Joe Jelinek, Research Director at Kapronasia, discusses the Open Banking progress made in Asia Pacific and the opportunity for greater financial inclusion in Southeast Asia.
Open Banking is the use of application programming interfaces (APIs) to streamline the sharing of customer bank data with third parties. It was born out of the notion that customers own their own data and so can decide who has access to it and for how long. In all cases, it is the customer that gives their consent for data to be accessed by third parties.
While that is the premise of all Open Banking, there are different ‘flavours’ of it that can be observed across the Asia-Pacific (APAC). At a high level, these can be roughly parcelled into those that are market-led and those that are regulator-led. In the following section, we will look at five selected jurisdictions to provide an overview of their Open Banking progress: Australia, Hong Kong, Singapore, India, and Indonesia.
A taste of Open Banking across APAC
Starting with Australia, it is one of the only markets in Asia-Pacific that is unambiguously regulator-led. Australia’s Consumer Data Right (CDR) legalised and made mandatory Open Banking across financial institutions. The CDR is, however, part of a broader move to empower customers with their own data. This year sees Australia continuing to roll out its data sharing framework, now with a focus on the energy sector with the recently published Consumer Data Right Amendment Rules (No.2).
Hong Kong’s regulator, the Hong Kong Monetary Authority (HKMA), meanwhile, has not mandated Open Banking, instead opting for a voluntary opt-in process and providing high-level guidance assisting financial institutions to agree on standards among themselves. In 2018, the HKMA published a four-phased Open API Framework, part of a collection of initiatives to prepare the territory to move into a new era of Smart Banking. The first two phases encouraged banks to make their product information available via APIs and allow customers to apply for financial products via third parties. Hong Kong now expects to complete Open APIs Framework Phase III and IV by the end of 2022, which will allow access to account information, and enable payments and transfers.
In contrast to Australia and Hong Kong which are seen as being regulatory-led, Singapore is touted as a market-led jurisdiction for Open Banking. However, while there is no mandatory requirement for banks to open up their data, systems, and services, the regulator, the Monetary Authority of Singapore (MAS), has taken a strong top-down approach to implement Open Banking. Starting in 2016, the MAS was the first regulatory body in Asia-Pacific to publish guidelines on Open Banking and to outline a plan for banking data to be made available through open APIs. More recently, in December 2020, Singapore launched SGFInDex, a platform that leverages the country’s national identity system, SingPass, to let individuals aggregate their financial data for financial planning.
India, with APAC’s largest population of underbanked people, is one of the region’s greatest Open Banking opportunities. The government has also invested heavily in building the infrastructure to make Open Banking easier. The ‘India-Stack,’ a public-private platform that was introduced more than ten years ago, includes United Payments Interface (UPI), an interoperable payments system underpinned by Aadhaar, a national identity database. India has also launched an account aggregation framework, a financial data sharing system to ease the accessibility of financial data. By focusing on the important key prerequisite components of Open Banking, India is creating the necessary conditions for implementing an Indian Open Banking scheme.
Another interesting market in APAC which deserves a mention is Indonesia, with its 92 million unbanked adults and 47 million underbanked. Similar to India, Open Banking represents a massive opportunity. As such, regulators have expressed support for Open Banking as part of Indonesia’s digital financial transformation reform. In 2019, Bank Indonesia (BI) put in place its ‘Indonesia Payment Systems Blueprint 2025,’ laying out five main key areas of focus: Open Banking; retail payment systems; financial market infrastructure; data; and regulatory, licensing, and supervision. As part of its Blueprint 2025, BI has developed a real-time retail payment system infrastructure (BI-FAST), published an Open Banking roadmap for data ownership, and standardised Open API payments for industry players.
Southeast Asia’s opportunity for greater financial inclusion
More than 70% of Southeast Asia’s adult population is either ‘underbanked’ or ‘unbanked,’ with limited access to financial services. In addition, millions of Southeast Asia’s small and midsize enterprises face large funding gaps. Banks relying on traditional distribution models have simply found it too expensive to serve poor and remote communities across the region. The cost of processing a financial product, and the cost of customer acquisition, is just too high. Open Banking promises to lower these costs considerably.
That is because, while banks may still be the ultimate providers, non-banks such as fintechs or ecommerce platforms, can provide users with financial services on a white-label basis via the use of APIs. This type of arrangement, known as embedded finance, turns the economics of serving individuals on its head. Distribution costs are slashed and given the sheer scale of the un- or underbanked, there are profits to be made.
However, Open Banking is not the panacea to the region’s financial inclusion problems. That is because Open Banking is premised only on leveraging consumers’ banking data, which obviously the unbanked do not have. Instead, we must look beyond Open Banking to Open Finance and ultimately to Open Data – a world where consumers fully own their data and can benefit from products and services derived from it. The next step to Open Banking then in the region is Open Finance. This initiative extends the idea of Open Banking to allow the sharing of consumers’ financial data that is beyond the banking system. From entities such as ecommerce platforms, telcos, or utilities. Such alternative sources of consumer financial data can then be used by both banks and non-banks to leverage an individual’s financial footprint to provide a range of financial services.
Open Finance not only offers the Asia-Pacific a pathway towards greater financial inclusivity; it also offers financial players an opportunity to access a larger market. A win-win surely for all and sundry.
[Editorial comment: This article has first been published in the Open Banking and Open Finance Report 2022. Can be downloaded in via linked article published by ThePaypers]