Open Banking has emerged as a force, in the financial landscape offering the potential to reshape how consumers and businesses interact with financial services.

Europe took the lead in Open Banking by introducing concepts like PSD2 and the UK’s Open Banking Standard. Now this trend is spreading worldwide with different countries finding their ways to implement Open Banking beyond just traditional financial services.

As Open Banking continues to gain momentum it becomes essential to examine the approaches adopted by countries across the globe. This article aims to explore two classifications of Open Banking regulations; market-driven and regulatory-driven approaches.

By delving into these approaches our goal is to provide an understanding of the current state of Open Banking regulations and their impact on various stakeholders such, as the financial sector, consumers, and businesses alike.

Market Driven Approaches

In market-driven environments, financial institutions voluntarily embrace Open Banking practices with the aim of fostering innovation enhancing customer experience and maintaining competitiveness. These initiatives are primarily being driven by leaders, in the industry fintech companies and other individuals involved who understand the benefits of sharing data and collaborating.

Several countries, including India, Japan, Singapore, and South Korea have not yet implemented mandatory regulations for Open Banking. However, policymakers in these nations are actively introducing measures to encourage and speed up the adoption of frameworks for sharing data within the banking industry.

In Singapore, the Monetary Authority of Singapore (MAS) and The Association of Banks have worked together to create an API Playbook. This resource aims to make it easier for banks and FinTech companies to exchange data and communicate by providing guidelines on how to implement APIs and promote collaboration.

Japan’s Financial Services Agency (FSA) has also taken steps to promote Open Banking practices. They have put in place an authorization process for Third Party Providers (TPPs) made it mandatory for banks to publish their API policies and encouraged them to form partnerships with at least one TPP by 2020. Due, to Covid 19 circumstances this deadline has been extended until 2022.
Most Japanese banks have complied with encouragement by September 2020. However many third-party providers (TTPs) are still hesitant to grant access, to their API for some reasons. On a level, though numerous solutions have emerged, indicating that the Japanese market is embracing Open Banking initiatives and overcoming resistance.

In contrast, the United States has adopted a market-driven approach to Open Banking without government support. A recent report proposed establishing regulations for data sharing in services. However, due to the nature of US banking and regulations across states and people’s aversion to regulation, there is currently no significant push for a nationwide Open Banking policy.

Recognizing the significance of Open Banking, major US banks are utilizing APIs in collaboration with partners to remain competitive and attract customers. Nonetheless, there is no industry API plan in place leading third-party providers to often resort to “screen scraping” methods when offering new services. Screen scraping involves accessing a customer’s bank account using their login credentials—a process that can be costly and inefficient for TPPs. Moreover, this method places banks accountable, for any issues arising from screen scraping activities even if they were unaware of practices.

Furthermore, the practice of screen scraping can result in third-party providers (TPPs) gaining access, to customer data more than necessary. This poses increased risks for both customers and banks.

These examples illustrate how countries without regulations on Open Banking are actively cultivating a culture of innovation and collaboration within their sectors.

By adopting measures that encourage data sharing and cooperation between banks and FinTech companies these countries are positioning themselves to reap the benefits of heightened competition and enhanced customer experiences that Open Banking can offer.

Approaches Driven by Regulations

Regulatory-driven initiatives in Open Banking are fueled by government regulations or legal mandates that require institutions to share customer data with authorized third parties. The objective is to stimulate competition, foster innovation, and enhance consumer choice.

Outside the European Union, two significant jurisdictions have embraced a driven approach to Open Banking; Hong Kong and Australia.

In July 2018 the Hong Kong Monetary Authority (HKMA) introduced an API Framework that outlines a phased approach for banks to implement APIs. This process commences with the sharing information, about products and services, culminating in the sharing of data and payment initiation services.
However, there is a difference, between the EU approach and the approach taken by banks in Hong Kong. While banks in Hong Kong are required to develop APIs they have the flexibility to limit access to Third Party Providers (TPPs) with whom they choose to collaborate. Unlike mandating Open Banking HKMA has made it an optional choice for banks providing high-level guidance for those who choose to participate.

On the other hand, Australia stands out for its ambitious vision. The Consumer Data Rights Act (CDR) which is currently being finalized shares similarities with Open Banking initiatives by allowing consumers to share their data with third parties of their choosing. However, what sets CDR apart from other initiatives is that it is a data policy initiative that is solely focused on financial services. Initially, applicable to banks CDR will eventually extend its scope to include the energy and telecommunications sectors and potentially any sector.

Another unique feature introduced by the CDR legislation is the concept of ‘reciprocity.’ This means that any organization receiving customer data through CDR must reciprocate by sharing its customer data when requested if it operates within the sector. This principle ensures competition, among banks and fintechs by creating a level playing field.

To sum up, Open Banking has emerged as a factor that is shaping the financial landscape. Different countries have adopted either market-driven or regulatory-driven approaches to encourage innovation, competition, and better customer experiences. Market-driven approaches, as seen in India, Japan, Singapore, and South Korea rely on industry leaders and fintech companies adopting Open Banking practices. The hand-driven approaches followed by Hong Kong and Australia involve government regulations or legal mandates that require financial institutions to share customer data with authorized third parties.

As Open Banking gains traction worldwide it becomes crucial for stakeholders, in the sector to understand and adapt to these regulatory approaches. By embracing the opportunities brought by Open Banking countries can foster innovation improve customer experiences and fundamentally transform how consumers and businesses interact with services.