Is the promise of open banking a miracle or mirage?

The potential benefits of open banking are drawing admirers, but considerable obstacles remain, so further integration presents both an opportunity and a challenge

The universal desire for a seamless and convenient experience when executing transactions explains why the open banking concept has grown so rapidly in the financial industry as a way to better interconnect different systems.

The recent upsurge in interest in open banking contrasts favourably to several years ago, a time when fear took hold and most financial institutions remained conservative about sharing customer data with third parties, let alone potential competitors in the industry.

However, the concept offers distinct advantages that are starting to win over the doubters. Whether it is within the sphere of payments or trade finance, the ability to facilitate the flow of information between a bank’s system and a financial technology (fintech) firm via an API (application programming interface), for instance, could give treasury professionals greater flexibility surrounding the types of solutions they implement.

For example, a treasurer is likely to be reassured knowing that their bank would be capable of embedding themselves with an external e-wallet provider if they chose to partner with one. That was the case for China-based Juneyao Airlines a few years ago, when it announced that it would offer collections powered by WeChat to the company’s banking account at Standard Chartered.

Despite the undoubted potential for open banking, challenges remain. In particular, there is still a long road ahead to truly achieve a liberal exchange of financial data. Top concerns for both banks and fintechs are data security and customer privacy, issues that act as a barrier to further integration, according to the recently released World Fintech Report 2019.

The difference in organizational culture and mindset was another key concern, a stumbling block cited by 65.5% of banks and 70% of fintechs surveyed during the compilation of the report. This represents another top challenge before open banking can gain wider acceptance.

For the banking sector, open banking’s key strength is the technological impact on payments, while fintechs look forward to how its implementation could improve lending services, the report reveals.

Despite all the challenges presented by open banking, there is still a significant push to embrace the technology, with jurisdictions such as the European Union implementing the PSD2 (Second Payment Services Directive) last year, which encourages banks to share their data with third-party payment providers. In Hong Kong, the city’s de facto central bank, the HKMA (Hong Kong Monetary Authority), has developed a framework for open APIs for the local banking sector to supplement further integration.

Crucially, investments are still being made in the technology required for open banking to thrive, with Tencent and Temasek recently investing around US$35 million into TrueLayer, a UK-based open banking technology provider.

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