Open Banking: the opportunities and the risks

The objective of Open Banking is to drive financial services innovation. Where previously banks only allowed their customers to see their accounts through their own banking website or mobile app, Open Banking now forces banks to make this data available to any aggregator that connects to it, giving consumers control over their data and their finances.

This has created a wealth of new banks, services, and ecosystems to emerge giving consumers greater choice of who they use for their financial services. It also gives banks access to innovative services and potentially more customers and channels.

Europe led the way with its regulatory approach to levelling the playing field and increasing competition, therefore the flavour of Open Banking is quite prescriptive and standards-driven. In comparison, the US embraced a market-driven approach that has seen incredible innovation but perhaps a less consistent standards approach.

Although Open Banking of any flavour is undeniably a positive move for both consumers and financial institutions, it potentially opens 1000s of unsecured digital channels.

Because of its regulatory and standards-based approach, Europe has been able to quickly build strong customer authentication (SCA) regulations to secure all those digital channels and deliver exceptional customer experience in the financial services sector. This in turn is driving the acceleration of the Open Banking ecosystem of financial services.

There are several Open Banking initiatives underway in the GCC region, but except for Bahrain regulators, have not yet stepped in to shape this movement.

Bahrain introduced regulations that stipulated the adoption of Open Banking by all retail banks and gave them six months to comply. Every bank has opened up its application programming interfaces (APIs), making customer data completely available.

In Saudi Arabia, the Central Bank has introduced an Open Banking policy to advance innovation in the financial services sector. The country plans for Open Banking to go live in the first half of 2022.

In 2018, one of the UAE’s leading banks, the Emirates NBD, partnered with Virtusa to develop a cloud-based, gamified open banking sandbox. The sandbox enables developers and fintechs to build and publish API applications. It is hoped that this project will bring competitive products to market.

However, opening banks up and exposing thousands of APIs without checks in place will lead to risks.

So, can the difference in approaches from the US and Europe offer the GCC region important insight? to accelerate Open Banking in the region?

Here are some of the key observations of Open Banking and the evolution of SCA in Europe.

Open Banking journeys are all orchestrated through redirect flows where users are returned to their bank login page or banking app for authentication when they need to authorise access to account information or initiate a payment.

Traditional authentication methods such as usernames and password or even SMS OTP add considerable friction, impact the user experience and are detrimental to the successful adoption of Open Banking.

European regulators, banks and solution providers were already working together to formulate a clear and unified vision on SCA adoption before the Covid-19 pandemic forced consumers almost exclusively ‘online’.

This development has highlighted further the pressure on banks and businesses not only to ensure authentication is scalable and secure but to move beyond a username, password, and SMS OTP to avoid user frustration/cart abandonment and reputational damage. SCA is well on its way to being implemented.

A regulatory-led collaborative approach will be the success factor to ensure SCA supports Open Banking as part of the wider digital transformation agenda and Covid-19 mitigation in MENA.

Ali Chamseddine is head of Payments Strategy at Callsign