OUTLOOK 2022-Open banking grows throughout Asia amid market fragmentation, data security and trust concerns

The roll-out of open banking is expected to gather pace in Asia this year, fuelled by the need to promote financial inclusion and innovation. The financial services sector will have to address teething problems with standardising application programming interfaces (APIs) across the various jurisdictions, and must work hard to guarantee data security and cultivate trust within the eco-system.

Singapore, Hong Kong and Australia have been at the forefront of open banking implementation. The second phase of the Singapore Financial Data Exchange (SGFinDex) was launched in November 2021, enabling individuals to access their financial information via applications held across a range of government agencies and financial institutions.

“SGFinDex is a tangible expression of harnessing digital technology to enhance the financial wellbeing of Singaporeans,” said Ravi Menon, managing director of MAS. “In the next phase, individuals can look forward to accessing information on their insurance policies through SGFinDex as well.”

The initiative is a public-private partnership. It is led by three government agencies in collaboration with the Association of Banks in Singapore, seven banks and SGX Central Depository.

Market-driven approach

The MAS was the first regulator in the region to provide guidelines on open banking. It teamed up with the Association of Banks in Singapore to release a “Finance-as-a-service: Application Programming Interface (API) Playbook” in November 2016, marking the citystate’s adoption of a market-driven approach to open banking.

Korea has followed a similar path. The Financial Services Commission (FSC) launched a regulatory sandbox scheme in April 2019 which included a number of financial solutions as “innovative financial services”, with open banking part of the plan.

The FSC also revised the Electronic Financial Transactions Act in March 2021 to place a stronger focus on safety and security in payments sectors.

Interoperability, fintech and API adoption

Given that banks and fintech firms tend to operate across multiple jurisdictions, interconnectedness between market participants will be essential; transaction safety, security, financial inclusion and innovation require high standards of interoperability.

Open APIs, as opposed to private ones, play a crucial role in the implementation of open banking by facilitating connections between banks and other stakeholders, and could signal the level of interoperability, according to PayPal.

The rate at which financial firms adopt new technology can also help gauge the degree of open banking implementation, as techadvancement offers a competitive and innovative environment through the transfer of consumer data.

Countries which support such moves have become the front-runners in terms of open banking. Singapore’s goal to transform itself into a “smart nation”, for example, is underpinned by the country’s open banking infrastructure.

Hybrid, regulatory and progressive approaches

Financial inclusion has been one of the main drivers of India’s hybrid open banking approach, supported by efforts from both the government and the market. The development of the digital infrastructure, the India Stack, is widely seen as having been a major enabler of the country’s booming open banking ecosystem. The India Stack encompasses several APIs.

The Indian government also released the Data Empowerment and Protection Architecture in September 2020 to promote financial inclusion and encourage paperless payment by applying account aggregators.

Australia has adopted a regulation-driven approach to the development of open banking. The country mandated its infrastructure via the introduction of the Consumer Data Right (CDR) in the banking sector. The CDR will be rolled out to the energy and telecommunications sectors in the near future.

Guided by the Treasury and the Australian Competition and Consumer Commission, the data to be used in open banking will be released in three phases. The major banks have already completed the release of data APIs, while other banks were required to complete by February 1.

The Hong Kong Monetary Authority (HKMA) launched an open API framework to support open banking in July 2018. The framework is intended to facilitate collaboration between banks and third-party service providers through a four-phase progressive approach. Phases III and IV commenced in December 2021 and are being overseen by the Hong Kong central bank.

“There have been ongoing consultations and discussions with stakeholders and market players on implementation details,” King & Wood Mallesons said in a November 2021 insight note.

The development of open banking in China is hindered to some extent by the sweeping regulatory reforms the authorities have imposed on the tech sector, as well as stringent data privacy controls. There are, however, plans to launch new rules governing open APIs and to accelerate the formulation of regulatory standards for open banking practice in the country.

Challenges

The installation of hundreds of open API platforms across the various Asia-Pacific jurisdictions has presented some challenges to the development of open banking. Such fragmentation hampers the growth of the eco-system and complicates industry attempts to combat money laundering and other threats.

Data security and the cultivation of trust are further challenges to the more widespread roll-out of open banking. Banks across Asia are for the most part held accountable for implementing authentication and identity management. Banks must be able to verify customers’ identity and ensure that transactions can only take place with customers’ consent.

About the author

Yixiang Zeng is a senior correspondent with Thomson Reuters Regulatory Intelligence in Singapore.

Thomson Reuters, a worldwide trusted provider of answers, helps professionals make confident decisions, run better businesses and gain competitive advantage in complex arenas – law, tax, compliance, government and media.

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