Biao Hao, Executive Architect, IBM Global Solution Center in Dallas | Bharat Bhushan, CTO, Banking & Financial Markets, IBM Europe
Open Banking is transforming the world of banking, from the way consumers will use banking services, to how it will reorganize and flatten the banking industry, and lower the barriers to entry. In 2015, European Parliament adopted Revised Payments Services Directive (or PSD2 in short), with the intention to increase competition and promote innovation in the payments industry. Since then, PSD2, as a regulation driven approach, has been adopted by regulators in many countries around the world. In countries without regulations, Open Banking is driven mostly by FinTechs and banks, with the desire to provide their customers new or better products and services. Even in countries with regulations, regulators and financial institutions are taking different spins and perspectives on this topic. For example, the UK regulator has defined a very prescriptive standard for the top 9 banks to adopt, while the remaining 5,000 banks in Europe have chosen to follow whatever standards they like, as long as they meet the spirit of the regulation.
These varied approaches in the market often create confusion among regulators and financial institutions. As a global organization that is present in over 90% of financial institutions, IBM can create a unique perspective on the topic and demonstrate what financial institutions can do to comply or compete in this area.
Global Open Banking Landscape, an initiative sponsored by IBM’s Academy of Technology and Industry Academy, has set out to map the current developments and state of adoption of Open Banking around the world. With contributions from more than 80 IBM volunteers across 20 countries and 5 continents, the initiative produced a report (refer to the slide deck below) covering regulatory and industry drivers, regulations and technical standards, use cases, adoption levels by financial institutions and consumers, and advice on how to turn the challenge of Open Banking into an opportunity.
Below are excerpts from the report.
Regulation vs. Market Driven
As illustrated in the diagram below (chart 5 of the slide deck), regions with Open Banking regulations include Australia, Brazil, European Economic Area, India, Japan, and United Kingdom, while market driven countries include Canada, China, New Zealand, Singapore, Sri Lanka, Switzerland, Turkey, United Arab Emirates, and the United States.
Opportunities and Prioritization Matrix
Open Banking use cases, represented as opportunities, are ranked based on complexity, business impact, and customer value as illustrated in the diagram below (chart 6 of the slide deck).
Short summary of select countries: China, India, Singapore, Australia, the United States, and Brazil.
While there are no regulations, Open Banking is widely adopted by FinTechs and large banks to grow their customer base and meet the growing needs of their customers.
- Large banks build their own ecosystems with broad open banking capabilities including consumer and business accounts / lending, payments and settlement, investment and wealth management, foreign currency exchange, rewards, bank information, and more.
- “Super apps” from large FinTechs have a huge customer base (Alipay has 400+M users, and WeChat has 600+M users). Smaller banks leverage these “super apps” to deliver their financial services capabilities.
The banking industry in India has two flavors of Open Banking, Account Aggregators, initiated by Reserve Bank of India, and voluntary adoption by the banking industry and FinTechs.
- In 2016, the Indian banking regulator, Reserve Bank of India (RBI), adopted concepts from Open Banking / PSD2 via a directive for the registration and operations of Account Aggregators (AAs). The AAs, similar to TPPs, facilitate the exchange of customer financial data among banks, FinTechs, and other parties.
- From 2009 to 2010, the Government of India had already started building unique identification (UID — Aadhaar) for India and had made the API available. Subsequently, the Government of India built various APIs, known as the India Stack, for nationwide use. This included Unified Payments Interface (UPI) that unleashed changes in Indian payments, banking and FinTech industries.
Currently, there is no specific data sharing or Open Banking legislation in Singapore. However, the government provides a guideline for Open Banking APIs, which are defined via a publicly available infrastructure.
- In November 2016, the Monetary Authority of Singapore (MAS), in collaboration with the Association of Banks in Singapore (ABS), published a comprehensive roadmap — Finance-as-a-Service: API Playbook. The playbook set out a comprehensive framework that introduced governance, implementation, and use cases and design principles for APIs.
- API Exchange (APIX) is an open-architecture API marketplace and sandbox platform for collaboration between FinTechs and financial institutions in which participants can integrate and test solutions with each other via a cloud-based architecture.
In 2018, the Australian government established the Consumer Data Right (CDR), the legislation to give Australians greater control over their data. Subsequently, in 2019, the Consumer Data Standards (CDS) was defined as the technical standards. Australia has several unique Open Banking features including:
- Customer Experience Guidelines — The regulator has undergone consumer testing and experience guidelines research to provide recommendations to the market surrounding what the Open Banking customer flows and consent experience should look like to ensure that the customer experience across banks is consistent.
- Not Just Banking — The CDR legislation is intended to be applied sector by sector across the whole economy, starting with the banking, energy and telecommunications sectors.
- Exposing Payees and Direct Debits — The intent is to allow for the automation of transferring payees and direct debits from competing banks, effectively alleviating the pain and anxiety surrounding switching banks.
Open Banking in the United States is defined by growing consumer demand without any legislative mandate. Successful apps, such as Mint and YNAB, which both offer a single view of a user’s accounts across multiple financial services providers, have prompted banks to provide access to customer account data using APIs, which provide better performance and security than screen scraping. OFX is a legacy standard that was adopted by many Personal Financial Management (PFM) solutions. Financial Data Exchange (FDX) is a new technical standard gaining traction in the U.S.
- The Financial Data Exchange (FDX) is a non-profit organization dedicated to promoting and enhancing a common interoperable standard and operating framework for sharing consumer financial data.
- FDX is open to all financial institutions and FinTechs, with 94 members as of February 2020.
- FDX counts over 8 million consumers at the beginning of 2020, and is expected to have 12 million consumers by April 2020.
The financial system is dominated by five large traditional banks. The majority of the population is still unbanked, with very limited access to financial products such as loans and personal credit. Those that do have access to credit face the highest interest rates in the world. Banco Central do Brasil (BCB or Bacen) is the financial system regulator. Its main objective is to foster competition among the large banks, and also allow new entrants such as Neo Banks and FinTechs to create opportunities for lower interest rates and more diverse financial products. Bacen first issued a public consultation for feedback in November 2019. In May 2020, Bacen published the regulation with an implementation calendar (detailed below). In the initial stage, only banks classified as tier S1 and S2 (Regulation #4453/2017) have to comply.
- Phase 1 (November 2020): Share information about available products and services and provide access to data about channels, products and services related to checking and savings accounts, and payments and credit.
- Phase 2 (May 2021): Share customer personal information and transactional data (accounts and credit).
- Phase 3 (August 2021): Initiate payments transactions and credit service proposals.
- Phase 4 (October 2021): Provide information about currency exchange, investments, insurance and retirement funds.
We would like to thank Chae An and Dr. Thomas Hager for executive sponsorship, Elisabeth Stahl and Connor Loessl for support, and Rahul Kinger for designing and compiling the report. Special thanks to all the participants for their contributions, especially the team leaders, Alex Cuthbert, Alberto Miyazaki, Alden Chan, James Sanders, Chuan Jun Liao, Jurgen Lang, Tim Allcock, Pal Krogdahl, Rhujuta Kene, Deepak Raghaven, Mikio Kamada, Rika Sugiyama, Guy Perera, James Stephens, Kamran Sheikh, and Sevilay Kurt, for leading the teams that compiled contents for 18 countries.