Banks Wide Open — An Introduction to Open Banking and its Present Outlook in Malaysia
A Brief History
It all started in the year 2015, when the revised version of the Payment Services Directives (PSD2) was released by the European Parliament as an initiative to encourage innovation in financial services, integrate the payments market and offer better consumer protection in the payments realm. This spurred the movement to allow for more transparency and flexibility in handling customers’ financial data. A year later, the Competition and Markets Authority (CMA) of the United Kingdom initiated the open banking rule for the nine biggest UK banks. In 2018, it came into force in the UK and had since then led the open banking revolution across the world.
Source: https://en.wikipedia.org/wiki/Open_banking
What is Open Banking
Without open banking
When we open an account at any bank, our data (transactions, bill payments, account details etc.) is kept in silos in the servers of that particular bank. The bank has full control and visibility of our data and no one else apart from the account holder can access the information. If the server is a garden, this garden is completely locked without any access to third parties.
With open banking
Open banking rules that banks are required to build a gate into the garden for third parties such as fintech startups to access the information of the account holder. This means that you can now allow permission for authorized third parties to access your financial data in order to offer you financial services and products. The key to enter the analogical garden gate is API or Application Programming Interface, which you can read a crisp explanation of it here.
Impact
With access to your financial data such as transactions and bill payments, startups, businesses, and innovators can now build services and products on top of it.
If you have accounts opened at multiple banks, you probably felt before the pain of having to access them through separate applications as the data is kept silo in separate gardens. With open banking, one can build a platform which integrates all the bank accounts and allow users to view them on a single dashboard interface. A good example of how a financial management app uses open banking would be Yolt.
Furthermore, open banking can potentially revolutionize the lending industry. For most, getting loans still require an arduous process with procedures including photocopying bank statements, identification documents, and visiting a brick and mortar store. With open banking, consumers can save the hassle by providing consent to lenders to view their transactions instantly. The result: a greatly improved customer experience. On the other hand, lenders can improve their businesses by speeding up credit assessment and decision through access to instant information. Since the financial data obtained comes in a standardized digital format, lenders can also run data analytics on it to improve the precision of the credit assessment.
Recognizing the potential large-scale impact of open banking, mammoth sums of money are being poured into open banking players. Earlier this year, Visa acquired San Francisco-based Plaid for USD 5.3 billion. Elsewhere in Europe, the fintech company Tink secured a 90million EUR investment round. Here is a list of leading UK companies providing open banking services to banks and financial institutions.
Open Banking in Malaysia
In January 2019, the central bank, Bank Negara Malaysia (BNM), released a guideline documentation for banks to standardise their data format. (For your information, open banking will not work if each bank has its own data format. Imagine the pain of third parties having to work with tens or hundreds of different data formats(!) This helps us understand why a standardized format is necessary). Do have a look at the official repository here if you are interested to see some examples of data format. There is also Strings Global Sdn Bhd, a startup providing open banking services to local banks. All signs point to the budding rise of open banking in Malaysia in the coming decade.
Conclusion
So, as we can see, open banking enables our financial data to break out of the enclosed servers of the banks and allows it to be shared with third parties which in turn provide value by building services and products on top of the data. This also means greater transparency and flexibility, opening the playing field for innovators. However, it is not all sunshine and rainbows. Making your data accessible to multiple parties increases the risk of cyber attacks. Security and data integrity need to be heavily prioritized. With Malaysia taking strides towards the digitalization of finance, there are plenty of reasons to believe that open banking will be a key stepping stone.
