Open Banking and Blockchain — An Opportunity

Open Banking is an Australian Treasury and the Australian Competition, and Consumer Commission (ACCC) mandated initiative to direct banks to share consumer data in a machine-readable way. The goal is to reduce the friction of changing financial service providers and to trigger innovation. As per the latest timeline, phase1 rollout of Big Four Banks is on its way in July 2020. It is adoption from the United Kingdom’s Open Banking and EU’s Second Payment Directive (PSD2).

While the industry will comply towards the phase implementations, there will be few imperatives to focus. Few of them are listed below

• GDPR — GDPR could potentially pose an antithesis role to the Australian open banking standards and need to be tackled accordingly. Australian banks and organisation may have been possibly dealing with personal data (PI) relating to an individual of the EU and EEA region.
• ISO20022 — defines the metadata for the Financial Institutions and covers protocols like FIX, SWIFT
• Information exchange complying with Information security standards, e.g. Data Confidentiality, Data Integrity, Data Availability, Non-repudiation
• Open Banking Enablers (OBE) — The ecosystem where the innovative solutions are proposed, developed and offered to the customers will be developing. Adoptions, however, will entirely depend upon the data privacy, ease of use and competitiveness of the offering. These OBEs would need to work hand in hand with major banks and Accredited Data Recipient (ADRs).

The role of Blockchain

The cutting-edge technology like Blockchain will contribute to the success of Open Banking standards and will make this a potent combination. The cornerstone of Blockchain is to provide transparency, immutability, ease of verification and audits. Pairing APIs with Blockchain technology, banks can create digital and innovative ecosystems, adjust operating models and connect with their existing customer base in a whole new way.

While few of them would augment the existing solutions and many will take the utilisation of banking data to the next level. Few of the potential use cases are mentioned here.

Identity & KYC Verification of customers and its counterparty is critical to the banking system. A Blockchain-based federated solution around identity and KYC will play an important role where customers hold the sharing of the control of its PII, a basic premise of GDPR.

Centrelink Welfare Payments Australian govt aims to save $2.1B in their welfare payouts to needy, by asking individuals to report the actual fortnightly earnings. OBEs can potentially develop innovative solutions around automation of submitting the bimonthly data to the Centrelink system and making it transparent and immutable over Blockchain.

e-Invoicing and Bank reconciliation Australian small businesses are collectively owed $26 billion in unpaid invoices at any given time. Of all late payments, over 20% are due to errors on invoices. A start-up like BlockLedger already has an innovative product named Lucaplus, an innovative e-invoicing platform, integrates with major banks to reconcile invoice payments to complete e-invoicing workflow and help auditors to verify it using Blockchain.

Credit Rating This is an algorithmic number that gauges a consumer’s overall ‘creditworthiness’. With the open banking standards, to access the credit score and to maintain the rating on Blockchain will bring-in transparency and efficiency in the system, making it completely trustless.

Financial crime compliance Blockchain, a Distributed Ledger Technology (DLT) enabled KYC systems can help initiating, controlling, execution of transactions against the assigned cryptographic key and help tracking the provenance of the transactions.

Trade Financing is still done on papers such as bills of lading or letters of credit, being sent by fax or post around the world. As the Blockchain maintains immutable digital bills across different stakeholders on a trustless basis, the reconciliation will bring in massive efficiency in the whole ecosystem.

Syndicated Loans Keeping in mind of high-profile cartel cases caught in previous years, ACCC is serious about having better monitoring around the lending process. Holding the entire loan workflow on the Blockchain makes perfect sense, any changes to a loan’s specifics, e.g. ownership can be quickly reflected across.

Key Technological Options and Challenges

While core technological advancement started in 2009 with the Satoshi’s whitepaper led to the advent of Bitcoin, it picked up really in 2015 when programming capabilities were added to Digital Ledger with a platform called Ethereum. In 2020, we are sitting on a plethora of different Blockchain platform options.

• Public, Private/enterprise and Permissioned Blockchain
• Public and Private Transactions Blockchain
• Programmable and non-programmable Blockchain
• Consensus Mechanism e.g. PoW, PoA, PoS
• Governance Mechanism

Financial Services Institutions (FSIs) are highly regulated and must perform due diligence on counterparties. They are expected to be wary to deal with trustless public networks for their confidential, high-value institutional business. However, they may be at ease in sharing information in the closed environment or consortium of nodes, e.g. enterprise or Permissioned Blockchain. So, platform selection will be a crucial decision. Some of the platforms which are suitable in the open banking contexts

• JP Morgan’s Quorum enterprise offering
• Ledgerium Blockchain
• Two Hyperledger suites of products
• Hyperledger Burrow
• Hyperledger Sawtooth
• Ripple XMR

Going ahead

There is already a defined roadmap for Open Banking adoption in Australia and Banks, ADRs and OBEs are ready with their sleeves up. The end consumers are going to see many innovative products around this very soon. 86% of surveyed businesses believed Blockchain would gain mass adoption in the years to arrive, and Open Banking will be one such area.

However, that doesn’t mean that adopting the standards will be a smooth ride. There are inherent industry challenges to the process. The right staffing will be one such challenge. Waiting for on-demand skilled resources is a sheer waste of time, and that’s a lesson learned hard by the market in the previous years. There will be a significant focus on building in-house teams from scratch.

Looking at the roadmap, coming couple of years will be an interesting period in this space!