Open banking

Open banking is a financial services term as part of financial technology that refers to:^[1]

1. The use of open APIs that enable third-party developers to build applications and services around the financial institution.^[2][3]
2. Greater financial transparency options for account holders ranging from open data to private data.
3. The use of open source technology to achieve the above.^[4]

Open banking, as a concept could be considered as a subspecies to the open innovation concept, a term promoted by Henry Chesbrough.^[5][6] It is linked to shifts in attitudes towards the issue of data ownership illustrated by regulations such as GDPR and concepts such as the open data movement. The banks turn into financial service platforms, technically implemented through a Banking as a Service-concept.^[7]

History[]

In October 2015, the European Parliament adopted a revised Payment Services Directive, known as PSD2.^[8] The new rules included aims to promote the development and use of innovative online and mobile payments through open banking.^[9]

Support for the concept is not unanimous. Mick McAteer of the UK's Financial Inclusion Centre, thinks that only the tech-savvy will benefit.^[10] He says that open banking is "a daft idea", which will lead to more financial exclusion for those on low incomes.^[10] He says it is naïve of regulators to expect consumers to own their data and be able to get better deals from banks, and points out the danger of consumers being exploited, either by businesses offering new types of expensive payday loans, or misuse of data and personal information that people have revealed in places such as social media.^[10]

United Kingdom[]

Competition intervention[]

In August 2016, the United Kingdom Competition and Markets Authority (CMA) issued a ruling that required the nine-biggest UK banks – HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske Bank, Lloyds and Nationwide – to allow licensed startups direct access to their data down to the level of transaction-account transactions.^[11]

The direction came into force on January 13, 2018, and using standards and systems created by Open Banking Limited, a non-profit created especially for the task. However, enforcement rests with the Competition & Markets Authority. Protection for consumers is the responsibility of the Financial Conduct Authority (FCA) (for account information and payment initiation services, under the PSD2 directive) or the Information Commissioner's Office (for data).^[12]

The CMA direction only applies to the nine largest banks and works alongside the broader PSD2 rules that apply to all payment account providers.

Adoption[]

As of January 2020, there are 202 FCA-regulated providers who are enrolled in Open Banking.^[13] Many of them provide financial apps that help manage finances and also consumer credit firms who use Open Banking to access account information for affordability checks and verification.^[14]

United States[]

Financial Data Exchange (FDX) organization was formed in 2018 as a non-profit consortium that started to sign on members from the fintech and banking communities in late 2018.^[15] The group consists of the largest financial institutions as well as aggregators and fintechs. Founders sought to create a common technical standard to enable secure, consumer-permissioned data sharing for financial data, effectively sounding the first signal that the US was going to pursue something like Open Banking. FDX aims to establish a common, shared standard for Open Banking through a market-driven approach, the idea being to engage with the different market players and use a consortium approach similar to Bluetooth.^[16]

The group maintains five core principles:

1) Control: the consumer should have control over how, where, and for how long their financial data is used. 2) Access: the consumer should have access to their financial data at all times and across all account types. 3) Transparency: third parties should be transparent about how they are using a consumer’s financial data. 4) Traceability: consumers should be able to trace the routes data takes along the data sharing network. 5) Security: the consumer’s financial data should always be protected with secure connections and trustworthy parties.

Open Banking in the United States became a hot-button issue with the Biden Executive Order indicating the Administration's desire to harness a robust 1033 rulemaking. ^[17] The Dodd-Frank Act mandated that consumers have the right to their own financial data and should be able to access it in ways such as through financial applications, regardless if the application sits in the data holder house or not.

Some Open Banking providers such as Plaid settled for 58M in a consumer-driven privacy related class action lawsuit in 2021. ^[18] By contrast, another leader in US Open Banking, Finicity, maintains higher than necessary compliance standards by self-subscribing as a consumer reporting agency and maintaining high standards of consent and privacy-related practices. ^[19]

Latin America[]

The specific context of Latin America as it relates to Open Banking force to consider the importance of the informal economy,^[20] the prevalence of fraud with online payment,^[21] and the concentration of the banking industry,^[22][23] as well as the early implementation of technologies such as mandatory and centralized electronic invoicing. The importance of also provides an alternative source of information to open banking that does not yet exist in other countries in the world.

Mandatory and centralized electronic invoicing was implemented early on in countries such as Mexico, Chile, Colombia, and to a lesser extent, Brazil, offering the possibility to retrieve open accounting data in a similar way as open banking.^[24]

In this context the use cases are: Better knowledge of users and potential customers, Automation of KYC (Know Your Customer) processes, creation of new products and services especially for the unbanked, and fraud Reduction.

Key Latin American Countries by size are also the countries at the forefront of the adoption of open banking:^[25]

Mexico

Mexico is a leader in Fintech regulations and innovation in Latin America. Whether for centralized mandatory open banking or for the adoption of a coherent Fintech law, Mexico was the first country to implement legislation that serve as inspiration for other countries.^[26]

The most relevant legislation regarding open banking was the Fintech Law of 2018. On March 9, 2018, the Law was published in the Federal Official Gazette (Diario Oficial de la Federación o “DOF“, by its Spanish acronym).  Article 76 states that standardized computer application programming interfaces (APIs) must be established that enable connectivity and access to other interfaces developed or managed by the same subjects referred to in the aforementioned article and third parties specialized in technology technologies. the information, in order to share the following data and information: open financial data, aggregated data and transactional data. As a consequence, more than 2,300 institutions were technically required to share information.

