The Taiwan Banker recently spoke with Zennon Kapron, director of the Singapore-based consultancy Kapronasia, about how open banking is being rolled out across the Asia-Pacific region and which markets are furthest ahead in the process. Kapronasia is a boutique research firm focused on the digital financial services space in Asia.
Questions:
1. What are the key benefits open banking can bring to retail and corporate banking customers? How about for traditional banks and fintechs?
ZK: For both retail and corporate customers, open banking is about choice. Typically, a bank will provide a specific set of products and services to their customers limited by their business scope or technology. Open banking is about expanding that choice so that customers not only have a choice of products from their bank, but other financial institutions and fintechs. Rather than go to another bank to buy a product or service, the customer can access it through their own bank. For the customer, this provides a more satisfying experience. For the bank, it is an opportunity to sell more products and deepen engagement with its customers.
2. Where did the open banking movement originate and why?
ZK: There was no one event that moved the needle on open banking, but certainly Europe’s push with the Payment Services Directive 2 (PSD2) helped bring the idea of open banking to the forefront insofar that it required banks to setup APIs that were accessible by external parties. In many ways, it is about opening up the market to competition both between banks and between banks and fintechs.
The UK was among the first major countries to develop an open banking policy and put it into practice. Back in 2016, the UK government set up the OBIE (Open Banking Implementation Entity), with a stated intention to make the country one of the best places in the world to bank and boost the digital economy. Open banking for current accounts in the UK was launched in early 2018.
3. By some estimates, Singapore is leading open banking in Asia. In which areas is Singapore especially proactive?
ZK: When we look at the progression of open banking across Asia, progress tends to be either government or private sector driven. In Singapore's case, the government has encouraged the development of APIs for open banking, but left it up to the private sector to implement. Singaporean fintechs and financial institutions have been pushing their "digital transformation" agenda, so they have eagerly developed APIs and open banking platforms. Uptake is still a work in progress; somewhat due to demand, but the platform is there.
It will also be interesting to see what happens as Singapore’s digital banks launch. They will bring new business models and forms of competition that might catch the traditional players off guard. Among the applicants for digital bank licenses in Singapore are some very successful internet finance companies, like Ant Financial, and other platform companies which are determined to make digital banking a core part of their business, like Grab, the ride-hailing giant, which is partnering with Singtel. These types of companies have access to troves of user data that they can use to customize their offerings for customers. Traditional banks need to be mindful of this type of challenge. APIs could help traditional banks onboard new products and services, thus allowing them to compete more effectively in the digital banking space.
4. Hong Kong is also generally given high marks for its open banking policy. How would you describe the Hong Kong approach to open banking? How does it differ from Singapore's?
ZK: Hong Kong has taken a more prescriptive approach to open banking with the HKMA and other regulators being more heavily involved in the definition and framework of what the API frameworks should look like and how they should be implemented. HK’s digital banks will also be expanding their footprints in the market and driving competition and may not actually need open banking APIs at all if they decide to develop these services on their own.
5. In Australia, the government has framed open banking as part of a broader policy initiative to give consumers more control over how their data are used. However, it also seems designed to shake up the status quo. How do you think open banking will affect the industry in Australia?
ZK: Australia is typical of other financial centers in that a handful of banks control about 90% of retail and commercial deposits. That is incredibly limited and an indication that there needs to be more competition. In Australia, open banking will hopefully open up competition in the financial industry as well as give individuals more control over how their data are used.
One thing interesting about Australia's open banking rollout is that it comes in the wake of the Banking Royal Commission's findings of widespread wrongdoing in the financial sector. Some of the country's biggest lenders were mentioned by name in that report, and not in a flattering way. That's not the primary reason Australia is adopting open banking, but it certainly suggests some complacency on the part of the country's traditional banks. Open banking has the potential to put some positive pressure on them to improve their services and compliance.
6. Taiwan is fairly unique in Asia for being highly overbanked. There are 37 traditional banks for a population of 23 million, and three digital banks will go live later this year. How could open banking affect the Taiwan market?
ZK: In many markets that have embraced open banking, we actually haven’t seen tremendous change. Fintechs, in many cases, have decided to go it alone and create their own products and services, in some instances even relying on other fintechs. As an example, Monzo, one of the more well-known virtual banks globally, uses TransferWise for its cross-border transfers. German banking platform provider Mambu also uses TransferWise in its product offerings.
As Taiwanese individuals and businesses become more comfortable with digital finance, I believe we’ll see a large shift to some of the new digital banking platforms. Open banking may be an enabler, but not necessarily the cause.
The fact that the three digital banking licenses in Taiwan were all awarded to groups that include financial services incumbents shows that the regulator is pursuing a measured approach. It is true that Taiwan already has plenty of banks. But in the aggregate, digital banks that innovate in a way that's beneficial to customers can have a positive effect on the overall banking industry, helping to raise the bar for everyone.
7. What are the main challenges of implementing open banking?
ZK: Open banking can rapidly shift the competitive landscape, which can be challenging in some less mature financial markets. With Europe’s PSD2 and even Australia’s push into open banking, there has also been quite a bit of pushback from the traditional players. Although some argue that there are benefits for them as well, in markets like Australia, consumers seem to be quite fed up with the status quo and are looking to try something different. These shifts may force banks to shift their business in awkward ways and very quickly.
Data privacy and security are also important considerations and concerns. Historically, a bank would have very few external third parties that connect into their network. With the open banking framework, there are many more "attack vectors" that banks need to be aware of and ensure they are secure. Banks and fintechs also need to make sure customer data is secure. Although in some jurisdictions, such as Australia, the push is to give customers more control over their data, at the same time, we need to make sure we don’t lose control of their data.
8. Do you expect the coronavirus pandemic to adversely impact open banking rollouts in Asia Pacific?
ZK: As many of the open banking initiatives in Asia are very new, the coronavirus has definitely slowed things down. Pushing towards an open banking model does have risks as we talked about above, and so is not something that governments are interested in tackling at the moment when they have so much more on their plates.