by Mark Pereira

There have been a number of initiatives in recent months to encourage the growth of the Fintech industry including the funding of a national strategy for digital transformation, a proposal by the Central Bank to improve the payment system in Trinidad and Tobago as well as the continuing work of FinTechTT to facilitate a national Fintech evolution. The topic of Open Banking has been notably absent from these discussions, but it is critical to the success of the nascent Fintech industry.

A Primer on Open Banking

According to Insider Intelligence, open banking is a system under which banks open their application programming interfaces (APIs), allowing third parties to access financial information needed to develop new apps and services and providing account holders greater financial transparency options. This is a major shift in the status quo since historically, traditional financial institutions have been solely responsible for storing and processing data about people’s financial lives. As elaborated on by Belvo, for this reason, our understanding of financial information — and what we can do with it — has been limited almost exclusively to the services offered by banks.

The Role of Fintechs

According to Investopedia, financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. ​​​At its core, fintech is used to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilising specialised software and algorithms that are used on computers and, increasingly, smartphones.

These fintechs leverage digital innovation to shake up the financial intermediaries’ market by delivering new tech capacities to improve efficiency and customer experience. These developments include faster processing of financial transactions as well as easier and more transparent transactions. Fintechs connect participants in financial transactions in digital ways to reduce economic frictions and have the capacity to improve financial inclusion.

According to an article from TechCrunch, open banking is at the heart of the relationship between tech and the economy. With open banking, financial service providers can provide more bespoke services for their customers by analysing data from many different sources. FinTech Magazine elaborates that open banking has a significant role to play in the future of fintech and businesses. In fact, since open banking requires that banks make valuable data available via APIs, it is leading to a revolution in the way that small and mid-size enterprises (SMEs) are funded — one in which data, and not hard capital, is the most important factor driving fintech success.

Potential Impact for Stakeholders

One of the key strategic initiatives for Trinidad and Tobago as part of the modernisation of the legal and regulatory framework is a program to enhance digital financial inclusion. Initiatives like the implementation of the financial innovation hub is one of the ways that the country is making the business environment more digital friendly, and this can expand the value added by the private sector. Open banking has the potential to both enhance digital financial inclusion as well as enable businesses to operate more digitally. Indeed, it has the potential to positively impact the whole economy.

Benefits to consumers

One of the main beneficiaries of open banking is the consumer. According to Belvo and Investopedia, significant benefits can accrue in the following areas:

Increased number of tailored financial solutions

Open banking has the potential to offer personalised and relevant product and service options for consumers, thanks to access to more data sources that allow tailoring experiences to their specific needs. By providing access to financial information, users will now have services that match their consumption logic, as well as a much friendlier, simpler and faster experience. For example, open banking APIs can facilitate analysis of consumers’ transaction data to identify the best financial products and services for them, such as a new savings account that would earn a higher interest rate than their current savings account or a different credit card with a lower interest rate.

Security and control of consumer data

Financial institutions and fintech companies must find ways to convince potential customers of the benefits of their products and services. Online and digital financial products and services need to focus on two key factors: security and transparency. With the implementation of open banking, consumers will have full control over how their financial data is used and who can access it. They will also have the confidence that it is being handled under the best security standards throughout the process.

Faster access to credit and financing

One of the main benefits is the diversity of credit services to which consumers can apply. By using open banking, companies that offer loans will now provide credit offers much faster, helping consumers get the money they need at the exact moment they require it. For example, open banking could help lenders get a more accurate picture of a consumer’s financial situation and risk level in order to offer more favourable loan terms. It could also help consumers get a more accurate picture of their own finances before taking on debt. This is not limited to traditional credit models, but also for creating new products. One example of this is a “buy now, pay later” service, which offers the possibility of buying in instalments at different stores and establishments to people who do not have a credit history or a credit card.

Additionally, mortgage credit is also benefiting from open banking. Fintechs are taking advantage of the access to their users’ fiscal data to streamline all processes and help their customers buy a property in a simple and secure way. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide.

