Why Move to Open Banking and the Obstacles to Achieve it in the Philippines
The economic principle of competition tells us that a competitive market model benefits the consumer the most as it fosters innovation among firms and reduces the price of commodity goods. The same market behavior is expected from an open banking financial system where banks cross share information, customers willingly allow data commercialization, and regulation enables data sharing for commercial use. In theory, open banking is good for the whole financial and banking industry as proven by models from the EU, UK, and America. But why has the Philippines lagged on this movement compared to neighboring countries like Singapore, China, and India? What are the obstacles keeping the adoption of open-banking low in the Philippines?
Open Banking and APIs
Open banking can be defined as a collaborative model in which banking data are shared through APIs between two or more unaffiliated entities to deliver enhanced capabilities to the marketplace. APIs, which stands for application programming interface (API), are the mechanisms and conduits by which banks interact with others in the digital ecosystem. In an open banking system, data sharing is accomplished with the use of APIs which connect systems for data access. APIs are not exclusively used in financial services; it has been long used in security authentication and authorization, allows IT systems integration in a cloud-based model, and access of product catalogs/information, among others.
Open banking opens opportunities to increase customer value and improve the user experience in banking products. Innovation and technology play a major role in designing cheaper, faster, and better banking experience leveraging on APIs and open-source information. More and more mobile-first, connected customers are demanding easier and seamless banking experience. Beyond this, open banking also provides a silver lining for improving banking services for rural banks, SMEs, cooperatives, and microfinance companies leading to financial inclusion.
The Case for Open Banking in the Philippines
Open banking is part of the Bangko Sentral ng Pilipinas’ (BSP) three-year digital transformation agenda as the lead regulator of bank and non-bank financial firms prepare the groundwork for its policy for digital banking in the country. Several local and foreign banks have also started to operate as digital-first, mobile-led as an early adoption for imminent transformation in the local industry. Most notably, UnionBank of the Philippines early on launched an API developer portal that houses more than 150 API endpoints available for fintech companies, banks, SMEs, and public consumption. While regulation for an open banking system is still forthcoming, the application of APIs in financial service and transactions has already been happening for some quiet time in the form of remittance center partnership with banks, cross-platform e-wallet top-up, and checks clearing system, among others.
The benefits of open banking and API adoption are massive, from innovation incentives, extended market research, API monetization and reduction in partner costs, and operational efficiency, and improved customer experience. Some of the business case and benefits are as follows:
1. Open banking provides the customer with a better choice for financial products
With advanced customer data analytics, customization of products and services is possible with multiple options, or service providers to choose from. Customers are given the upper-hand to choose among various options that fit their profile and purchase capacity; businesses also improve the customer experiences by providing tailor-fitted products that customers most likely expect.
2. Alternative and traditional credit scoring will be easier and faster with better access to customer information
According to a PwC report, a major benefit of open banking is the ability to credit score thin-file customers. Open banking gives lenders access to significantly more information and better insights than traditional methods to create better credit reports to assess a traditionally thin-filed customer. Transaction history from in-app mobile purchases, mobile payments, telco data, and e-wallets are some sources of information that can be shared through an API.
3. Rural banks, cooperatives, and microfinancing institutions (MFI) will have access to a wider range of banking products and offer more to customers.
Rural banks, cooperatives, and MFIs are not part of Automated Clearing Houses per BSP regulation which means they are almost not part of initiatives such as the National Retail Payment System (NPRS) and excluded from international networks such as SWIFT. Through an open banking partnership with a fully-licensed commercial or universal bank, their customers can access the NPRS platforms like PesoNet and InstaPay for sending money and paying bills via data sharing through APIs. This allows financial inclusion in rural communities that big banks do not reach or cater to now.
4. SMEs (and its customers) will have better access to financial products and banking services
Small and medium-sized enterprises (SMEs) makeup 99.6 percent of all registered businesses in the Philippines and employ over 70 percent of the working population. The sheer size of the industry provides a huge opportunity for open banking and API adoption for personalized, instant, and cheaper access to financial products and banking services. With open data sharing, payments and disbursements can be automated, financing options can be faster, and cash management systems will be better delivered.
Obstacles to Adoption
The potential of open banking has reached a fever pitch and the regulators at BSP are responding to it. The benefits of it are extensive: better customer experience, industry innovation, and financial inclusion. However, with any change in technology or an innovation drive in the market, there are also challenges and inherent risks that come with open banking. While the BSP and its partners already started the initial steps to encourage innovation such as the launch of the NPRS and now creating the regulation for digital banking, there still some aspects that are considered obstacles to open banking and API adoption:
1. Are banks willing to share customer data?
Banks and large financial institutions traditionally see the custody and protection of customer data as their responsibility in keeping the trust of customers. The general practice of banks in the Philippines is to provide an audit trail, risk assessment, and permission from the data owner to share data, or more so commercialize the data. To allow data sharing, banks will need to go beyond compliance to develop a set of core objectives for open banking.
2. Are customers willing to give consent to share their data?
The elephant in the room in open banking is customer consent and transparency on the data commercialization. Data security and compromise are top of head customer concerns when it comes to data sharing. Although the Data Privacy Act of 2012 allows data sharing, customers are worried about sharing information because of privacy issues. While it is easy to warrant consent by a small feat of clicking ‘I Agree’ is data sharing agreements (DSA), businesses should have the responsibility to educate and inform customers without confusing or scaring them.
An enabling environment is also a requirement for the successful adoption of open banking and APIs in the country. Like in Singapore, dubbed as the Silicon Valley of Asia for fintech, innovation sandboxes and technology scaling must also happen in the Philippines. These will likely include digital identity (i.e. National ID system) and access management systems (Public Key Network), consent management, and data and analytics. The Philippine government already started initial projects in creating an enabling environment for fintech startups; it is only a matter of time and a few regulatory push that open banking will soon be the new normal for the financial sector.
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