Open Banking set to transform finance in the GCC

What is driving the Open Banking trends in the region?
Open Banking is a series of reforms that drive competitiveness in the banking sector. By driving change in how banks handle their customers’ financial information, Open Banking puts control back in the hands of the consumer. Customers can decide whether or not to share their financial information with authorised providers, to gain access to new services and innovations that can help them manage their money better.

The Middle East and the UAE specifically have some of the highest mobile penetration rates in the world. Changing consumer trends, the desire for consumers to have full control of their finances and accounts under one view, and a better range of services tailored to them are the main drivers behind open banking. According to Finastra’s recent survey of financial institutions, ‘Banking and collaboration: State of the nation survey 2020’, the main driver for banks for tech-driven innovations like Open Banking in the UAE is to cut costs or improve efficiency, a factor cited by 59 per cent of respondents. The second greatest driver is to implement ‘digital transformation across our organisation’, according to 47 per cent of respondents.

Which technologies are required to enable Open Banking?
Open Banking requires open application programming interfaces (open APIs). These provide a computing interface to a software component or a system that defines how other components or systems can use it. It enables the secure sharing of data with authorised third parties and facilitates partnerships between financial institutions and technology providers that can help improve the customer experience. Open APIs could allow customers to pay for purchases at retailers using their bank loyalty points, for example. Open APIs also facilitate the creation of mobile wallets, where customers can view all their financial activity through a single interface. Almost 90 per cent of UAE bank executives surveyed by Finastra say their organisation is adopting or looking to adopt open APIs.

For Open Banking to realise its potential, it needs a foundation technology that can enable scalable innovation and accessibility – cloud. Cloud enables financial institutions to avoid the burden of managing infrastructure on-premise, and to integrate third-party fintech creativity via APIs. Cloud can also improve operational efficiencies through enhanced automation and resilience.

These benefits will affect the way banks evolve their operations. Many banks are still operating on-premise, but more are now using a hybrid model for cloud applications such as CRM and HR, connecting these to their on-premise core. Established banks are starting to use private clouds, where they can take advantage of the distributive processing power that cloud provides while moving off-premise and simplifying their IT infrastructure.

Are there security concerns with opening up APIs?
Until recently, larger banks’ readiness to adopt cloud was constrained by data sovereignty concerns. Today cloud providers have become more flexible in terms of where they locate their data centres. This has created opportunities for banks in territories not previously regarded as candidates for cloud.

Open Banking enables third parties to access customer data through open interfaces. Financial institutions must proactively take steps to ensure that customers are able to realise the benefits of new services without their personal data being compromised. Essentials steps that banks and partners can take include encryption, so that data cannot be read if intercepted; proactive threat detection that identifies attempted intrusions; and vulnerabilities in real-time and adoption of multi-factor authentication at the customer level.

What regulatory hurdles stand in the way of Open Banking?
Respondents to the survey believe there is a need for ‘standardising best practices’ across the industry, via regulators (69 per cent) and by technology (53 per cent). Bahrain was the first to set up an Open Banking regulatory framework in the Middle East, replicating the efforts of global finance hubs such as the UK and Singapore. Authorities in the Kingdom of Bahrain are working closely with fintech providers and start-ups to develop a data-fuelled model of banking that is transparent, efficient and secure.

Regulation typically relates to which third parties are authorised to access data on behalf of a customer, liability and dispute resolution should problems occur and the fees that those holding data can charge third parties for providing API infrastructure. The survey revealed that nearly half of UAE respondents (47 per cent) believed complex regulations are a barrier to collaboration with third parties.

What are the pioneering fintechs/startups leading the Open Banking evolution in the region?
The Central Bank of Bahrain (CBB) is very pro-innovation, which has been a key factor of the success of Bahrain as one of the Middle East’s leading fintech hub. From the first regulatory sandbox to the first set of comprehensive cryptocurrency regulations, the CBB has been at the forefront of developing a flexible and forward-looking regulation system that supports fintech innovation. The introduction of Open Banking which came into force in June last year, is a big step in Bahrain’s leadership role in the fintech sector and is leading the way to a way of innovation in the financial sector in the Middle East.

Bahrain’s new system will debut with the adoption by the National Bank of Bahrain (NBB) of the FinTech Tarabut Gateway’s Open Banking infrastructure. Tarabut Gateway is leading the way, having been the first company to graduate from the CBB’s Regulatory Sandbox last year.

Other incubators and accelerators such as Bahrain FinTech Bay and DIFC FinTech Hive are pushing fintech innovation and collaboration in the wider financial industry.