Open banking goes global: Get an insiders view on the 3 approaches sweeping the sector

Open banking empowers consumers to securely share their financial data with the service providers they choose. It’s a global trend that opens financial services to new consumers, new markets, and new offerings. Read our earlier post to learn how open banking works and why it’s gaining global importance—and momentum.With open banking, third-party developers build applications and services around data within financial institutions, giving account holders access to more financial services options. Regulators and regulations (or lack thereof) influence how open banking takes shape.

In some countries and regions, regulators take the lead. This regulation-led approach starts with mandates and standards that financial service providers follow. In regulator-led open banking, financial service providers are expected to use application programming interfaces (APIs) to deliver and access data. Market-led approaches leave open banking to the players. That slows the creation of consistent standards and APIs but accelerates the development of new services. A few countries take a hybrid approach. With hybrid open banking, the market builds on standards, but participation by financial institutions isn’t required. As examples, you see a regulator-led approach in the United Kingdom, market-led open banking in the United States, and a hybrid path in India.

At Amdocs, we work with financial service providers globally. This gives us a broad perspective on open banking. Let’s look more closely at how the three approaches to open banking are evolving in specific countries and regions.

Regulator-led approaches

Financial services is one of the most regulated industries. That’s because financial service providers hold two crucial assets: people’s money and their personal information including their financial information. Open banking presents a means of sharing customer’s information with third parties that they choose. Some regulators have stepped in to set guidelines that need to be followed to ensure open banking is widely available and works as intended. Countries and regions where regulators mandate open banking include:

• United Kingdom: The UK is a leader in open banking. Regulators asked nine major banks to comply with open banking standards by 2018. Smaller institutions soon followed. The Open Banking Implementation Entity (OBIE) creates standards and guidelines to move the industry forward efficiently and securely. These standards include APIs. According to the OBIE, more than 340 regulated providers and over 245 third-party providers participate in open banking.
• Europe: Open banking in the European Union is similar to the UK. Both the UK and the EU include APIs as the backbone for data sharing. Yet, industry enthusiasm for open banking proved to be lower than in the UK. Despite a slow start, more than 400 licensed third-party providers can access their customers’ banking data thanks to open banking in the EU.
• Australia: The Consumer Data Right Act lets consumers share data with authorized third parties. The Act applies to areas beyond banking and financial data, and it ignited the move to open banking in Australia. The Australian Competition and Consumer Commission is the lead regulator for the Act, and it provides accreditation for third-party participants. Open banking in Australia launched for banks in 2020, but it only applied to account and transaction data for certain products. The scope of open banking has steadily expanded to include more financial products.
• Hong Kong: The Hong Kong Monetary Authority launched an open API framework in 2018. It called for a phased approach to implementing open APIs, beginning with information sharing for products and services. Banks must implement the framework, but they can restrict access to the third-party providers they choose to work with.
• Israel: Open banking is just getting started in Israel. The Financial Information Services Law of 2021 mandates the creation of open banking in Israel, with the Israel Securities Authority charged with regulating the implementation. FinTech companies were able to begin applying for certification in June of 2022.
• Canada: Another late mover with open banking, Canada is in the process of formulating an open banking framework. The framework will allow for secure open banking using APIs. The FinTech sector in Canada has evolved without standards-based APIs for data sharing and so have other markets. Some markets stayed with this approach in the absence of regulations. Without standard API frameworks, FinTechs cater to market demand for open banking services using other methods to access data. We’ll consider market-based open banking in the next section.

Market-led approach

Due to the glacial pace of standards creation, the market drives open banking in the United States. FinTechs provide the technology and developer tools that connect third-party applications to people’s data. Plaid is one significant technology player in this arena, with more than 12,000 financial institutions using its platform. MX is another prominent player in the space.

Some financial data connectivity relies on APIs in the US, but some use a practice called screen scraping. The downside? Screen-scraping is far less secure than APIs. Open banking standards could end the practice of screen-scraping. The Consumer Financial Protection Bureau is responsible for taking charge of the effort (and has been for 10 years), but the agency has made little progress. While some think that could change in the near future, the open banking approach in the US is primarily led by the key technology players. They provide the connectivity between financial institutions and third-party service providers.

Hybrid open banking

Several countries have pursued what could be called a hybrid approach to open banking. To us, this means that a centralized authority has created a foundation for open banking, but that foundation may be limited or voluntary. Hybrid approaches are somewhat disparate, interesting examples include:

• India: Here we don’t see a mandate that financial service providers support open banking, but there is a backbone for payments connectivity. India developed the Unified Payments Interface (UPI) to facilitate transactions. More than 300 banks use the interface. There’s also a centralized identity management system. This has led to the creation of an ecosystem that supports many innovative financial products. In 2021, India’s FinTech industry had a market size of $31 billion. Nepal uses the UPI as a payment backbone, too.
• Japan: Open banking isn’t mandatory in Japan, but regulators established an authorization process to support data exchange between banks and third-party providers. It has also encouraged banks to partner with third-party providers.
• Singapore: As in Japan, open banking isn’t mandatory in Singapore, but it is encouraged. The Monetary Authority of Singapore created an open-architecture platform called the API Exchange to facilitate secure financial data connectivity. The platform is open to financial industry participants in other countries.

Get the most out of open banking

There is no single path to open banking. As you look at each approach, you’ll note differences between countries and regions even within the categories we’ve explored above. A regulator-led model requires groundwork but, with a successful rollout, regulators expect a secure, long-lasting, and dependable framework. A market-led approach can bring services to the market faster, but the players must take responsibility for data security. The hybrid approach may be the slowest of all, but it has the advantage of giving freedom to market players while also providing consistency and structure.

What does open banking look like in your country or region? No matter what form it takes for your financial service institution, we see open banking as an opportunity. When you make the most of open banking and are able to create the right portfolio of services with the right fintech partners, you engage with your customers much more. Talk to us about how cloud, experience design, and new ways of working can help you maximize the opening banking opportunity.