Open banking is becoming a reality and opening up many doors to new business models in the developed countries. This article illustrates open banking and its growing role and how it can help accelerating the financial inclusion in Pakistan.
On January 13th 2018, Open Banking became a reality in the United Kingdom of Great Britain and Northern Ireland. On the same date, PSD2, which is very similar and we’ll explain the technical difference shortly, also came into force in the European Union. Both have been relatively low key affairs and surveys suggest most consumers in both territories have paid little attention and don’t really understand what either mean to them personally as retail financial services customers. However, the subsequent impact these regulatory changes will have for consumers in Europe and the UK are expected to belie the subdued public reaction.
Imran Gulamhuseinwala, the head of Open Banking Limited (A non-profit organisation coordinating the implementation of Open Banking in the UK) and Fintech lead in EY, stated “it’s going to be revolutionary”. Why? The fact of the matter is how banking actually works hasn’t really changed…ever. A few decades ago ATMs appeared so we could withdraw cash without waiting in line in a bank branch. When computers became normal records and processes were digitalised. The internet era brought online banking and smartphones mobile apps. But the nuts and bolts of how things actually work have stayed the same. Open banking changes that status quo fundamentally.
And open banking is coming to Pakistan also in 2018, in the form of Third Party Service Providers’ (TPSP) licenses to be issued by the Pakistan Telecommunication Authority. Pakistan’s digital banks have also started exploring the open banking and how to enable an integration with a wider ecosystem through open banking. It’s a little different to the Open Banking and PSD2 of the UK and EU – with a more limited focus on mobile and digital wallets. Nonetheless, within the Pakistani environment could prove just as revolutionary and should pave the way to wider ranging reforms including the traditional banking sector in coming years.
But let’s first take a step back and look at the details of just what open banking is and why it is expected to have such a profound impact on the retail finance industry and the control consumers have over their own finances.
Open Banking in a Nutshell
In many regions of the world, almost the entire population has a traditional bank-held current account into which they receive their salary and any other income and withdraw cash, make debit card payments and pay bills. Despite being in an era where it is common to change service providers such as mobile phone operators, internet providers and even utilities providers where this is not still a monopoly system, most people choose their bank as a teenage and stick with it for life. That bank has a very complete record of everything that individuals earns, spends or borrows. But banks don’t actually do much with that information. Open banking obliges banks, and other financial services companies, to open that data to third parties, but only at the customer’s request. It gives financial services clients full control of their financial data and who has access to it.
The UK’s Open Banking system goes one step further than the current EU PSD2, in that this data has to be provided by the bank, or financial services provider in a standardised API format. In Pakistan, it will mean mobile-banking, digital and mobile wallet providers will have to open their customer’s data so that it can be shared with and used, should the customer wish it to be, by different providers.
What Will the Practical Result of Open Banking Be?
Open banking will revolutionise financial services in two main ways for consumers:
– Increased competition
– A wider range of products and services
Open banking will mean banks, or in Pakistan’s case banks and branchless digital wallet providers such as telecommunications companies, will no longer only be competing against each other. They will face competition from anyone who wishes to offer financial services. This opens the door wide open for new non-bank Fintech competitors and will fundamentally alter the payments value chain, what business models are profitable and customer expectations and power.
Banks, or digital wallet providers, will no longer be one-stop shops. Personal finance will become an open platform where ‘consumers can embrace a more modular approach to banking by giving verified third parties their data’.
As open banking develops the kind of services it will give birth to are hard to predict at present but can be expected to be significant and wide ranging. One example given is how Uber essentially resulted from Google Maps, with the democratised taxi service running on Google Maps’ API. Some of the more obvious initial results of open banking are expected to include the following:
Money Management: customers will be able to connect different bank accounts, mobile wallets and other financial services products under one dashboard. This will help make their money management a much more efficient process.
Lending: rather than having to fill out forms and provide bank statements when applying for a loan, open banking will let customers potentially provide easy one or limited-time access to all of their financial history to a lender. This will help both individuals and small businesses. Currently both customer and lender have to do a lot of manual work to provide and process this information. This is expected to be of particular value to consumers who have ’thin files’, which means limited financial history.
Payments: at present, to make an online payment the recipient must digitally contact an “acquirer” such as WorldPay or Global Payments. This financial services company relays the payment order to Visa, Mastercard, or whoever your debit or credit card processor is, who then take the payment from your bank account or wallet. Open banking will cut out all of these middlemen. You simply authorise the payment and the bank or wallet authenticates it directly. This will make online payments both quicker and cheaper.
Security: open banking will not be any less secure as current online banking. APIs are trusted data transfer technology and the same kind of customer authentication as now will need to be provided to authorise a transaction. Increased compatibility will in fact reduce the requirement to share banking data and any misuse of data will be subject to the same laws as currently the case.
Open Banking in Pakistan
At the moment, branchless banking services provided by companies such as UBL’s Omni, Telenor’s Easypaisa and Jazz’s Mobicash do not allow customers to transfer funds from one to another. Open banking will mean inter-operability between providers so users can conveniently switch between them for different transactions and send funds from wallet to wallet and wallet to bank account.
Eventually, this first step will hopefully pave the way to a full open banking system for Pakistan similar to that now in operation in the UK and EU. This will mean a greater competition, lower prices and a much wider range of more efficient services.
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