Control and improve personal finances

Another great opportunity for consumers would be to improve the management of their personal finances through products that provide visibility, control and timely advice on how to optimise the use of their finances. An example of such a service is an application where users can manage their money, create budgets, track their current account and credit card spending, all in one place. Another app might help visually impaired customers better understand their finances through voice commands.

Salary on-demand is now a reality

On-demand payroll allows hundreds of workers to get their paycheques paid whenever they want without having to wait until the pay date. Progressive financial companies help workers avoid having to resort to informal sources of financing (which have high interest rates) and can have the money they have worked for when they need it most. In one case, this model is offered to gig economy workers, who are characterised by not having a fixed salary and are not on the organisation’s payroll, such as delivery drivers.

Benefits to businesses

Open banking can be a catalyst for digital trade facilitation in Trinidad and Tobago as well as foster payments and credit facilities for micro, small and medium-sized enterprises (MSMEs). According to TechCrunch, TrueLayer and TechFunnel, there are several specific business benefits that can be realised:

Convenient access to loans

To traditional banks, the capital held by MSMEs is generally small and this has resulted in MSMEs being historically underserved. With open banking, the securing of finance would be easier as MSMEs could share details of their capital holdings across multiple institutions and in multiple instruments. This would provide banks a much better view of the aggregate financial position of a MSME. Additionally, due to its simplicity, it enables them to quickly determine their eligibility for loans without manually submitting documents and financial statements. As a result, both business owners and lending institutions save time, effort, and resources.

No chargebacks

When customers dispute a charge, businesses incur more than just a fee. Chargebacks can pose a reputational risk to companies, affecting their payment processing rates in the future. Open banking payments don’t offer chargebacks, preserving businesses while protecting customers in other ways.

Reduced Costs

MSMEs can reduce their merchant service fees thanks to open banking since they don’t need as many point-of-sale terminals and card readers. A reduction in fraud and a lack of fees from the acquirer, Mastercard and Visa make this possible. In fact, businesses can save up to 80% on fees compared to cards. Additionally, open banking can accommodate large payments, and at a lower fee than card-based payments.

Higher conversion rates

A better customer experience is provided by open banking. Payments initiated by mobile banking require biometrics (usually a thumbprint or Face ID) to secure and approve the transaction, as opposed to online banking that requires a card reader and your login details. Mobile banking applications allow you to approve open banking payments easily and thereby improve the likelihood of conversion. Similarly, for ecommerce a better user journey means more purchases. By eliminating the need for tedious data entry, open banking payments provide seamless, mobile-first customer experiences that convert 20% more often than cards.

Faster settlement

Waiting for funds to settle is an inconvenience that many businesses hope to avoid. While cards and Direct Debit payments can take days for funds to settle, open banking payments provide instant settlement, ensuring that companies receive their money when they need it. This can be a significant benefit to MSMEs.

Benefits to Fintechs

As noted above, one of the main purposes of fintechs is to help companies, business owners and consumers better manage their financial operations, processes, and lives. Open banking is a key ingredient for fintechs to fulfil their purpose. According to Nordigen, Investopedia and Teknospire there are specific benefits for fintechs:

Fertile ground for start-ups

The term “start-up” indicates a new company that focuses its resources on immediate scaling and growth. Services in the digital space are almost always scalable, which is why start-ups are almost exclusive to the digital side of the entrepreneurship spectrum. Open banking enables new ways of interacting with financial assets as well as meet the demands of modern markets. Such developments lead to the rise of relatively young companies, commonly known as start-ups.

Opportunity to fulfil customer expectations

Open banking offers an excellent opportunity to fintech organisations to meet the consumers’ requirements for new and better services such as personal finance management, account comparison, and access to credit services through a single application.

Protection of consumer privacy

Before banks offered open banking, the closest thing available were aggregation sites that combine users’ account information from all their financial institutions so they can see it in one place. Such services accomplished this by requiring users to hand over their usernames and passwords for each account, then scraping the data off the screens of those accounts. This practice has security risks, and the results of screen scraping are not always entirely accurate. Open banking APIs are considered a more secure option because they enable applications to share data directly without sharing account credentials.

