Exemplary actions from regulators in Europe and some APAC countries, fostering and incentivizing innovation, are behind the emerging local open banking (OB) initiatives. As a result, fintechs are introducing innovative solutions, such as simplifying cross-border shopping with local payment methods or streamlining credit rating processes . Promising results are driving the evolution of the OB initiative and hinting at wider adoption of such solutions.
Frank Breuss, CEO of Nikulipe, a fintech company specializing in creating and connecting local payment methods (LPMs) to access fast-growing and emerging markets, believes OB can drive financial inclusion and democratize the payment market. Breuss offers his insights on the current industry landscape, suggesting what’s next for the new wave of finance.
OB Going Mainstream in the U.K.
The adoption of OB products is widening amongst Britons, with a record-breaking 5 million user milestone achieved at the beginning of this year. The key driver behind this growth was HMRC’s addition of a “pay by bank” transaction option into its annual self-assessment process used to collect income tax.
Furthermore, a crucial phase has ended for OBIE, the responsible regulatory body in the U.K., which announced that its initial road map for OB is now complete. The last milestone includes an essential update on the 90-day reauthentication requirement. From now on, users are not required to re-authenticate access for every open banking service with each of their connected banks every 90 days. This topic has been a point of contention within the industry for a long time and should now enable a better user experience for OB users.
Premium APIs in Europe
According to the European Payment Service Directive (PSD2), all banks operating in member states need to have an API that allows fintechs immediate access to data. But this initiative is often criticized for the limited approach toward the amount of data made available by the banks, which includes only the most basic transaction information. The term “premium APIs” is now starting to surface in the industry, with the promise to allow fintechs access to additional bank data.
“The open banking ecosystem is expanding in numerous avenues of consumer financial activity,” Breuss said. “As a result of correct regulations, banks are obligated to work together with fintechs, which genuinely adds to the level of innovation. This allows more and more fintechs to build diverse value-added services, such as easier credit rating and solvency check solutions, and products that improve ERP [enterprise resource planning] or KYC [know your customer] processes.”.
The financial industry in Europe is now looking for ways to advance and build on its current success. Unfortunately, regulation is naturally the primary constraint for innovation, as PSD2 does not obligate banks to collaborate by offering the full scope of their data. That is now beginning to change through voluntary and disciplinary initiatives. Some banks look to gain a competitive advantage through early development of premium APIs, allowing third-party providers more access to savings, investment, and even FX data. At the same time, the European Banking Authority has hinted at potential fines in the future if banks make no progress toward making more data available to fintechs.
“For Europe, it’s now about the ‘next step’ — it’s possible that this time the innovation comes from the market side, and regulators will have to catch up,” Breuss said. “We are seeing the expansion of OB technology, and the growth of this ecosystem is only possible through collaboration between financial institutions and fintechs.”
Looking at Europe from a local perspective, the Baltic region is one example of solid regulatory support for companies creating OB solutions. In Lithuania, the Central Bank publicly registers all APIs offered by regional financial institutions — one of many initiatives to foster the local OB ecosystem.
Australia and Singapore
Since 2020, the Australian Central Bank has taken a strong stance by insisting banks share data with third parties that have been accredited by the ACCC. The result is a more efficient financial system where Australians can sign up for new credit or debit cards, apply for loans, and easily switch from one bank to another. Even practical tools for budgeting that let you track and plan your spending are gaining traction amongst users. On the other hand, in Singapore, OB solutions aim to provide trusted identity, password, and authentication solutions throughout the customer journey and, by doing so, solve a prominent issue — fraud and identity theft.
“The OB technology is unifying by design, and we will see more and more innovation where solutions feed on each other and merge to create even more complete processes. The value for users is speed, security, and optimization of everything finance-related,” Breuss said.
Investments in Africa
Various African countries have taken regulatory initiatives to establish an infrastructure for OB solutions. Last year, Kenya’s Central Bank had promised to define standards for API development and encourage data exchange in the market, whereas Nigeria’s Central Bank issued guidelines back in 2021. The fintech world is recognizing the efforts of numerous countries in the continent to establish a sound environment for innovation, and, as a result, $16 million were injected since 2015 into companies developing OB solutions, according to Quartz Africa.
“OB is a huge topic in Africa, as stakeholders see benefits to improve banking systems, foster innovation, and (hopefully) increase financial inclusion,” Breuss said.
Other major economies are realizing that it's time to act but are yet to take any significant steps toward implementing OB regulation. In the U.S., OB solution implementation is still lagging behind for some of the same reasons as in Canada — consumer data privacy concerns. Albeit, Canada’s Department of Finance has just elected a new lead for implementation and regulation, looking to gain momentum in this new wave of finance.