The COVID-19 pandemic has caused a huge shake-up of our normal day to day lives. Deaths and disruptions reached even the farthest corners of the globe — it has been all-encompassing. Now, it’s time to think about living in the post-pandemic world.
Consumers and businesses are rapidly adapting to a new normal — the way they live, operate, and consume goods and services. The current situation is undeniably boosting the growth of e-commerce and digital offerings. But what does this mean to banks? It is crucial for banks to come up with new ideas to remain relevant to their customers, who are expecting more innovative and fully mobile digital services to enable frictionless customer experiences.
Let’s take a look at some facts and figures: Customers in the US have spent more money online between April and May 2020 than the last 12 Cyber Mondays combined, around 93% of growth in May compared to 27% on average to the prior 12 months. In the Middle East & Africa, too, we see a rapid shift to cashless and innovative payments, as more than 70% of consumers in the region are now using some form of contactless payment methods.
As a result of this shift to e-commerce and digital, we see banks prioritizing and driving digital banking and payments to meet the increasing demand for online and mobile solutions. With consumers experiencing the benefits and convenience that digital banking and payments offer, it is unlikely that they will go back to traditional banking anytime soon.
Open banking to cope with post-COVID challenges
In this digital-first landscape, we can observe an emerging concept that has the potential to accelerate innovation and solve the new challenges that banks are facing: open banking.
Open banking, although around for a few years now, is still a fairly new concept to most, especially here in the Middle East and North Africa (MENA). In a nutshell, open banking is a concept to allow third-party providers (TPPs) — such as fintechs — to connect and collaborate with banks using their open Application Programming Interfaces (APIs). However, in Europe, open banking has been mandated by the regulators in the form of the Revised Payment Services Directive (PSD2) in the European Commission, in the UK by the Competition and Market Authority, and in Australia by the Australian Competition and Consumer Commission. In the US, open banking has been left largely to the market. In the MENA region, we are now seeing the first trend setters such as the Open Banking Regulation in Bahrain.
As a result of the different approaches, it’s no surprise therefore that open banking means different things to different people; in fact, when talking to banks, fintechs and regulators, everybody has varying interpretations of what it means for them as financial institutions, associations, businesses and consumers.
Open banking as a powerful framework designed to promote much-needed innovation in the financial sector underpinned by two main pillars:
Regulatory initiatives: Regulators utilize open banking as a means to create a level-playing field between banks, FinTechs and established payment companies with standards and guidelines. Regulated use cases usually include banks opening up for payment account information, payment initiation and customer and banking product information.
Bank innovation and monetization: Banks develop business models that leverage partnerships and monetize open banking. They become technically and culturally capable to innovate with FinTechs and close their digital capability gaps with them in the post COVID-19-era.
Logical next evolution step or the actual first step?
Does open banking go far enough? Should open banking be seen as a means to build a level-playing field with API standards and use cases for everyone, as well as offer competitive products to consumers and foster financial inclusion? Or, should we regard open banking as the stepping-stone to open finance that is expected to be far more disruptive?
Open banking now is limited in that it currently only applies to payment service operators. Over time, it will bring the ‘real prize’ that covers all aspects of finance for consumers and business including:
Use cases: 360-degree view of customers, financial advisors for retail, businesses and affluent customers, SME liquidity and cash management, account, loans & mortgage application and switching, frictionless creditworthiness and more — forming an open scheme-like cross-financial services ecosystem of core banking and payments capabilities.
Asset classes: All types of deposit accounts, credit cards, e-wallets (fiat and crypto currencies), loans, mortgages, capital market instruments (e.g. stocks, ETFs) and insurance policies.
Access types: Access to account balances/values and transaction information — and write access, namely initiating transactions such as domestic and remittance payments, buy/sell stocks.
Regulators as innovators in open finance?
We see FinTechs innovating, banks collaborating and regulators playing more and more of a leading role in forming the open finance framework. However, this field is changing rapidly; a one-size-fits-all regulation won’t suffice or be effective. In order to take us to the next level, the industry needs to think out of the box and develop an agile and efficient system that can keep pace with development.
There is everything to play for. And with this in mind, regulators have the opportunity to be innovative themselves and redefine the role they play in progressive banking and payments by regulating in an agile way. ‘Regulators as innovators’ could describe this more aptly.
We are increasingly observing that hotspots of innovation and growth are in the areas created by new regulations or are a conscious decision to simplify regulations. Today, global consumer choice in terms of financial services is more vibrant than ever, largely supported by regulators. There are several tools, including consumer legislation, bank licensing requirements and newer initiatives such as ‘sandboxes’—ADGM’s regulatory sandbox in the UAE, and the upcoming second version of the open banking regulation in Bahrain.
The future looks bright and open.
Source: Forbes Middle East