Will open banking be the next wave of digital transformation in Asia's financial industry?

Open banking is emerging as a key trend and the next ‘wave’ of digital transformation in global financial markets. At its core, it is focused on data sharing, which is enabled through application programming interfaces (APIs) which make it possible for two different systems to ‘share’ information with each other. Simply put, this means that consumers will have greater control over their financial data and who to share it with. An example of this in practice would be a mobile banking application that enables users to see all of their financial information and spending habits (across different bank accounts) on one interface.

Developments in the APAC region

Over the past few years, we have seen regulators in the APAC region take steps to encourage and at times even mandate financial institutions to adopt open banking practices. In Australia, the Consumer Data Right legislation has been passed, which empowers consumers to instruct their banks to share their data with accredited data recipients. In Hong Kong, as part of its goal to move Hong Kong into a new era of ‘Smart Banking’, the Hong Kong Monetary Authority has also rolled out a framework requiring retail banks to adopt open APIs. The aim is to enable third party providers to access financial product information, and gradually increase this access to other types of information, such as customer acquisition and transactional processes.

Regulators in other jurisdictions have also been generally supportive. In Singapore, the Monetary Authority of Singapore (MAS) has not mandated open banking, but it has taken concrete steps to facilitate its development. Last year, the MAS published a consultation paper on proposed revisions to its Guidelines on Technology Risk Management and included a section on API development – an example of the balance it aims to strike between facilitating innovation and imposing risk management controls. Japan has also passed amendments to its Banking Act, requiring that banks make efforts to open up their APIs to electronic settlement agency service providers. This is in line with Japan’s Financial Services Agency’s Financial Digitalization Strategy, which aims to encourage financial institutions to implement technology in their businesses. Other supportive regulators include, for example, Malaysia (where the Bank Negara Malaysia has actively promoted the adoption of APIs since 2018) and India (where the Reserve Bank of India has recommended that an environment be provided to develop fintech innovations and test APIs developed by banks and fintech companies).

Benefits and potential concerns

However, the development of open banking is not without concerns for traditional financial institutions, particularly regarding compliance with their existing legal and regulatory requirements. For example, the sharing of consumer data may conflict with banking secrecy obligations (i.e. banks have a duty to protect customer information, and not to disclose it except in certain prescribed circumstances). Open banking may also pose issues from a data protection perspective and may raise questions on the liability of parties for any loss of customer data.

Nevertheless, such concerns should not be a major barrier to the growth of open banking. For instance, a common statutory exception to banking secrecy requirements is for disclosure with the customer’s prior consent. In some cases, banking secrecy and data privacy laws may need to be modernised to permit data sharing and open banking. Solutions do also exist for the liability issue – one solution adopted in Australia and the UK is to directly regulate data recipients, which provides clarity around liability and compliance obligations and improves the security and stability of the ecosystem. It is crucial for regulators to gain a clear understanding of the benefits and risks of data sharing and to strike an appropriate balance between consumer protection and innovation.

It is also important to note that open banking has the potential to bring plenty of benefit. There are opportunities for ‘revolution’ in the financial industry – such as the digital transformation of financial institutions, particularly in their legacy business strategies and operations. There will also be opportunities for new partnerships and collaborations between more traditional financial institutions and fintech companies who can bring different perspectives and technologies to the table.

Going forward

Given the rapid rate of development in the technological sphere, financial institutions should recognise that an openness to innovation in their business is key to long-term survival in today’s financial industry. It is generally expected that open banking will continue to develop in the future, particularly in light of technological advances, changes in market demand and increasing growth of a younger, tech-savvy generation. Going forward, regulators can play a key role in the implementation of open banking in their jurisdictions. Issuance of legislation and guidelines can provide welcome clarity and guidance to financial institutions, as they navigate new technologies and the uncertainty around liability amidst ongoing requirements in key areas such as banking secrecy, data protection, technology risk management and cyber security.