Challenges of Open Banking

While open banking presents several advantages there are challenges which are of concern to financial institutions and regulators. Here we draw from those identified by Nordigen and Investopedia:

Security

There is a broad concern for data breaches due to poor security, hacking, or insider threats that have become relatively widespread in the modern era, including at financial institutions. This will likely remain commonplace as more data becomes interconnected in more ways. With third-party providers usually being new fintech players and less experienced at dealing with financial crimes, attackers can pose as them, making it hard to differentiate fraud from reality. Furthermore, the processes, protocols, and infrastructure necessary for various business networks accessed by distant devices such as tablets, laptops, cell phones, or other wireless devices present certain risks. This domain known as endpoint security will always be a challenge for open banking adaptors.

Market awareness and trust

People have trusted banks for decades and the system they know not only works, but it’s something they trust and feel secure about. Pitching them the open banking idea and benefits is a harder task than one might think. People don’t really have the time or interest for that matter to educate themselves on open banking. Educating them, winning over their trust and making them regular users of the open banking technology is a process that will take time.

According to Statista, the number of open banking users worldwide is expected to grow at an average annual rate of nearly 50% between 2020 and 2024. This growth will happen in two main ways:

• Word of mouth — open banking users are the best ambassadors to spread the word and strengthen the trust around the technology
• Banks — when the authority and the previously trusted provider endorses the new technology, people will listen. Trust takes time but if banks actively pitch the new technology to their users, the adoption rate will continue rising

Readiness of banks

There is a reluctance of banks to move off their legacy software. Working with APIs is not only a huge deviation from the way they have been working for decades, but it requires sizable commitments in resources, staffing, and money. Open banking is likely to alter the competitive landscape of the financial services industry as it will force large, established banks to be more competitive with smaller and newer financial service entities. Established banks will have to do things in new ways that they are not currently set up to handle and spend money to adopt new technology.

Opportunities for banks

While the original objectives of open banking were to stimulate competition in the financial industry and enhance the quality of services provided, banks can also leverage certain opportunities. According to Strands Labs, there are three such opportunities:

1. As the custodians of people’s money, banks are in a unique position of trust to deliver on one of the most important consumer needs — safeguarding people’s income and savings. People trust their financial institution to provide the greatest protection compared to organisations in virtually every other industry. Traditional financial institutions can really exploit this competitive advantage in 2022 and beyond over challenger banks and fintechs, particularly digital-only competitors. Open banking may open banks up to greater competition, but new kinds of challengers currently don’t garner close to the level of trust that traditional financial institutions do.
2. Banks can imagine the possibilities and analyse the KPI gains that an effective open banking strategy execution could generate. By putting APIs at the core of their services banks can markedly improve the customer experience through optimal data use and faster, more precise operational processes. APIs make collaboration with third-party financial service providers so much easier, positioning banks to access expertise and technological innovation from outside their own organisation With APIs at the heart of banking customer service, financial institutions will truly be able to provide highly contextualised, relevant, and conveniently, speedily delivered financial services to the entire client base, both retail and corporate.
3. In 2018 when the first open banking regulations were well on their way in Europe, much of the talk was focused on how challenger banks and fintechs would be able to eat into traditional financial institution market share. However, the reality is that banks can use open banking to build on their own strengths to provide a much richer customer experience, and with it, enhanced acquisition and retention, revenue performance as well as improving back and middle office functions and efficiency. A key component in achieving this end is in identifying the fintech organisations that, rather than compete with banks, complement them. The bank provides the customer base while the fintech delivers readymade technological innovation.

The need for regulation

According to an article from Deloitte, there are a myriad of open banking initiatives, but they all fall broadly into one of two categories: market-driven or regulatory-driven. While there have been market-driven success stories in a few large jurisdictions, this has not been without the support of policy makers introducing a range of measures to promote and accelerate the take-up of data sharing frameworks in banking. Without clear regulatory approaches to enable secure data sharing in financial services there can be fragmented implementations lacking general interoperability.

A regulatory-driven approach introduces a legal mandate to share some financial data with third-party payment providers (TPPs). As noted by PYMNTS, the development of API-based communication solutions reduces the prevalence of screen-scraping which is found in many market-driven countries. Such practices can conflict with personal data protection regulations. Furthermore, a regulatory-driven approach can harmonise data sharing standards and improve the overall customer experience. As such, given the government’s focus on digital transformation as a key pillar for national development, a regulatory-driven approach is needed in Trinidad and Tobago.

