THE open banking movement that allows third-party developers to build applications and services around financial institutions can facilitate online transactions while boosting security.
According to a report by digital innovation consultancy firm Appsynth, financial institutions across Southeast Asia are recognizing the potential advantages of open banking, including improved customer experiences and access to innovative products. Many banks are actively developing APIs which facilitate data sharing and connectivity between different financial services, fostering innovation and competition.
In the Philippines, the Bangko Sentral ng Pilipinas launched the Open Finance Framework in 2022, aimed at developing an open, interoperable, and scalable ecosystem for consumers to take more control over their financial data, enabling them to access a range of financial products and services from different providers.
An expert in fintech and financial inclusion, Baasandorj Davaasuren, chief business development officer at AND Global, leverages his extensive experience driving technology adoption across 12+ countries to spearhead global expansion efforts, now shares with The Manila Times his thoughts on the benefits of open banking, the main challenges to its adoption, and his forecast on upcoming trends in the development of safer and faster fintech solutions.
The Manila Times (TMT): How would you define open banking for ordinary consumers? How is open banking different from or similar to such current terminologies as online/digital banking, fintech, etc.?
Baasandorj Davaasuren (Davaasuren): Open banking can often be confused with other financial terminologies. To put it simply, open banking gives you more control over your money by allowing you to share your financial information with other trusted companies, not just your bank. This offers more choices and provides better ways to manage your finances. For example, you can use a budgeting app to track your spending or a loan comparison website to find the best deals.
To further clarify, digital banking refers to how you access your bank’s services online, while fintech covers new financial technology companies offering innovative services. On the other hand, open banking is a subset of fintech that specifically involves sharing your financial data securely to receive improved services and helps enhance online banking by giving you more power over your financial data.
TMT: What is the main driver(s) on how open banking came about? What was the main need/demand for open banking at the beginning? Does that need or demand exist now in Southeast Asia?
Davaasuren: Open banking emerged due to several key drivers. Fintech companies were innovating with customer-focused financial services, prompting traditional banks to adopt open banking to remain competitive. The advent of APIs (Application Programming Interfaces) made it easier to securely share data between different companies in real time.
The primary demand was for more control and transparency over financial data. People wanted to manage their finances better and allow access tailored to financial services. This demand is still prevalent in Southeast Asia, where digital adoption is on the rise.
Open banking can also significantly enhance financial inclusion by providing services to those without traditional banking access. The supportive regulatory environment in countries like Singapore and Indonesia further fuels this growth.
TMT: What are the major benefits of open banking?
Davaasuren: Let me illustrate with a scenario: Before open banking, Jane, who banks with a traditional bank, manually enters her transaction details into a budgeting app, which is time-consuming and error-prone. To compare loan offers, for instance, she has to visit multiple bank websites, fill out numerous forms, and wait for responses. Additionally, she incurs overdraft fees due to the lack of real-time alerts.
After open banking, Jane securely connects her bank account to a budgeting app using APIs. The app automatically syncs her transaction data, providing an accurate view of her finances. When comparing loan offers, she uses a website that accesses her financial data (with her consent) to provide personalized options instantly. She also receives real-time alerts for low balances, helping her avoid overdraft fees.
In short, open banking empowers Jane with better financial management tools, personalized services, and a more seamless banking experience. The increased trust and reduced friction benefit both banks and their customers.
TMT: What are the constraints to get started in open banking? Will it demand heavy investments from banks and financing institutions?
Davaasuren: Open banking is a complex journey. Banks face a daunting path, as open banking implementation is indeed complicated. They face technological, regulatory and organizational challenges. Developing new systems, complying with diverse regulations, and changing company culture are significant hurdles. Consumer education and standardization also add to the complexity.
However, several strategies can mitigate costs.
– Partnerships with fintech companies. For example, DBS Bank in Singapore partnered with fintech firms like Kasisto to enhance its digital services without significant upfront investment.
– Utilizing open banking platforms where banks can quickly integrate open banking capabilities cost-effectively using existing platforms and API marketplaces.
– Regulatory sandboxes which allow banks to test solutions in a controlled environment, reducing the risk and cost of full-scale implementation.
– Phased approach in which banks can start with smaller projects and gradually scale up.
– Leveraging cloud services that reduce the cost of developing and maintaining open banking infrastructure.
TMT: What are the challenges then in open banking adoption in Southeast Asia? Do SEA banks and financing institutions have a model (presumably from the developed world) in seamlessly adopting open banking to unique regional and cultural differences in developing nations?
Davaasuren: Adopting open banking in Southeast Asia presents unique challenges due to regional and cultural differences.
Some of these key challenges and strategies include:
– Technological readiness. Upgrading infrastructure can be costly and time-consuming.
– Regulatory diversity. Each country has its regulatory framework, making compliance complex.
– Consumer trust and awareness. Educating consumers about data sharing benefits and security is crucial.
Adapting successful models from developed nations involves:
– Localized regulatory frameworks. Regulators can develop frameworks considering regional needs, inspired by models like PSD2 in Europe.
– Strategic partnerships. Banks can collaborate with local and international fintech companies, like DBS Bank’s partnership with Kasisto.
– Gradual implementation using regulatory sandboxes to test and refine solutions before full-scale deployment.
– Market-specific education campaigns involving tailored initiatives to build consumer trust and awareness.
– Utilizing cloud technology services that offer scalable and cost-effective implementation options.
TMT: I would understand that open banking would be digital and online in nature. It would be fair to ask: How would the open banking providers respond to data protection and security issues?
Davaasuren: You’re correct; open banking is inherently digital and online, which brings data protection and security to the forefront. Open banking providers prioritize data protection and security through robust API security, encryption and tokenization. They ensure data is encrypted both in transit and at rest, replacing sensitive information with unique identifiers using tokenization.
Compliance with regulatory standards like GDPR in Europe and PDPA in Malaysia is crucial. Continuous monitoring and regular auditing help detect and respond to threats in real time. Educating users about data security practices and maintaining transparency about data usage is essential for building trust.
Providers also use regulatory sandboxes to test security measures and collaborate with cybersecurity experts to stay ahead of emerging threats. These comprehensive strategies effectively safeguard user data in the digital landscape.
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