The UK is looking ahead to how open banking could be used in the wider financial services sector, while Canada is yet to implement any system
by Bethan Rees
Open banking – the practice that gives third-party financial service providers open access to data from banks and non-banks – has been on the rise in the UK since 2014. In an interview authored by Andra Constantinovic for The Paypers, the FCA’s director of competition, Sheldon Mills, talks about the future of open banking and how it fosters the right conditions for competition and innovation in the sector.
Mills relates open banking to the FCA’s competition objectives: “[It] fits squarely with our objective to promote effective competition in consumers’ interests. The point of open banking is to improve consumers’ experience and the value they get from specific banking services, by letting them share their data with third-party providers securely. For a long time, we’ve seen a lack of competition and innovation when it comes to banking services. Customers tend to stick with the same provider. This is great for the large banks who hold those customers – they have a captive audience to cross-sell mortgages, pensions, and insurance to. It isn’t great for incentivising competition, though.”
Under the revised Payment Services Directive, banks have to provide communication interfaces to third-party providers and these interfaces are usually called application programming interfaces (APIs). Mills says that APIs are “part of the fabric of the connected world” and, in terms of open banking, have provided “a dedicated and secure way for one financial company to access the customer data and payment functionality of another”.
The FCA is looking into how open banking principles could be extended across the wider financial services sector, a concept that has been dubbed ‘open finance’. Mills says: “We think open finance could improve the financial health of consumers and businesses by helping them manage their savings, loans, investments, pensions, and insurance much better and improve their access to financial advice.” He also mentions that it could assist with automated product switching.
The FCA has set up an advisory group to look into this issue and it plans to ask for views on how it can learn from open banking through a call for input before the end of 2019.
The Paypers article
Pilot in South Korea
In South Korea, an open banking system that is reported to cut transaction fees by 90% is in pilot testing, reports Sarah Clark for NFCW, a news provider on emerging technologies.
South Korea’s Financial Services Commission (FSC) has said that during the pilot, the government will conduct a thorough assessment and make any necessary adjustments, before it is rolled out to fintech firms on 18 December, reports Clark. Open banking will at first be offered to ten banks and then to another eight banks, plus fintech businesses.
Transaction fees and enhanced user convenience are among the benefits of open banking, according to the FSC. The transaction fee is said to drop from between ₩400–500 per transaction to approximately ₩40–50 for large service providers, and it is even lower for small to medium-sized firms at ₩20–30.
“The government expects that open banking will boost innovation and competitiveness in the financial sectors by introducing a comprehensive financial service platform, allowing fintech businesses to adopt open banking, and improving [the] user experience for consumers,” the FSC is quoted.
The government is reviewing the potential expansion of the open banking system to non-financial institutions, such as postal services, in 2020.
Decision time in Canada
Meanwhile, due to a lack of action on open banking, consumers in Canada may have to choose between convenience and security when considering third-party providers, according to Rizwan Khalfan, TD Bank Group’s chief digital and payments officer, in an article by Geoff Zochodne for the Financial Post. Khalfan describes this choice as “an unfair trade-off”.
Ottawa has been considering a framework for open banking since 2018, but hasn’t released the results of a consultation process that was launched in January.
Zochodne reports that in the meantime, a process called ‘screen scraping’ has been developed – where a customer gives their login credentials to a third party that retrieves their financial data – and it is growing in popularity. However, screen scraping could increase the risk of identity theft and cyber attacks, according to Zochodne, who refers to a Senate of Canada committee report.
To keep things moving, the TD Bank Group has suggested that the government follows the open banking model that is in force in the US, as the technology and infrastructure are already in place, says Zochodne, who explains further with a quote from Khalfan: “We leverage our investments on both sides of the border, so we are planning to use the same API gateways in Canada.” The bank’s proposal is for a customer to engage with a third-party provider, who will then send a request to the bank for the consumer data via an aggregator. The bank will ask the customer if they consent to share the data and then the data would be sent through to an API, Khalfan explains.
Khalfan says the bank is proposing an independent assessment organisation overseen by regulators – but not run by the regulators – as part of the open banking process. According to Zochodne, the TD Bank Group is “ready for anything”, but so far it has not received any suggestion from the government that a “regulator-run model is right for Canada”.
Financial Post article
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