Lowering the final barriers to open banking innovation

• Levelling the play field for new and innovative market entrants
• Setting the standards to promote transparency and clarity to sustain growth
• Asia Pacific is missing pan regional standards for open banking practices

At its core, open banking is based around the philosophy that two heads are better than one. Collaboration breeds innovation and partnership and cooperation with other service providers can build a more integrated and, therefore, seamless customer experience. It has the power to transform the delivery of financial services as we know it today.

Uptake in open banking practices requires entities to subscribe to this philosophy which, for many, necessitates a wholesale cultural change within their organisation. Such a change does not always come easily – especially as subscribing to open banking principles can involve collaborating with would-be competitors. But banks are increasingly seeing the benefits of leveraging partnerships with peers, technology providers, and even early-stage fintechs to build a better view of their clients in order to deliver more efficient and personalised products and services.

In the Asia Pacific region, this cultural shift is already in full flow – and arguably ahead of many other regions even those where open banking practices are more established. In Europe, for instance, ecosystems where a bank is currently more than a commodity provider is a scarcity. But in regions such as Asia and Latin America, this transformation is already happening. Ecosystems have been created for small and medium size enterprises (SMEs) and even for corporates integrating around 60 fintechs – something which we have not yet seen on such a scale in Europe despite the region being arguably further along in its open banking journey. The Asia Pacific region is bursting with potential both from an open banking and a general banking perspective. Singapore and Hong Kong both have a full API repository, and Australia, too, is a great proponent of open banking.

Levelling the playing field

But equally key to realising the open banking vision, is creating an environment in which such practices can be truly ‘open’.

In many ways, technology is succeeding at this. It is democratising banking so that new and innovative market entrants can play a contributory role. RESTful application programming interface (API) is an architectural style for an API interface that uses hypertext transfer protocol (HTTP) requests for access to and use data, for example, was specifically conceived to make API definitions understandable by all including fledgling start-ups with limited banking experience that nonetheless have useful skills or technologies to contribute to the ecosystem. This has been a game-changer in the technology market as the field has been opened to third parties wishing to develop API solutions all without the need for pre-established banking client relationships.

Standards are key to sustainable growth

But such progress is less meaningful unless supported by standardised frameworks that promote transparency and clarity.  In this sense, robust regulatory frameworks are key to supporting the proliferation and uptake of open banking practices and to enabling new market participants and technology providers to join the ecosystem and contribute their unique strengths.

Take Europe, for instance, where the relatively promising uptake of open banking solutions has been underpinned by established standards and regulatory mechanisms. The introduction of the payment services directive 2 (PSD2), a region-wide regulatory framework to support the transfer of payments within the European Economic Area, was the start of formalising frameworks for open banking in Europe.

Even though the PSD2’s scope was limited to a small set of payments and accounts services, it is rightly viewed by many as just the beginning and preparing the ground for initiatives with a wider scope. And other initiatives are gradually forthcoming. The Berlin Group, the working unit behind the introduction of the PSD2 implementation standard consisting of almost 40 banks, associations and payment service providers is now working on a much larger standardised framework that will cover, inter alia, loans and securities.

A key benefit of better-defined frameworks is the greater structure and clarity they offer during the sandpit phase of innovation. Indeed, the first question on any project will not be about the content of the project but rather about the API design. So, if the need for this question can be removed, as it has been in Europe, projects can progress much faster.

Establishing Asia Pacific standards

Yet such pan-regional standardisation is still to emerge in the Asia Pacific region, a missing link that hinders the proliferation of open banking practices there. Standardisation in regulatory frameworks would provide the security and clarity to make open banking accessible to all promoting sustainable growth in such practices. 

The recent granting of digital banking licences by the Monetary Authority of Singapore (MAS) to four new digital bank applicants is indicative of how quickly the market is evolving across the region and demonstrates clear appetite for progress. But such rapid change brings with it the need for standardised regulation to ensure that growth is controlled and does not compromise on security priorities. Indeed, the knowledge and experience that long established financial institutions have developed over centuries cannot be easily replicated, yet is essential in such a highly regulated industry.

As with any nascent trend, no doubt, regulatory standardisation will catch up with the market’s evolution in the Asia Pacific region. There is certainly enough momentum to warrant focus in this area. Open banking is visibly changing the face of financial services as providers become increasingly aware of the concept’s possible role as a conduit to business transformation. And the COVID-19 pandemic has also only strengthened the case for such developments as consumers turned to online platforms to manage their finances and therefore see greater value in usability and seamless access. While the consumer benefit is obvious, the benefits to banks should also not be underestimated. Open banking practices encourage peer-to-peer learning, connectivity between systems and territories. It can extend the reach for financial institutions across both geographical and industry boundaries to make their products relevant for, and more accessible to, a broader audience.

Christoph Berentzen is the cluster lead for API banking of Commerzbank, the second largest bank in Germany by asset size.