At the recent Annual Banking Law Update, in South Africa, international law firm Hogan Lovells, reflected upon a common, positive theme: banks are sitting on a goldmine of data about their current account customers. At its core, open banking is about providing secure access to financial information. Whilst historically, the banking relationship has been a very closed and private relationship between banker and customer, open banking challenges that model and promotes the sharing of the customer’s transactional banking data with trusted third parties.The consequence is that customers will have more choices about who to share their information with and what data they want to share.
The open banking movement is predicated on the basis that – data belongs to the customer and that the customer should have control over how it is used and with whom it is shared. Depending on the legislative background, an ‘open banking’ solution might involve a bank collaborating privately with a third party and allowing controlled access via an application programming interface (API), as in the case of the Nigerian Open Banking NGO, or it may be mandated by law, either as an obligation on providers individually to provide access or an obligation imposed collectively.
Open banking can be a force for good as it allows third party providers to access financial data where a customer chooses to allow access. Customers are no longer restricted by the sometimes limited additional services that their own bank offers, but can access more efficient and effective services offered by third party providers without having to change banks which increases choice. This increased choice can encourage competition on several levels. Where access is opened up through a standardised open banking framework, third party providers will find it easier to access customers and more products and services will appear. This in turn should encourage banks to provide a better service to their customers by either developing their own competing services or by partnering with (or acquiring) popular third party providers. As payment service providers (both new and old) become more competitive and are able to reach new markets, innovation is likely to increase to help participants stay relevant and competitive. With the lower costs of digital innovation, more entrants will join the market with competing products, and as the market broadens, new customers and needs will be identified.
It will be crucial to the success of any open banking project that all participants understand the legal basis on which third parties are entitled to access. From a legal perspective, the overriding concern will always be to create a framework that ensures the security of the account and credentials, facilitates the customer’s freedom of choice, and allocates risk and liability appropriately to protect the customer. Where account providers are obliged by law to permit access, however, one of the first considerations for legislators will be whether those account providers can agree (or impose) contracts on third parties or not. Where this is not permitted, the law should ideally extend further than might otherwise be the case in terms of setting the rules and limits of access.
Since open banking is primarily about access, one of the main issues that an open banking initiative will need to grapple with is how to ensure safe and reliable access. Hence,there are a number of issues that require careful consideration before an open banking system can be implemented. One of them being legal issues. There are particular legal issues that are unavoidably linked with open banking, which will influence the shape that the open banking system takes. Each open banking system will have to make decisions about means of access, liability, banking secrecy, and data protection, as well as the nature of the rights and obligations between participants.
The burning question for legislators is therefore whether – in the long term – the aims of open banking are better achieved through ‘enabling’ legislation that removes obstacles and then relies on competitive forces to make it a success, or through mandatory legislation that may result in more activity sooner, but may also result in a narrower and more restricted end product.
This may be seen as a threat by some incumbent banks but it also presents great opportunities for innovative banks, new providers, and customers, as well as bringing the potential for positive social change. For these reasons, open banking may be both exciting and alarming to banking regulators, for whom the challenge is to allow it to flourish in a controlled manner that does not undermine the regulator’s overriding objectives of stability and security.
However as explained in the presentation by James Black and Krista Koskivirta, Hogan Lovells International LLP, inaction is not the answer because in many cases these changes are coming whether incumbents want them or not, and any provider that lacks a response will be left behind. In reality, there are two broad options: compete or collaborate. Incumbents that are innovative and flexible will be able to compete by putting out new products and services that are more aligned with the new multi-party banking industry. For incumbents that are unable or unwilling to do that effectively, collaboration may be the key to opening up access to new customers and markets. In either case, survival will be determined by how quickly the sometimes antiquated banking systems can be adapted to reap the benefits of open banking for customers.
Although, open banking in Nigeria is driven by an NGO that is backed by industry participants and is aiming to provide open source non-profit API standards that are free for banks and FinTechs to use. This concept needs to be buttressed upon to increase competition, choice, innovation and ultimately financial inclusion.
JAMES BLACK AND KRISTA KOSKIVIRTA
James Black is Counsel, Hogan Lovells and Krista Koskivirta, Associate, Hogan Lovells
Tags: financial inclusion
, Open Banking