In this regard, Article 76 provides that the information that may be shared by financial institutions, money transmitters, SICs, clearing houses, financial technology institutions, are:^[27]

• Open data; being those of products and services offered to the general public;
• Aggregated data; being those related to any type of statistical information related to operations carried out by or through the mentioned institutions; and
• Transactional data; those related to the use of a product or service, including deposit accounts, credits and means of disposal contracted in the name of the customers of financial institutions.

In addition, on March 10, 2020, the Mexican Central Bank (Banco de México) (“Banxico“) published in the DOF the Circular 2/2020 as secondary provisions of the law, specifically dealing with open banking.^[28] In such, different financial market entities were required to share information through Computer Application Programming Interfaces. The March 2020 secondary provisions issued in the DOF only apply to Credit Information Companies (Sociedades de Información Crediticia) (“SIC“, by its Spanish acronym) and clearing houses.

In June 2020, the rules for exchanging open data, applicable to all financial institutions (banks, fintechs and companies authorized by the Comisión Nacional Bancaria y de Valores (CNBV, the Mexican equivalent of the SEC). In it, financial institutions, such as banks, popular finance companies and savings and loans cooperatives, among others, were also included in the law

In accordance with the above, Circular 2/2020 states that both SICs and clearing houses must obtain authorization from Banxico for the use of the APIs by other institutions. In turn, SICs and clearing houses must enter into agreements with other entities authorized by Banxico for the exchange of information. Additionally, the issuance of fees to be charged between institutions that exchange information is also defined. Finally, Circular 2/2020 states that in case of non-compliance with the provisions of Circular 2/2020, SICs and clearing houses may face fines levied by Banxico.

Regulation of aggregated data and transactional data are expected to be legally defined in 2021. Industry experts agree that their enactment will generate value, causing high demand or data requests. Such is the size of the market that Gartner, the consultancy, claims that the open banking opportunity in Mexico tops one billon dollars.^[29] In that context, a Finerio Connect survey indicates that 68% of Mexican executives say open banking will be a significant game changer in the Mexican financial industry and  83% of respondents agree that "open banking allows the improvement of the services offered to customers". In addition, 68% consider that "open banking will offer growth opportunities to financial companies" and 65% states that "it will be generating positive competition between companies".^[30]

Regulatory advances now allow Mexico to be the first Fintech ecosystem by number of startups, according to the Finnovista Fintech radar, with 441 companies, followed by Brazil (370), Colombia (200), and Chile (67).^[31]

Brazil

The most recent movement of the Central Bank of Brazil was the Bank of Brazil's deployment of its open banking model, which mandates banks and financial institutions (including fintech) to make available information on traditional financial services and products.^[32]

Brazil's implementation is mandatory for institutions with large size, significant international activity and high risk profiles and optional for all other institutions.

This implementation of the first phase happened almost two years after the first open banking framework was published April 2019, in which the fundamental requirements for the implementation of the law were disclosed.

From 2021 onwards, the Central Bank of Brazil will continue to release details on the following phases of implementation:

• Phase 2 — Customer Information (July 2021): At this stage consumers will have the option share their data (registration, account transactions, card information and credit transactions) with the institutions of their choice, at the time of their choice. This is expected to allow for the development of more personalized products and services.
• Phase 3 — Transactional Information (August 2021): At this stage, consumers will have access access to services such as innovative payment options and credit offers, through the shared channels by  financial institutions, allowing consumers to shop around in a large selection of products and services
• Phase 4 — Extra information (December 2021): the following phases will include additional products such as insurance, pension plans, investments, among others.

Chile

In late 2020, the Chilean government announced that it was working on a proposal to regulate the activity of financial technology companies, and incorporate an open banking standard for the market. As a result, last September the government edicted the Financial Portability Act, a set of regulations aimed to facilitate switch between banks and financial providers.^[33][34]

As of early 2021, banks have begun to make investments to open their legacy systems to other verticals, which support partner connection, a change impulsed, in part, by the opening laws such as the ones in Mexico.

Colombia

Colombia also announces its interest in developing an open banking standard, but is betting on a voluntary model; that is, letting the financial institutions open at their own pace.^[35]

The Financial Regulations Unit (URF) is expected to foster a public-private discussion that will set the stage for open banking best practices^[36] letting the stakeholders in the ecosystem free to define the regulatory framework. The regulator asked the stakeholders to come to an agreement on two preliminary stages:

• Stage 1 — First semester 2021: Conducting exploration to define the model to be implemented, as well as discussing the roadmap for its implementation.
• Stage 2 — Second Semester 2021: Issuing regulation and promoting "possible use" of sandbox testing.

Adoption in the rest of the world[]

A number of other countries launched open banking initiatives based on the European and UK models. These were either through industry collaboration or through legislative changes. An open banking project was launched in Australia on the 1 July 2019 as part of the Consumer Data Rights project by the Australian Treasury department and Australian Competition and Consumer Commission.^[37] The CDR legislation was passed by the Australian parliament in August 2019. ^[38]

On 1 June 2017, a group of bankers and fintech experts in Nigeria got together for the Open Banking Nigeria initiative to drive the adoption of common API standards for the country.^[39]

Security risks[]

Open banking made banks open their application programming interfaces (APIs) to third-party FinTech companies, which comes with security risks. Customers using open banking apps will now be in an entirely new trust relationship. Hackers can target third-party apps and excessive access privileges could be given to employees. Malicious actors will get new opportunities to trick banking customers as well as third-party companies with phishing scams.^[40][41]

See also[]

• Account aggregation
• Open Banking Nigeria

References[]

This finance-related article is a stub. You can help Wikipedia by .

• v
• t