Barriers to Open Banking

Akber Jaffer, Chief Commercial Officer, Marketplaces and TEMS, Finastra

Open Banking represents a powerful confluence of technology and regulation to power the future of financial services. Accordingly, there’s a strong appetite to build on its potential. 

Finastra research based on over 750 banks and financial institutions worldwide (carried out prior to the COVID-19 outbreak) found that 86% of those surveyed want to use open APIs to enable Open Banking in the next 12 months. Over half of those surveyed considered Open Banking ‘a must have’, with 49% saying it would have the strongest impact on corporate banking. 

Yet with regulation needing to keep pace with changing technology and R&D investment required in a testing economic environment, will Open Banking realize its full potential?

The need for an open mind 

For collaborative financial ecosystems to be scaled up, we must negate restrictive thinking. As the economy contracts, it might be tempting to revert to type, to position traditional financial institutions in one silo and fintechs in another, retaining a state of competition, rather than collaboration between the two. 

This thinking manifests itself in a high street bank offering a digital representation of its physical operation, or when a fintech only aspires to offer a better customer experience to millennials. In the front office this might be evident with payments and account aggregation solutions for mobile banking apps.  

The problem here is that a digitized bank is not a digital bank. Providing a digital front-office does little for customer experience if the back-office isn’t functioning in the same way. That’s why fintech collaboration in the back office is so important, delivering faster system upgrades. Front and back office integration can be improved when banks and fintechs collaborate to supply a more integrated and robust customer experience. 

This happens through an ecosystem approach in which open platforms enable third parties to collaborate, co-create and deploy sophisticated financial services apps across the industry. This is the catalyst needed to help deliver the full benefits of Open Banking. 

Regulation – a barrier or a bonus? 

Almost half of those audited in the Finastra study believe regulation is holding back innovation. 48% stated that ‘regulation is too tight’, 10% more than in 2019. 

The same percentage (48%) believe there is ‘not enough government or industry support to foster innovation’, particularly so in Hong Kong (62%) and Singapore (49%), which is surprising given the competition between the two cities to lead fintech innovation. 

Tellingly, the study found that 83% of the financial institutions surveyed believe regulations regarding fintech innovation should be harmonized between different geographies.

Yet there are positive signs. This month, the New York State Department of Financial Services (NYDFS) signed a memorandum of understanding with the Autorité de Contrôle Prudentiel et de Résolution in France, to build a closer fintech relationship between the two jurisdictions. 

The first US regulator to reach this level of agreement with its French counterparts, the NYDFS memorandum will remove barriers to firms wanting to operate between the two markets, supporting cross-border fintech developments. 

And just recently, the Saudi Arabian Monetary Authority (SAMA) used blockchain technology to deposit liquidity into its banking sector. This shows that an innovative regulator can be willing to experiment with emerging technology. 

And if regulation can evolve, can R&D development follow suit?  

R&D and legacy technology 

Our research also found that the cost of fintech development or R&D is of concern in the USA, UAE and APAC regions. In the USA, 55% noted concern; Hong Kong: 55%; Singapore: 51%; and 46% in the UAE. Add to the equation the turbulent economic conditions we find ourselves in and reports of dwindling fintech investment, and it’s a challenging picture. 

Despite these conditions, Open Banking will require ongoing investment. However a survey by Tink noted that legacy IT is seen as the top inhibitor of investment in Open Banking by one in three (33%) of its respondents. This correlates with our findings in which over one in five of respondents said, ‘our current IT systems (are) no longer fit for purpose.’

R&D aided by a platform approach must allow legacy systems to upgrade and interact with new technology. This will be particularly important when the ISO 20022 payments messaging standard eventually rolls out. This is when synchronized digital messaging processes will be interacting with analogue systems existing in many traditional institutions. A major challenge with ISO 20022 is that banks must overhaul their business operations to adapt to asynchronous messaging. In this scenario, platform-based partnerships with fintechs will be essential. 

As Open Banking develops new technologies and third-party integration across the payments ecosystem, regulations will require further reform to ensure operational resilience, as is being explored by The European Securities and Markets Authority (ESMA) and Germany’s Federal Financial Supervisory Authority. 

It’s all in the balance

According to data from Innovate Finance, the UK fintech sector attracted record VC investment of $4.9 billion in 2019, surpassing the $3.6 billion from 2018. This is reported to fall in the short term given the pandemic, but if it can, the industry must continue to invest in R&D and encourage regulation to encourage innovation.  

Overall, 41% of global banks in the Finastra survey say that they are ‘still in the early stages of adoption’, so it’s difficult to measure the impact of Open Banking on their business so far. Yet the study also noted that improvements in customer experience are accelerating API adoption. This was particularly the case in the US (45%), Hong Kong (42%) and France (36%). 

Constant fine-tuning of regulations to keep up with the rapid pace of technological change will be important, as will ongoing investment to upgrade and replace legacy systems.

Furthermore, the platform model and collaboration are now critical in ensuring long-term survival by bringing together multiple suppliers, technologies and advanced analytics to accelerate innovation. These processes must be in place if Open Banking is to realise its potential. 

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Author: Laimis Bilys

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