Open banking in Asia has been slow or stalled – in the developed markets. In Asia’s emerging markets, open banking could become a much more powerful driver of disruption and change to traditional consumer and SME banking.
DigFin is profiling fintechs in three countries that show the potential for open banking: Indonesia, Philippines, and India. But first:
What is open banking and why is it relevant?
Open banking is about using application programming interfaces (APIs) to connect customer data between financial institutions (banks) and third parties, including fintech companies and companies with customers, like e-commerce platforms.
Banks by tradition and be design are jealous guardians of customer data, partly for security reasons but also because they don’t like to share.
Regulator-driven
In Britain and Europe, the regulators decided banks were too cozy and uncompetitive, so they mandated banks open up their data to accredited third parties.
The idea is if a customer – a consumer or a small business – wants to access a service, they can request the bank share their account information with a third party, which APIs are meant to enable in a seamless, real-time manner.
These efforts have hit snags. Europe’s Payments Services Directive II, or PSD2, has placed a lot of burdensome rules on consumers, which has limited adoption. In the U.K., most banks view open-banking mandates as a compliance tick-the-box exercise. They put the minimum resource toward maintaining their APIs and ignore regulatory calls to meet certain standards.
These examples show that it’s hard to achieve the balance between regulation to protect consumers, introduce competition, and deliver useful business opportunities to banks.
The Chinese exception
In Asia, regulators in developed markets are also attempting to strike this balance. First, though, let’s look at the world’s most successful market for open banking, full stop: China.
China’s regulators didn’t do anything to require open banking. They just let innovative tech companies like Alibaba and Tencent scale at a breathtaking pace.
The rapid rise of AliPay and Tencent’s WeChat Pay created superapps, on top of which were layered all kinds of digital services. Banks had little choice but to put their balance sheets to the service of lending to superapp customers with no insight into these customers. Tencent, the big-tech company behind WeChat Pay, even launched its own digital bank, WeBank, which now serves over 200 million customers.
It’s only over the past year that Chinese regulators have moved in, with a massive restructuring of the entire fintech industry and tech sector at large. Ant Group, the fintech arm of Alibaba, has been forced to stop renting out its platform to banks and must now accept being regulated as a financial institution if it’s serving loans, including a requirement it use its own capital.
In other words, the China story is unique and the reverse of what’s happening in most other countries, where open banking is being imposed from above as a means of forcing incumbent banks to be more competitive and responsive to consumer’s data rights.
Most attention in the region has gone therefore to the developed markets of Australia, Hong Kong and Singapore. They have the largest and most sophisticated banking sectors. Their regulators, taking cues from Europe, have sought to introduce their own versions of open-data rules.
They’ve also stepped on the same landmines that have blown up attempts to use open-banking regulation to drive adoption.
Hong Kong
In 2018 the Hong Kong Monetary Authority issued a set of rules to boost fintech in the city, including a phased-in approach to open banking. Banks don’t see a commercial use.
In fact, they are not even able to trust the process of opening data to third parties, because HKMA hasn’t provided an accreditation process. Europe’s PSD2, although mired in red tape, does at least require third parties to jump through some regulatory hoops, which means banks aren’t automatically liable if there’s a data breach.
The HKMA also decided not to determine the standards for data sharing, and left this to the big banks such as Bank of China, HSBC and Standard Chartered, to figure those out. This isn’t the recipe for disruption. Indeed, the lack of a clear regulatory mandate has led some fintechs to give up on open-banking in the city.
Now HKMA has decided to build its own data-sharing platform for small businesses involved in global supply chains, called Commercial Data Interchange, or CDI. This platform could prove to be a smash hit – or it could be a government white elephant. HKMA officials said it would launch late last year but it hasn’t yet.
Singapore
Singapore’s government has also decided to build its version of an open-banking platform. It launched SGFInDex in November 2021, leveraging Singapore’s national identity system, SingPass. The platform lets individuals retrieve personal financial information from participating banks and the stock exchange, as well as from government housing and pension agencies.
The goal of SGFinDex is narrow: to let users aggregate their financial data, from credit card balances to outstanding loans to investment portfolios, only for the purpose of financial planning. It doesn’t include third-party fintechs or merchants.
The Monetary Authority of Singapore has been early on broader open banking, promulgating standards for APIs, data authentication and security as early as 2016. It hopes SGFinDex is the tip of the iceberg. It has also backed an initiative similar to HKMA’s CDI, called SGTraDex.
In both Hong Kong and Singapore, although the governments have clearly signaled a desire to see open banking take hold, actual activity has mostly revolved around the government-backed platforms. Banks such as DBS, Citi, HSBC and Standard Chartered have made tentative steps toward opening their data, but crucially these initiatives often focus on pulling data from consumer-facing partners – not the other way around.
Australia
Australia’s regime is closer to the UK’s Open Banking Initiative, using regulation to pry open banks’ data troves. Australia’s 2020 Consumer Data Right law is actually a broader move to empower customers with their own data that has also kickstarted open banking.
The paperwork, costs and strict requirements has slowed licensing and adoption. There’s also a lot of customer education required (as opposed to unregulated sectors such as buy-now pay-later fintechs and other unsecured consumer lenders).
Australian regulators have responded by simplifying the rules to make it easier for smaller fintechs to obtain accreditation this year, and to allow data to be shared from joint accounts (important for households seeking mortgages).
Slow motion
The Aussie media trumpets this as a superior model than those of the UK or Europe. Digital challengers have embraced this opening (see our story on Volt Bank and Railsbank). Incumbents will gradually follow. But it’s still a slow process, and important parts of household wealth, such as superannuation, remain out of bounds for data sharing.
In all three cases, Asia’s developed markets have relied on a top-down, regulator-driven approach to open banking. The results have been mixed. Hong Kong and Singapore’s regulators have actually built their own platforms to address specific niches of data sharing. In all three markets, the disruptive potential of open banking APIs is only being realized slowly and in piecemeal.
The true power of open banking is not to be found in these markets. It is Asia’s emerging markets that are poised to disrupt traditional banking through open APIs. This series will look at examples in Philippines and India. But this week we’ll turn to one of the region’s most exciting markets: Indonesia.
