Well before COVID-19 advances in financial technology were already forcing banks to embrace the technology in their business strategies by either innovating themselves or partnering with fintech firms to remain competitive. In fact, the traditional banking model is rapidly getting outdated and the open banking model is emerging.
The COVID-19 health crisis accelerated the adoption of mobile and digital banking and provided an opportunity for banks to push hard the envelope on innovation and enter the race to design solutions that satisfy the needs of customers irrespective of where they are located. The World Retail Banking Report 2020 provides three salient statistics on these developments. First, it reports that 57% of customers said they now preferred internet banking in the aftermath of COVID-19 as compared to 49% before COVID-19. Second, it reports that 55% of customers said they now preferred to use mobile apps for banking as compared 47% before COVID-19. Third, it reports that 21% of customers would now prefer chatbots and automated voice to assist them when interacting with banks as compared to 15% before COVID-19.
Emphatically, the lesson financial institutions are getting from COVID-19 is that being digital-first in both value proposition as well as in operations is imperative and no longer something in vogue. In this regard, the health crisis has specifically catalysed the open banking initiative that was already underway and forcing banks and fintechs to co-exist in a different way. Rather than partnering with fintechs, banks are now opening their application programming interfaces (APIs) to share data with other service providers that include fintechs. An open banking ecosystem involves banks sharing customer data through APIs with relevant third-party providers (TPPs) with the consent of the customer. This enables customers to view different financial accounts, spending patterns, advice on financial requirements, and other services on a platform, and be able to compare alternatives.
Open banking became formally accepted in Europe through the European Union Second Payment Services Directive (PSD2) adopted in 2015 to facilitate a better integrated, efficient, cost effective and competitive payments market. The UK followed suit to embrace the ecosystem in 2016, Beyond Europe, notable countries that are embracing open banking include: Australia, Canada, Hong Kong, Japan, Israel, Mexico, New Zealand, Singapore, South Africa and the USA. Having foresight of the direction of the financial sector, two prominent financial companies acquired fintech enablers of open banking; Visa acquired Plaid while Mastercard acquired Finicity during the first half of 2020. Some prominent large banks such as DBS Bank in Singapore, Société Générale in France and Wells Fargo in the USA have embraced open banking and have made it the core of their strategies.
In South Africa open banking is viewed as one policy tool that could spur competition in the banking sector in which only five banks -ABSA, Capitec, First National Bank, Nedbank and Standard Bank – have a combined market share of over 90%. Notably, two South African banks – Nedbank and Investec – announced in 2019 that they were embracing open banking. Nedbank is the first bank both in South Africa and Africa to open its API platform, API Marketplace, to fintechs that meet its technical standards for open banking. This is a boon for fintechs because they can innovate products that could be guaranteed to be used by Nedbank customers if their products are accepted into its API Marketplace. Similarly, Investec has entered the open banking by collaborating with Bud, a fintech that helps banks connect their apps and data to other fintechs and financial service providers. Amidst COVID-19 in 2020, a South African fintech, truID, received significant funding to develop open banking technology to assist financial service providers to access consumer banking data securely.
The Intergovernmental Fintech Working Group (IFWG) comprising FIC, FSCA, the National Treasury, NCR, SARS and the South African Reserve Bank are supportive of open banking and view it as one means of promoting innovation, fostering competition and financial inclusion. However, the Group is aware of the potential risks relating to data ownership and data privacy and hence envisage the regulator having a role in supporting an open banking environment by providing guidelines for licencing and consumer protection. Currently, open banking in South Africa is market-driven as it is in the USA and Canada. However, since the South African payment industry is interconnected with that of Europe, its financial institutions would naturally be required to comply with PSD2 regulations. The European Union has gone further to protect consumer data through its General Data Protection Regulation (GDPR). In South Africa regulators are likely to soon expedite a regulatory framework for open banking taking cue from the practice in Europe and Australia. On 1 July 2020 Australia launched its Consumer Data Right (CDR) for data sharing. The CDR is a mechanism for consumers to share data held by trusted third parties securely with their consent. On 1 July 2020 South Africa promulgated the Protection of Personal Information (POPI) Act for which businesses including financial institutions were given a year to institute measures for compliance. The POPI Act has implications on the operations of financial institutions with regards to protection of consumer data as it provides guidelines on disclosure and processing of personal information. Incidentally, through interconnectedness with Europe, South African financial institutions would be required to comply with GDPR as well as the domestic POPI Act. Since GDPR standards are more onerous, the POPI Act may need to be amended to align with GDPR standards.
Going forward, open finance is the next frontier. The open banking ecosystem is limited to sharing payments accounts data. Open finance is a framework that covers all financial data including insurance, wealth management, pensions and investments, and not just payments accounts. Some jurisdictions, for instance, the UK regulators, have since recognised the need for an open finance framework and are exploring its feasibility. In an open finance ecosystem, competitive rivalry will be replaced by co-opetition, that is, cooperative competition between banks, telcos, fintechs, Big Techs and other TPPs whose shared goal will be to give the best value for money to the consumer.