After a comparatively slow start to open banking adoption compared with Europe, Asia is not only seeing the benefits but looking to take its capabilities to the next level. 

DBS

Asia-Pacific is widely seen as leading the way in banking technology, but one area where the region appears to be lagging behind is open banking. In Europe, for example, allowing third parties access to bank account information, and giving customers greater control of their data, has transformed the way in which customers, banks and fintechs interact. In Asia however, the pace of change has been slow. 

Open banking arrived in Europe with the implementation of the second Payment Services Directive (PSD2) in January 2018. Developed by the European Commission, the new rules were enforced across all EU and European Economic Area member countries. PSD2 enabled third parties to access bank data, with the consent of the customer. This was coupled with the arrival of the EU’s General Data Protection Regulation (GDPR), which came into force in May 2018. GDPR set out strict rules for how consumers can control the use of their own data. Given that the standards were homogenous across the whole of Europe, these moves profoundly altered how banking is conducted across Europe. 

Sudhir Pai, chief technology and innovation officer at Capgemini Financial Services, says Asia’s banking sector has been taking notice of what has been happening in Europe. “Asia’s regulators are looking at what has been done there, and while they don’t want to take a lift-and-copy approach, they are looking at what went well and are trying to replicate it,” he adds. Banks in Asia have embraced various digital initiatives on the back of exponential growth in the digital and cashless economy, powered by mobile and payments penetration, though this has not been referred to as open banking.

Payment opening

The most notable development in Asia so far has been the rise of mobile payments which have used open application programming interfaces (APIs), the technology that underpins open banking. 

“The open API framework is flourishing in China due to tech giants such as Ant Financial and Tencent using open APIs to create an ecosystem around their payment applications,” says Gavin Gunning, senior director at S&P Global Ratings. 

Even so, the ability of these companies to connect to banks has been limited in some locations due to the banking infrastructure. “Adopting open banking is not a straightforward process for many banks in the region as they still run on legacy platforms that don’t use APIs,” says Arun Kini, vice-president and regional head for Asia-Pacific at bank technology provider SunTec. “We are seeing banks embarking on transformation [journeys] to overcome the problems.” 

Regulators catch up

Regulators have been taking steps to encourage innovation similar to what has happened in Europe. Australia, Japan and South Korea have all made regulatory decisions on open banking adoption. Hong Kong has written adoption into law, but is yet to give a timeline on account and payment initiation services. 

The arrival of digital banking licences in the region is also part of the revolution, as regulators fear falling behind. “Many regulators are reacting to the competition,” says Mr Pai. “When the Hong Kong Monetary Authority [HKMA] announced digital banking licences, the Monetary Authority of Singapore [MAS] followed soon after. We expect to see this happen with open banking regulation too.” 

Ho Kok Yong, financial services industry leader at Deloitte South-east Asia, adds: “Some regulators in the region have taken a sandbox-type approach to collaboration between banks, fintechs and regulators. In July 2018, the HKMA published an open banking API framework developed in collaboration with industry stakeholders, which is already gaining traction.” 

There has been a strong response to HKMA’s framework, with 20 retail banks in Hong Kong launching more than 500 open APIs since the start of 2019. Furthermore, the MAS API Playbook has logged 121 transactional APIs, which carry sensitive customer information, and 192 informational APIs, which contain non-sensitive data.  

Among the earliest adopters of open banking in Singapore was DBS. The bank now boasts more than 500 APIs with 400 partners, including the likes of AIG and Gojek. The developments have found practical solutions in the corporate space, with rubber trader Halcyon Agri using DBS’s APIs to connect its farmers, rubber producers and tyre manufactures, who can interact and follow pricing and supply information in real time. 

The South Korean model 

Taking a holistic approach to open banking has worked effectively in accelerating adoption. South Korea’s Financial Services Commission (FSC) took the decision to include all players in the ecosystem from the conception of its open banking regulation. The FSC announced in February 2019 it was to establish an innovative infrastructure for the payment sector. 

A spokesperson for the FSC explains that the decision was made because under the previous system banks could only provide services to their own customers. “There were growing concerns about South Korea falling behind in a recent move toward open innovation. Fintech firms also demanded a more level playing field. Financial consumers were experiencing inconvenience as they had to download multiple banking apps to access services from individual banks,” the spokesperson says. 

Over the following eight months, working with the banking sector, fintechs and the Korea Financial Telecommunications and Clearings Institute, the FSC created its open banking system. The pilot was launched in October 2019, and became fully operational in December 2019. 

The rate of adoption has been rapid. As of February 2020, more than 17.1 million people had signed up, with about 30.2 million accounts registered. All 18 banks involved have opened up their customer account information, and 17 banks and 33 fintechs are now providing services using the account information. 

Where fintechs fit 

Involving all parties from the outset does not necessarily make them happy bedfellows, however. Banks have been worried about the threat of increased competition from fintechs, which has made them resistant to change. 

“The elephant in the room globally has been how to create an open banking framework that balances the need for innovation, cybersecurity and information privacy, but does not unfairly favour either traditional industry incumbents or new economy-type players,” says Raof Latiff, group head of digital, institutional banking, at DBS. 

Deloitte’s Mr Ho adds: “Opening up bank data carries an inherent threat of commoditisation for incumbent banks as it enables third parties to own the primary customer relationship. However, incumbents are in a position to enhance customer loyalty and engagement by harnessing this additional data to provide a more personalised customer experience and develop new propositions.” 

