Hardtalk on Open Banking: Regulatory vs Market-Driven

Two seasoned experts in the field, Michael Salmony (Europe) and Paul Brisk (APAC) discuss the latest developments in global Open Banking, emerging best practices in the world and debate on the key lessons learned by markets going into Open Banking through impulses from the regulator or from the market itself.

Michael:

Hello everybody, my name is Michael Salmony. I’m part of the expert council of APC and very happy to have a talk today with Paul Brisk about Open Banking. Paul, maybe you’d like to introduce yourself.

Paul:

Thanks, Michael. Yes, I’m Paul Brisk, I’m currently in New Zealand, but I’m usually based in South East Asia. I’ve had some exposure to what’s happening with open banking in Asia, and today we’re going to talk about open banking and maybe contrast what’s happening in different parts of the world. So, maybe we should start by defining, what we mean by open banking, which could have a different meaning in different parts of the world, but Michael you’re based in Europe do you want to start with a definition of open banking.

Michael:

Okay, glad to start. Yes, I’ve been working a lot in Europe on open banking but also in a number of other geographies, right up to Japan. So, one does indeed see different interpretations of what everybody means by open banking, but for me it means allowing third parties (non-banks) access to data that the customer has at his bank. And so, by allowing others to access data that you have at a bank, you can do totally new business models. You can provide better service you get more competition, you get more innovation. So, this is probably the development when we look back in 10 years’ time where we will say this caused the bigest change payments and banking.

Paul:

Yes, and I would agree with that. The way I like to think about, or define open banking in particularly for people who aren’t familiar with it, is that, if I’m doing a transaction or I’m interacting with a digital distributor, maybe through a mobile phone app, I’m doing something that’s perhaps a little bit whiz-bang, a little bit innovative. If I have to cut out of that transaction to access my bank either to download account information or to request that my bank does a payment and to complete the transaction that I was doing with the digital distributor, then for me that’s inconvenient, there’s friction involved and therefore that’s not open banking. However, if I can stay within the environment of that digital distributor and ask my digital distributor to access my bank on my behalf with my consent to either access information stored at the bank or to perform a bank service, such as payment, while not having to access the bank’s environment, via the bank’s interface, but stay within that digital innovators environment, then that’s a much more convenient, frictionless experience and that is therefore open banking, that’s what open banking creates for the end user.

Michael:

Okay, I think we agree on that. I mean to put it simply maybe: if you just go to some new service provider and he – with your consent – looks across all your accounts and says “look you may be over insured here, under insured here, I may be able to get you a better loan deal here, you seem to be interested in ecology topics why don’t you invest in this” all by using data from your bank under your consents, that I think is the magic of this open banking.

I think what we wanted to talk about was to have a little bit of a debate – a Hard Talk as we like to call it – about regulatory versus market driven open banking. They seem to be two fundamentally different approaches which we see in the market. And we’ve decided to take sides: I will go for the regulatory side and you would go for the market side although I think we both see the advantages of both.

Maybe I’ll just quickly kick off, why I’ve chosen the regulatory side, because I think, unless the regulator steps in this is not going to be a pervasive effort, it’ll only just be a few big banks doing it and unless the regulator actually steps in and says I want the whole of Europe to do it or whole of a community to do it, this will not happen. So, although we’ve seen market driven developments in in America, and curiously Germany, for 20 years already, we are not getting full traction across all banks and that will be one argument I would like to bring. I have a few more, but I’ll let you speak now on this regulatory approach, which I think actually has a number of advantages. What would you say to that?

Paul:

Yes, so I think, the regulator-driven approach is probably where open banking first emerged. And I think it helps to understand, why the regulator-driven approach occurred and I would characterize markets, such as western Europe, the UK which probably were the first places where regulator-driven open banking started. Why did it start there? Because the regulators looked at those markets, saw that the banks had those markets sewn up and were blocking the entrance of innovators who needed to get access to banking data to allow banking services to provide fintech type services. So, the regulators stepped in and they did that very well or quite ingeniously. They said, actually the data that sits at the bank is a result of a customer doing a transaction, doesn’t belong to you the bank, it belongs to the customer. And the customer has the right to share that data with whoever, whichever third party they wish for the creation of a benefit. So, I would characterize that environment, that regular regulatory driven environment as the banks responding to regulation. They’re in react mode. And actually, I would say, and I said it’s still early days, but I would say that most banks are still resisting that. Market-driven markets and we’re seeing some of those markets.

