Banking: Open banking to spur innovative personal finance services

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 28, 2019 - February 03, 2019.
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Open banking, or the practice of sharing financial information via electronic means in a secure manner, is gaining traction across the world. This is expected to lead to the launch of new personal finance services from as early as 2021, says Ismail Chaib, chief operating officer of Technical Solutions Berlin (TESOBE), the initiator of the Open Bank Project.

Chaib says more than 15 countries are planning to adopt open banking initiatives, especially after the EU implemented its Payment Service Directive (PSD2) in January last year, obligating banks to give third-party providers access to their customers’ account data.

“The trend has spread quickly to Asia. In July, Australia and Hong Kong announced their plans for open banking. Singapore’s regulator has published several guidelines for its banks to implement application programme interfaces (APIs),” says Chaib.

Berlin-based TESOBE provides open source API platforms for banks. It is working with 50 banks around the world, including Santander UK plc and BNP Paribas SA, to explore the possibilities of open banking.

“We launched a financial technology (fintech) competition earlier this year with Santander. It gave about 100 participants, who are developers, the opportunity to see how they could build new applications using the banks’ data and integrate them with the banks’ existing systems,” says Chaib.

He points out that the EU remains the leading region in the implementation of open banking due to the rules and regulations in place. Thus, EU residents can expect to see more services rolled out by banks and fintech start-ups that can help them better manage their wealth.

Bank account aggregators and robo-advisors are two examples of products that can be introduced. These aggregators allow individuals with accounts in several banks to have a one-stop holistic view of their financial status by logging into a website or mobile application.

Banks will be able to provide these services because the bank account data, which is usually held by an individual bank, can be shared across third-party platforms in a secure manner with the consent of the bank’s account holders. This data can then be analysed to produce valuable insights. “These are the low-hanging fruit that banks are expected to pick,” says Chaib.

These services are expected to be introduced more widely in 2021, starting with Europe. But right now, banks in the region are focusing on compliance with rules and regulations such as the PSD2 and General Data Protection Rule (GDPR).

In a nutshell, the GDPR gives EU citizens more control over their personal data, which includes their right to access, correct and erase the data. It also lays out the obligations of various organisations, including banks, when it comes to protecting individuals’ data.

“Banks will only be focusing on compliance in the next 12 months. When things start to stabilise, they will be able to pay more attention to what they are going to do with all the data under the new regulatory environment,” says Chaib.

He adds that open banking is not moving as fast in some countries, including Malaysia. However, the local banking industry would naturally move in the same direction based on what is happening in the EU. That is because it is the interests of regulators and consumers for the industry to become more innovative and efficient.

Chaib says the banking industry has seen very few innovations over the years as a small number of big banks tend to dominate the market. This phenomenon creates an environment of less competition, which leads to lower levels of innovation.

“For instance, four of the biggest banks in Australia own about 90% of the retail banking market. In the UK, four banks own about 85% of the market. The regulators clearly want to see more competition in that space to drive innovation. And one way of doing so is to let them open up the account data to third parties,” he adds.