Lay of the open banking land

Open banking is making waves in the banking and financial services sector and beyond. We delve into open banking’s progress across three key markets — the UK and Europe, the US, and Asia.

Lay of the open banking land

UK and Europe: a hands-on approach

It comes as no surprise that the EU has been a strong supporter of open banking. Pioneering legislation such as the Payment Services Directive (PSD) and revised PSD2 are markers of how open banking has been initiated and received in various markets globally.

The EU has taken a hands-on, regulatory-driven approach. The bloc requires financial institutions (FIs) to enable the permissioned sharing of customer data to third-party service providers via application programming interfaces (APIs). Crucially, the legislation comes with strict data security compliance standards.

While some FIs may have initially pushed back, subsequent uptake — following implementation of PSD2 legislation in 2018 — has proven promising across the UK and Europe. In the UK, COVID-19 has impacted this surge through consumer-driven behavior.

According to Business Insider, the number of UK bank customers who have connected their accounts to SaaS tools and other third-party providers has more than doubled — surging from one million to over 2.5 million people. This is like due to consumers wanting better visibility and control of their finances through cashflow tracking and money management apps now more than ever.

While the UK served as a trailblazer, the rest of Europe is following suit after a slower start. Many European countries have only recently adopted open banking, prompted in part by new fintech launches and advancements.

Fintechs have also upped their game. One great example is Revolut, a money management and payments app that helped bring open banking to Germany, Italy, Ireland, and France. In addition, to fintech advancement, more secure API providers (the link between customer data, banks, and requesters) have aided the European uptake of open banking. For example, Tink, an API provider enabling access to financial data from across Europe, has been central to the rollout of open banking across the UK and the wider continent notes AltFi.

But it’s not just tech companies that are driving open banking ventures. FIs are spending on these imperatives too — and not just for compliance reasons. According to a Tink study, the median spend on open banking in this region falls between €50 to €100 million — and nearly 50% of financial executives indicated their budgets exceed this upper limit. Moreover, about 60% of FIs reported increased spending on open banking initiatives, with an average annual growth rate of spend in this category at 20% to 29%.

It’s clear open banking is here to stay in the UK and Europe and that usage will continue to grow. The future of open banking in this region will likely bring more consumer-centric opportunities as banks, fintechs, and other technology providers work towards innovative advancements.

USA: a hands-off approach

Unlike their counterparts across the Atlantic, the US has opted for a market-driven approach that remains hands-off and non-regulated by the federal government. The reason for this is two-fold. In ‘Open Banking around the world’, Deloitte notes that state-based variances in banking regulations make the creation of overarching policy challenging to create and, ultimately, oversee. In addition, a cultural dislike of excessive bureaucracy impedes the desire for unifying federal laws.

Despite the government’s hands-off approach, FIs in this region are interested in positioning themselves at the forefront of open banking technology. They recognize its potential to differentiate their service offerings, attract new customers, and keep existing ones engaged. Forward-thinking FIs have prioritized strong digital transformation strategies. Many have partnered with fintechs in this space to innovate beyond their spheres of expertise.

An interesting trend that has come to fruition — in part due to the lack of clear government support towards open banking — is screen scraping. Screen scraping involves copying data or information shown on a display (i.e., on a desktop, app, or website) so that it can be used elsewhere.

This extraction can be done manually or through automated scraping tools. So, for example, an online retailer may “scrape” the internet to collect and aggregate information on their competitor’s pricing. Online travel websites are another good example of where the technology is being leveraged. These sites scan the internet for various rates and deals, aggregate those, and display them back to the end user.

Although the technique has been applied across a variety of industries and use cases, screen scraping has been an especially important development for the banking sector. Predominantly for access to customers’ banking data in situations where open APIs or customer permission are unavailable. Such use cases may involve tools such as Yodlee, a data analytics and aggregation platform. Yodlee pulls relevant data across the apps and websites customers access, aggregating the data, and shares it with banks to help them better assess risk.

While screen scraping aids the quick collection of customer information otherwise inaccessible, many FIs are actively shifting away from the technique favoring an ecosystem-based approach. Such an approach involves agreements for API-based data sharing and ultimately fosters more transparency and trust between FIs and their customers.

In addition to wanting to nurture customer relationships, security risks and the amount of time scraping tools may store customer data are two reasons prompting the industry to pivot. Ultimately, APIs are the path forward. They allow banks to share and receive — with permission — the specified information they need (such as account balances or transaction histories), queried only from certain accounts, and in a method by which the customer grants access.

Asia: a market-driven approach

If the UK and Europe’s approach to open banking has been hands-on through regulatory bodies like the CMA and PSD2 respectively. And the US’ hands-off approach has spared the federal government from involvement. Then Asia seems to sit comfortably somewhere in the middle, with varying governmental involvement across the continent.

While the UK and Europe’s regulations compel banks by law to make specific types of customer data available — such as payments and account information — many of Asia’s open banking initiatives don’t stem from obligation. Rather they’re based on an inherent willingness to share data due to commercial motivators and a strong desire for accelerated digital transformation.

One example that illustrates Asia’s rapid adoption of open banking comes from a Forbes finding. Forbes notes that despite regulations, most EU banks still only average four APIs in their product suite. In stark contrast, China is making waves in open banking organically.

Despite a lack of government-driven onus, several banks in the region are rapidly building out the necessary infrastructures needed to support data-sharing with the intentions of shaping innovative customer journeys and behaviors. China’s burgeoning digital ecosystems have seen rapid growth in the last few years, and API development has boomed through the likes of WeChat Pay and Alipay.

Besides China, Singapore deserves an honorable mention. Singapore’s Monetary Authority — in conjunction with the Association of Banks — has published a Taxonomy of APIs. This ‘API playbook’, so to speak, encourages data exchange and communication between banks and fintechs. It currently logs upwards of 238 transactional and 279 informational APIs.

In addition, Singapore scores exceptionally high on the International Data Corporation’s (IDC) Open Banking Readiness Index Scorecard. It ranks high for their open API and data infrastructure maturity, plus for their pace for leveraging APIs in data monetization.

In Hong Kong, an important financial epicenter like Singapore, the Hong Kong Monetary Authority (HKMA) introduced a four-phase open banking regulation in 2018. Since 2019, roughly 20 banks in Hong Kong have released 500+ open APIs for product information, loans, credit cards, and other applications.

While we’d love to go into each country’s Open Banking progress in depth, that would make for quite a bit of reading. So to get a country-by-country play across Asia-Pacific, we suggest checking out Fintech News Singapore’s summary, as well as BBVA’s 5 Open Banking Models in the region.