Michael:

I will have to jump in, because you’re making quite a number of points here. Because I think I would disagree on a few a few points if I may,

One is, I think the initial thing was actually market driven, as I said: Germany has had open banking for 20 years, driven entirely by the banks as has the US. But it wasn’t pervasive. It didn’t make it across Europe for example and in US it didn’t make it across all banks and therefore people are leaning towards more regulatory driven approaches. And I totally agree with you, it is Europe that has been the first to actually enforce this in the whole world. So, this is a case where Europe is absolutely leading the world and a number of other geographies are looking at Europe to see what they can we learn from this experiment or this first mover on how they’re moving. But I think now that the regulatory impetus has been given, the banks were indeed initially reticent and said “Oh that’s another regulation and this is just going to cost us, we’re going to have to implement APIs and how do we make this secure, …”, but all studies now show that the banks have fully embraced this development. They see this as an opportunity of generating new revenues, of partnering with fintech’s, offloading some of the topics they don’t want to do with intelligent partners, offering new services, developing new business models. There is a lot of evidence and practice in the market showing that – despite the initial regulatory impetus or maybe because of it – that actually the banks are embracing open banking and that’s for the benefit of everybody.

Paul:

So, look at the other side of the coin for market driven. I’d say that where market-driven markets are different. So, you cite Germany as actually having tried market-driven open banking for maybe more than a decade, maybe a couple of decades. Why did it not gather in momentum? My feeling on that is again, because you’ve got markets where the banks actually had the market sewn up. They’re highly profitable and they serve most of the people in that market with bank services with bank payment instruments. No room for innovators to really crack into those markets. So, if I look at the other side of the coin, if I look at an India or an Indonesia or a China, the banks only serve the top of the value chain because falling below that level, serving people that are the lower part of the demographics, is unprofitable for the banks. So, that left a giant space open for fintech’s to come in and innovate without having to compete against the banks. They served those people and actually created digital commerce ecosystems where in effect they connected buyers within sellers, usually via mobile phone apps. So, created true digital commerce through to payment. Now initially, they concentrated on low-value sectors, but as they grew in critical mass, Indonesia is an example case in point, I guess would be Gojek, created a payment digital payment tool Go pay. They then created critical mass of customers moved up the value chain and started threatening the banks.

Michael:

I agree with you Paul on Indonesia – and that’s a market of course you know very well. But I think if one looks at the empirical evidence, one can see, if you just draw a map of the world to show where regulatory driven and where market-driven activities are happening, it is almost always regulatory, I’m afraid. And I would also disagree with a number of examples you’ve given, I’m afraid. For example, China and India. To me China is an incredibly state-driven economy by definition and India has the UPI which is also driven by the central bank of India which is effectively a state driven initiative. I think we are converging on the fact that we need both, right. You need the market driven to actually make things happen to get the innovation there but maybe you do need a regulatory impetus to cover the whole market to make it to actually get moving. You also need the regulator for other things around open banking like privacy and liability and things like that which the markets may not agree on across 4000 banks in Europe or across tens of thousands of banks across the world.

Paul:

Oh, Michael I would agree with you that even in a market like Indonesia, I mean just on China one point I would make is that, I don’t see China as an open banking environment. I think the banks have been locked out. So, they didn’t get the opportunity to do open banking. And India and Indonesia ended up having to join these digital commerce ecosystems, so not pressured by the regulators. Although I agree to a degree some of that’s happened in India but not at all in Indonesia. But where I will agree with you to finish up is that even in Indonesia, where at the moment there are no standards, there’s no regulation, the regulators are moving to put regulation in – not to drive open banking, but what we’re talking about here is sharing customers’ data and potentially requesting third parties to do payments on behalf of customers. We need to ensure the consumer or the customer is protected.

Michael:

Sure, because that’s also an interest that the state has. Well, I think that was a wonderful discussion thank you so much, it was really good. We agreed on a lot of things, we also found a few things to disagree about which I think makes it much more interesting for everybody. Really look forward to working with you at the APC and I hope the friends watching this video will enjoy it too, thank you very much.

Paul:

Thank you very much Michael.