Open Banking: A Shared Opportunity

Beyond Traditional Banking - Open Banking: A Shared Opportunity

Digital transformation is an imperative for businesses in today’s economy and data has become one of the most valuable assets in this new era – the so-called Fourth Industrial Revolution.

Open banking, which is based on data sharing, goes beyond traditional banking and is poised to be the next wave of digital transformation in the financial sector.

What is open banking?

At its core, open banking relies on application programming interfaces (APIs) – the bridge that makes it possible for two systems to talk to each other and share data – to give consumers the right and ability to port and share their financial data with third-party providers and other financial institutions. This will put banks around the world in competition (and cooperation) with a range of new players, from fintech startups to technology companies.

Notably, open banking is increasingly supported by regulators across Asia and the rest of the world, either through mandatory regimes or overtly supportive environments. This means that open banking is unlikely to be a short-term trend, but rather an ongoing development that financial institutions will need to address – or, better, embrace.

In our new report, co-authored with Microsoft and Accenture, “Open Banking: A Shared Opportunity”, we explore the various drivers behind open banking in Asia and the issues financial institutions and regulators will have to address to ensure that all participants – financial institutions, third-party providers, and consumers alike – can reap the benefits of open banking.

The report also includes recommendations for the industry and regulators towards increased successful adoption of open banking.


Market drivers: Technology, demand and competition

Open banking is likely to rapidly gain momentum, driven by a number of factors:

  • Data-centric technology advances
    Digital transformation is disrupting the financial services industry, and data has proliferated and become more valuable. Advancements in API technology are making it easier and safer to share data.
  • Changes in market demand and customer expectations
    The upsurge in mobile and social technologies means consumers are more powerful than ever. Their always-connected status and ability to find information in seconds puts them in control of their experience.
  • Competitive pressures
    The changes in consumer behaviour contribute to the rise of new, more agile financial services providers, putting competitive pressure on incumbent banks. The regulators are also welcoming the competition.

Looking forward: The future of open banking in Asia

Open banking presents an opportunity for banks to reinvent themselves and find valuable roles in the new ecosystem. It will inevitably change the financial landscape, generating clear winners and clear losers.

Banks that thrive will be those that embrace open banking and modernize their business models, opening up to third parties and not relying on their incumbent status. Those that focus on simply harvesting or protecting their current business, on the other hand, are likely to face rapidly increasing erosion.


Diverse regulatory approaches to open banking

While the regulatory approaches and underlying policy objectives may vary by jurisdiction, the direction of travel is towards encouraging adoption of open banking. The report discusses the approaches of selected Asian jurisdictions, as compared to the UK, European Union and the U.S.

  • Mandatory jurisdictions: where open banking has been mandated by the regulator(s), including in phased deployments based on different categories of financial institutions, products or customers. These include European Union, United Kingdom, Australia, Hong Kong.
  • Supportive jurisdictions: where clear shifts towards open banking are occurring and regulators openly encourage, but do not mandate, open banking. These include Singapore, Japan, Malaysia, The United States, Taiwan, South Korea, India, New Zealand.
  • Neutral jurisdictions: where there have been little to no regulatory statements on open banking, but there has been some industry-led adoption and experimentation. These include China, Indonesia, Sri Lanka.

Paving the way for successful adoption of open banking

We looked at the uptake of open banking to date, the technology, demand, competition, and regulatory and policy drivers behind it as well as the various challenges and opportunities to derive the following recommendations for regulators and financial institutions to ensure the successful future adoption of open banking.

Financial institutions
  • Take a phased approach, starting by gradually replacing legacy infrastructure and ensuring technical scalability to support open banking
  • Test-run open banking through pilots or sandboxes
  • Effect cultural change: consider establishing a team focused on digital transformation
  • Be transparent with customers about security and privacy measures
  • Leverage your competitive advantages: customer trust and experience with regulatory compliance
  • Consider new partnerships and collaborations
  • Identify the value proposition for your business and seize the opportunity
  • Provide clarity regarding the regulatory stance towards open banking
  • Ensure financial institutions do not see open banking as a mere compliance exercise or something that increases their compliance burden Avoid overly prescriptive mandates, which could become outdated as technology advances and which could limit innovation
  • Consider what entity will oversee open banking and take a coordinated approach across government
  • Stay in step with industry readiness Use pilots and sandboxes to develop the open banking regulatory approach with industry
  • Consider the scope of data covered, reciprocity, and standardization
  • Avoid restrictions on cross-border data flows Leverage existing regulatory frameworks
  • Establish a framework for third party provider accountability
  • Work with other regulators towards greater harmonization and avoidance of conflicting compliance obligations

Open banking is poised to be the next wave of digital transformation in the financial sector. It has extra momentum because regulators around the world generally support it and, in some countries, even mandate it. In fact, one might say regulators are ahead of the industry in this regard in certain jurisdictions. Because of this, open banking is unlikely to be a short-lived trend.

Joy Fuyuno, Regional Snr Counsel, Digital Transformation & Privacy Asia

Joy Fuyuno
peiying chua
“The accelerating pace of technological change is possibly the most innovative and potentially most disruptive force in the financial services ecosystem today. Open banking looks to be the next wave, driven by regulatory support and customer behaviour. We are delighted to partner with Microsoft and Accenture to consider the shared opportunity which open banking presents, and the clear need for digitisation and cultural change while remaining compliant with regulatory requirements.”

Peiying Chua, Financial Regulation Partner

x The world in 2022