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Initiatives around the world aim to establish open banking systems which allow account holders to give third party providers (TPPs) of services secure access to their bank accounts. What is the state of play and how should UK fintechs respond?
Open banking describes systems where account holders allow TPPs secure access to their bank and payment accounts through application programming interfaces, or APIs.
This kind of access encourages businesses to develop innovative services for consumers, including credit scoring, AI-powered financial assistants, buy-now-pay-later, and lending offerings.
In the EU, the Revised Payment Services Directive (PSD2) made it compulsory for account providers to allow certain TPPs access to consenting customers' accounts through a system called Access to Account, or XS2A.
In the UK, the Open Banking Implementation Entity (OBIE) was established to implement an open banking framework, under which there are various tools which assist account providers and TPPs in meeting their XS2A obligations. Standardised and open source APIs, security profiles and customer experience guidelines are designed to facilitate the development of services.
In June 2020, OBIE reported that it had 260 registered providers, of which 76 were account providers, and 184 were TPPs. TPPs registered range from financial services veterans, such as AJ Bell, to new contenders like Zeux (an "all-in-one money app" combining payments, banking and investments). To kick off participation, the nine largest banks in the UK, the CMA9, were required to provide access through the framework.
There's no requirement for UK-based account providers (other than the CMA9) and TPPs to sign up to the open banking framework. It's possible to meet the PSD2 requirements through an account provider developing its own API, and allowing authorised TPPs access.
Open Banking Europe (OBE) provides information on compliance with XS2A, expertise, and a directory of TPP and account provider information. It does not provide standardised APIs or other technical services. There are various initiatives, private and public, working to develop and share APIs in Europe.
For example, the Berlin Group, a group of payment services providers from 10 EU countries, has developed a set of standards similar to the UK open banking framework which are available for free. The Berlin-based Open Bank Project provides open source "middleware", allowing TPPs to connect to a number of account providers' APIs.
Mastercard has reported that in Europe, up to 30 June 2020, 361 TPPs have been registered with national competent authorities under PSD2. This represents a 29.4% increase over Q2 of 2020. The COVID-19 pandemic has increased the use of open banking-based digital tools, as customers looked to online alternatives for commerce and money management. The UK remains the leader in Europe, with Germany and Sweden following in the rankings.
The Monetary Authority of Singapore (MAS) has been encouraging banks to develop APIs for some years; however, it has resisted implementing any measures towards standardisation. Instead, it has let the market lead the way, by providing an 'API playbook' – a guide for organisations developing APIs.
MAS is now reportedly looking to implement requirements for open banking implementation, and has convened an industry workgroup for Financial Planning Digital Services. This initiative will seemingly result in a similar system to XS2A and aim to increase data portability through an API framework. The scope of account providers targeted is likely to be wider than under PSD2 and will include insurers and wealth management companies.
Australia's approach to open banking is prescriptive, much like in Europe, but in relation to a wider range of data sources than under PSD2. Since July 2020, the largest four banks in Australia have been required to provide access to consenting customers' data for accredited TPPs on various accounts including savings and current, credit card, and loan accounts.
Under Australia's phased approach, data on other accounts such as business finance, investment loans and retirement savings accounts will also be made available. Banks other than the largest four will need to be ready for open banking by July 2021, with the full gamut of data being available by February 2022.
With such a broad data range being made available, it will be interesting to see what innovative products Australian accredited TPPs will be able to provide in the coming years.
The USA doesn't currently have any regulatory or legislative framework for open banking, and it is likely that any developments in this area will continue to be market-led. The fragmented US regulatory system makes implementation of a legal requirement for access to data, or standardised framework, complex. In March 2020, the Federal Reserve Bank of Boston noted that technology companies such as BBVA and Plaid are leading the charge by developing APIs which allow TPPs to connect to financial institutions.
In the absence of a centralised approach, industry groups are also developing their own frameworks for common open banking standards. The API Standardization Industry Group – a partnership between Accenture and the National Automated Clearing House Association – has launched interoperability standards and open source APIs. However, the lack of regulatory push is likely to continue to delay widespread adoption by established banks of open banking protocols.
The UK's open banking framework is clearly world-leading; however, open banking is on the increase across the world whether it is regulator or industry-led. "Open finance", a broader concept than open banking, is being discussed by UK regulators and industry bodies.
Other countries which require data access, such as Australia, are already providing, or planning to provide, access to a wider range of data than currently prescribed in Europe, which should lead to greater product innovations.
Even in countries where open banking is market-led, there are extensive developments in this area. UK fintechs cannot rest on their laurels and must continue to develop innovative products outside the constraints of what is available under the UK open banking framework.
To discuss open banking in greater detail, please contact a member of our Financial Services Regulatory team.
作者 Kelly Burke