Global perspectives

There is no “one size fits all” when it comes to open banking around the world. This section presents some of the developments across the globe as noted by TrueLayer and Nordigen:

• The United Kingdom is widely considered the leader in the European initiative for open banking. The Payment Services Regulations (PSRs) created the legal and regulatory framework for open banking in 2017. They brought PSD2 into UK law. Open banking in the UK began in earnest in early 2018, when the first of the nine largest UK banks began opening their account data as AISPs (Account Information Service Providers). PISP (Payment Initiation Services) followed later the same year. Since then, many more banks than the original nine have signed up to open banking in the UK.
• Currently, there are 296 regulated providers,
• 4.5 million regular users of open banking of which 3.9 million are consumers and 600,000 small businesses,
• 60% increase in new customers (up from 2.8 million in December 2020). 1 million new regular/active users are added every 6 months.

According to PWC research, 64% of adults will be ‘adopters’ of open banking in some capacity by the end of 2022 with a £7.2bn revenue opportunity created by open banking by the end of the year.

• In 2017, the Australian government announced the introduction of the Consumer Data Right (CDR) which aimed to give consumers (both individuals and businesses) greater access to and control over their data. The Australian government took inspiration from open banking in Europe but went a step further. The CDR is not just intended for the banking sector but will become an economy-wide data-sharing regime. After banking, the next target sectors are energy and telecommunications.
  The second half of the story is the New Payments Platform (NPP) — the coming together of Australia’s 13 biggest banks to create a set of guidelines for bank-to-bank payments. Since 2017, rules have been drawn up by the ACCC, one of the main regulators in the CDR regime. APIs have been built by the banks, with the “Big 4” delivering transaction APIs in July 2020 and have gone live with the first use cases.
• Open banking is booming in Brazil. The Central Bank of Brazil and the National Monetary Council (CMN) set up the initiative in early 2019 and separated it into 4 phases of implementation. Inspired by Australia’s CDR, Brazil is taking a similar approach to open banking as both the UK and Australia. The starting point is generic product information supplied by each bank, with no personal information shared. Over time this will expand into more sensitive transaction and account data. Finally, the central bank intends to look at Payment Initiation, the ability to instruct a bank to make a transaction from a bank account via an API.

Conclusion

Based on the Trinidad and Tobago government’s strategy for digital transformation, digital technology is critical to the country’s future success. In fact, based on a document from the IDB Group, the country’s digital transformation agenda is one that aims to achieve more sustainable and inclusive growth. This strategy focuses on one main area — the promotion of digitization to support economic transformation. Our financial services sector underpins all economic activities, and the digitization of this market brings about many benefits as has been seen around the world. As such, to achieve the goals of digital financial inclusion and promoting a digital friendly business environment, open banking must be part of the agenda. Such a transformation is one that will take many years, but the development of a robust regulatory framework will not only streamline its implementation in a participatory manner but also bring the benefits of open banking to stakeholders sooner. Roadmaps like the UK’s open banking implementation as well as others in Australia, Brazil and India can serve as inspiration for our implementation.

We must also consider that open banking can only be successful and sustainable if it has consumer confidence. In an article from the World Economic Forum, consumers must see clear benefits from data sharing including differentiated, tailored products, stable, reliable systems that are capable of handling steep increases in demand and delivering rapid service as open banking takes off. The complex, legacy IT systems that many banks are still using don’t have the capabilities to create and launch products quickly, and they can’t innovate and create tailored, hyper-personalised experiences. Fintechs can bring about digital innovation and create these clear benefits for consumers, and they operate in collaboration with banks. Open banking is critical to the success of these partnerships as it encourages banks to embrace an end-to-end digital architecture which is based on open APIs to create value.

Mark Pereira is the Founder of ZedLabs and the fintech product Wam, which is digital payment platform for the Caribbean that makes sending & receiving money simple, fast, and safe. Pay, get paid, shop, and be social all with Wam.