The FSC spokesperson believes that allowing fintechs access to their data may ultimately be beneficial to traditional banks. “It might be a difficult decision for banks to open up their payment networks and data to fintech firms, as the new entrants in payment and money transfer services could erode banks’ customer base and profits,” the spokesperson says. “However, banks should see the adoption of open banking as a new opportunity for customer acquisition rather than a threat to their existing customer base. As big techs are making inroads into financial services with their own platforms, banks are seeking a transition to banking as a platform through open banking.” 

An indirect benefit to banks could be receiving a higher credit rating in the future for open banking adoption. “In the fullness of time, new financial technologies could have a profound effect on banking,” says S&P’s Mr Gunning. “A case in point in the digital banking space is WeBank, which over the course of the past five years has transitioned from China’s first digital-only bank into a BBB category financial institution.” 

Mismatched approach

Part of the reason for the fintechs’ success is that they have been carving out spaces in areas neglected by the banks. “New entrants to the banking space tend to focus on underserved segments,” says Vinayak HV, senior partner at the Singapore office of McKinsey. “For example, the Grab-Singtel licence application in Singapore is likely to focus on underserved consumers and merchants.” 

Fintechs face varying levels of maturity in banking ecosystems across the region, which affects what is being implemented across countries. 

“Fintechs in India use IndiaStack API technology for payment APIs and biometric identity. In Singapore, we have seen fintechs in wealth management and the small and medium-sized enterprise space capitalising on MAS’s sandbox. Similarly, we have seen huge uptake on artificial intelligence start-ups in China, on the back of ecommerce growth,” says Capgemini’s Mr Pai. 

Greater levels of collaboration can progress development beyond retail payments into the corporate space. Mr Latiff says: “Companies across industries such as insurance, commodities, transport and logistics have been opening up their business systems through APIs, allowing their business partners to integrate their bank accounts, accounting platforms and enterprise resource planning to streamline payments and collections, and provide real-time transparency of transactions.” 

Open banking to open data 

As companies explore the full extent of what open APIs can do for their business, they are moving further away from pure banking and into areas that respond to specific needs of their home markets. 

“It is not just banking that is changing,” says Mr Pai. “Parts of Asia are looking at wealth, health and insurance, driven by economic and environmental triggers. Financial inclusion is a huge theme for India and other south-east Asian countries, whereas Royal Commission recommendations and subsequent climate change events might trigger new, innovative ideas in Australia towards compliance and the insurance space. We also have seen Japan’s interest in opening up data for life insurance and in the healthtech space to address ageing population needs.” 

Beyond this, Mr Pai believes the next phase will be to find ways to create value-driven opportunities responding to customer behaviour. “Through gamification, companies could reward sustainable tourism choices,” he says. “Banks and insurance companies are also looking at how they can reward customers through the bundling of services.” 

There is the risk of being over-ambitious, however. “Australia has taken a wider approach, seeing it as an adoption of open data, not just open banking,” says Marcus Hughes, head of strategic business development at US-based Bottomline Technologies. “The Consumer Data Right will include not only bank and card accounts, mortgages, loans and insurance, but will also extend to the energy and telecom sectors, to help consumers get the most competitive service. It does not, however, include payments, as this will be managed by the New Payments Platform, the real-time payments system. There is also a requirement for reciprocity. Banks have to give access to any fintechs that request data on behalf of the consumer.”  

But this has hit stumbling blocks. Australia had been due to implement open banking regulation in February 2020, but the Australian Competition and Consumer Commission announced it would be pushing security and privacy of data. Instead, the first wave, covering cards and deposit accounts, will be implemented from July 2020. The second, relating to mortgages and complicated products such as joint accounts and direct debits, will follow from November 2020. 

Guaranteed security

Whether the changes are mandated or not, the rules of each jurisdiction are playing a role in how open banking is expanding across the Asia-Pacific region. 

With strict regulatory mandates, Mr Ho says the development of open banking could make the financial services industry even more innovative and dynamic. However, without regulatory oversight, there could be challenges for customers. 

He believes there is a risk of data protection and security being neglected, and suggests authentication systems could be the answer to ensure the veracity of data for both the consumers and the banks. “It is for this reason that Europe’s PSD2 insists that banks deploy common Strong Customer Authentication standards,” adds Mr Ho. “However, in Asia authentication tools are, as of now, being provided through collaborative industry frameworks or sandbox development portals. Stronger cybersecurity measures are needed in the region.” 

Opening up the payments network is something South Korea’s FSC has been monitoring, aware that incidents could undermine the credibility of the financial industry as a whole. To counter this, a network of organsations are working together. The Korea Financial Telecommunications and Clearings Institute has a 24-hour fraud detection system to monitor transactions in real time. South Korea’s Financial Security Institute conducts security checks on fintech firms when they apply for open banking.

Despite the developments, getting to a place where open banking in Asia can replicate the success in Europe may not be possible. While most of the APIs implemented are the same standard as used in the UK, local restrictions may prevent transactions across borders. 

“Developing cross-border business in Asia raises issues around the regulation in individual countries,” says Mr Pai. “India’s data protection considerations with data localisation policies is one such example.” 

While Asia’s open banking revolution may be developing with greater depth and breadth than in Europe, the risk is that it may be confined to each country.  

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