What Hong Kong Can Learn From Open Banking in the UK

The UK model provides lessons to help ensure Hong Kong’s open banking ecosystem is able to realise its full potential, say Finastra’s Eran Vitkon and Shweta Jain.

As Hong Kong continues to forge ahead with its Open Banking journey, it is helpful to look at markets which have already trodden a path in order to learn from their successes. The UK in particular provides a helpful case study as it is widely regarded as a global leader in this space.

The two markets also share a number of similarities, including a mature banking industry and a landscape where a relatively small number of banks account for most of the market share, making the possibilities for disruption by Open Banking more exciting.

UK Open Banking regime

Open Banking was introduced in the UK in January 2018 when the Second Payment Services Directive (PSD2) came into force. The initiative was aimed at driving competition and innovation in the financial sector and leveling the playing field between incumbent banks and fintech challengers.

To date, more than 300 fintechs and innovative providers have joined the ecosystem, and more than 2.5 million UK consumers and businesses now use open banking-enabled products to manage their finances, access credit and make payments. This is up from 1 million users one year earlier.

As many as 4 million open banking payments were made during 2020, compared to just 320,000 in 2018. The number of API calls also increased to almost 5.8 billion during 2020, compared to 66.8 million two years earlier. What has caused this success?

UK’s success factors

The UK’s Open Banking regime can be characterised by its heavier emphasis on regulatory guidance and enforcement of technical and customer experience standards, all of which are governed by a singular, centralised mandate, with a clear regulatory framework.

These factors also create a platform on which the benefits of Open Banking can be easily realised by all players within the ecosystem. The UK’s approach also provided a strong incentive for banks – which are typically reluctant to provide access to their customers’ data – to participate in the ecosystem.

Over the course of 2020, incumbent banks increasingly started to see open banking as an opportunity to leverage technology and fintech partnerships to build a more comprehensive view of their customers in order to deliver more personalised financial products and advice.

Meanwhile, the Covid-19 pandemic prompted consumers to increasingly turn to money management platforms to handle their finances. With open banking enabled, the platforms were able to provide users on-platform access to their bank accounts to help them monitor spending, set financial goals and enable automatic savings.

Regulatory clarity essential for fintechs

From the fintechs’ point of view, regulatory clarity and robust standards and governing mechanisms provided in the UK’s Open Banking regime delivered a level of transparency that incentivised third-party service providers to approach the market with innovative solutions. It has been clear that information on bank transaction volumes and the relevant APIs were available and accessible.

Such information helps to attract fintechs by giving them visibility on the opportunities and market potential of a particular segment. A clearly defined framework also aids the development of Open Banking use cases as it helps banks understand which APIs they should create for third-party usage.

In addition, regulatory clarity helps fintechs understand the types of operations that can be performed, leaving less room for uncertainty.  In short, the clearer a regulatory framework, the more easily it can be used. An overly-open framework, on the other hand, can create challenges for adoption – as we have seen in the US market.

Consumer experience matters

From an end-user’s point of view, consumers want to enjoy simplified journeys and expect a high quality of service. The UK’s Open Banking authority’s customer experience guidelines bring together regulatory requirements and customer research to help fintechs deliver superior customer experience, while also helping them to avoid unnecessary delays or frictions that could arise with regulatory compliance.

Additionally, a strong regulatory framework also leads to a more comprehensive approach to governing consumers’ data security, which in turn, provides peace of mind regarding access to personal banking data and help to lower the barrier of acceptance for customers.

While the implementation of Open Banking in the UK meant further regulatory obligations for banks, they are increasingly seeing the value and opportunities it brings.

We have observed a growing awareness amongst UK banks that embracing the Open Banking model could be an effective approach to building customer loyalty, delivering better customer experiences, and thriving in a more competitive landscape.

This has been aided by a flourishing fintech ecosystem in which fintechs and third-party service providers increasingly deliver innovation and collaborate with incumbent banks.

What’s next for Hong Kong?

The Hong Kong Monetary Authority (HKMA) issued its Open API Framework in July 2018, setting out a four-phase approach for banks to implement APIs to allow third-party service providers to use bank-generated data to provide financial services.

To date, the first two phases have been implemented in Hong Kong. These made banks’ product information available via APIs and allowed customers to apply for financial products via third parties.  The final two phases will make account information available via APIs and enable transaction capabilities.

In light of the UK experience, the release of technical standards in the final two phases of Hong Kong’s Open Banking journey will be a welcome step for all stakeholders. The HKMA has previously stated that it planned to publish technical standards for the final two phases before the end of 2020 and then set a new timetable for implementation.

As the industry eagerly awaits the technical standards and new timetable, key considerations will be to resolve cybersecurity and data privacy challenges, in order to enable smooth implementation, incentivise banks and fintechs to participate, and help the ecosystem realise its full potential.

As a seemingly separate initiative, the HKMA recently announced plans to launch the Commercial Data Interchange (CDI), a new consent-based financial infrastructure which seeks to enable more secure and efficient data flows between banks and businesses to address pain points in SME financing.

Along with other regulator-led initiatives, the CDI could catalyse further industry developments in Open Banking by tackling key data flow and security challenges. With industry and regulatory support, Open Banking success in Hong Kong could mean that it, like the UK, could become a source of inspiration for other markets.

Eran Vitkon is Head of Open Banking and Shweta Jain is Director of Digital and Cloud Product and Strategy at Finastra.

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