Open banking is still in its infancy, yet it has the potential to reshape the banking industry on a global scale. To take full advantage, it’s important for financial institutions to understand the risks involved – as highlighted in new recommendations from the Joint Regulatory Oversight Committee.
As the world turns towards open banking – a term used to describe the use of open standards, technology and APIs that allow financial institutions to securely share customer data with third-party providers – consumers are set to benefit from a host of new product and service innovations.
But for institutions far and wide, open banking isn’t so much tearing up the rulebook as it is writing a second volume, with just chapter one complete.
The current state of play
As things stand, open banking is mostly unchartered territory. The US open banking ecosystem lacks the privacy rules afforded to consumers in the traditional banking industry, introducing a series of technical and privacy challenges which may be enough to dissuade firms from entering the market.
Meanwhile, the UK market is more structured. Open banking was initiated in 2017, following an investigation conducted by the Competition and Markets Authority into retail banking. This was followed by the Second Payment Services Directive passed in 2018, which made it mandatory for banks to share their database with third-party providers via APIs.
With tensions around privacy, competition and data portability still taking center stage, the UK’s Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) acted as co-chairs of the Joint Regulatory Oversight Committee (JROC), to publish recommendations on its vision for the expansion of open banking in the UK. These recommendations not only shed light on the future of open banking in the UK, but they also show how other nations can enable open banking safely and successfully.
Laying the groundwork for success
With demand skyrocketing, open banking systems need to scale quickly if they’re to keep up. More than that, they need to become economically sustainable while remaining resilient, reliable and efficient. That’s no small task, so it’s no surprise the JROC recommendations state that strong regulatory direction is required to build an environment where a wealth of new products and services can emerge.
An open banking ecosystem depends on enhanced data sharing and collection. This encourages innovation and competition, but the ecosystem should also put protections in place if things go wrong. To mitigate the risks that come with open banking, financial institutions must understand the level of financial crime, their unique exposures and how to address them.
On top of the ecosystem and data sharing practices, the JROC is also set to prioritize payments. Creating a greater choice of payment methods would offer flexibility and more cost-effective alternatives to direct debits and card payments. The payments space needs a commercially sustainable model in place, along with the right dispute resolution processes.
Taking a proactive approach to risk
As new measures and infrastructure improvements are rolled out, we’ll see a fresh surge of product innovation in the FinTech market. This will lead to an increased use and reliance on open banking by consumers and businesses, resulting in a growth of total investment in open banking.
Open banking works as it empowers users to make better decisions about their finances through increased visibility of spending and financial health, while also making financial services more accessible. The JROC recommendations will lay the foundation for institutions to create new products and services. Both consumers and SMEs stand to gain from additional functionalities and the benefits of competition, including lower fees for payments and product innovation.