistakes of the pioneers of open banking.
India and China are not necessarily known as open banking markets. But the outcome of central intervention to introduce new market players to work alongside the traditional banking sector seems to have had spectacular success in both. If success is measured in terms of greater financial inclusion, the displacement of physical cash in favour of digital payments, or the creation of new credit markets, the facilitative approach to open banking seems to have worked well in India and in China.
The US, which is also not seen as an open banking market, may also provide guidance. This market has traditionally had a very hands-off regulatory environment to retail finance, and established banks might have been forgiven for doing very little to enable access to TPPs. But such lack of activity has been a double-edged sword, allowing largely unregulated TPPs, data aggregators and screen scrapers to create a vibrant market for value-added services.
Regulators like the Consumer Financial Protection Bureau (CFPB) have belatedly taken an interest in this area, and new US government orders (similar to the UK CMA actions) are looming too. So it is no surprise that players across the industry have started to collaborate on initiatives like Financial Data Exchange (FDX) to create data sharing standards to secure and streamline the experience of open access.
These disparate markets may have varied economies and different socio-political states, but there have been some common themes, objectives and drivers for global open banking which are likely to chart the future of banking in South Africa. These forces include policy makers and regulators “nudging” markets towards more collaborative and interoperable services to facilitate more economic activity and wider inclusion.
But perhaps a greater pressure is coming bottom-up from businesses, consumers and citizens, where the demands of living in the digital era is creating a market for convenient, impactful and safe assistance. This market is not limited to banking and payments though – the need for digital agency has seen the boundaries of open banking extend into adjacent fields of identity management, verification of credentials, trust underwriting, privacy and the management of personal data. Initiatives such as the Australian Consumer Data Right (CDR) act point the way to a place beyond open banking where it is not just established banks that feel the regulatory nudge towards openness. CDR rebalances the asymmetry of banks being forced to open data, whilst non-banks (particularly big tech companies) embark on ventures based on sneaky data-hoarding.
Where do you see open banking in South Africa heading? Our next blog will explore South Africa’s unique landscape and challenges. Follow us on LinkedIn for upcoming blogs or contact us here with any questions.
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