The Podcast Transcript

Jacqueline Powell: Hello and welcome to the Payments Podcast. I’m Jacqueline Powell and today I’m hosting Marcus Hughes, head of strategic business development at Bottomline. Welcome, Marcus.

Marcus Hughes: Thanks, Jacqui. Always a pleasure to be with you, working on these podcasts.

Jacqueline Powell: It is. It’s great to have you on board. So, our topic for today is focused on how open banking is evolving into open finance which, in turn, is forecast to expand into open data.

Now this is part two of a three-part series. Last time, we looked at the general adoption of open banking, account information services and payment initiation services via APIs. And we touched on the move from open banking to open finance and, of course, open data.

Now, today we’re going to look at how different countries are approaching open banking and data sharing from Australia to the US, Asia and Switzerland.

Marcus, in our last episode, we closed out the conversation around the European aggregators dominating the open banking API scene and mentioned that many of them are now rolling out these solutions in other regions such as Asia Pacific and the Americas, while a few of the large North American aggregators are growing their European footprint at the same time.

So, kicking off today’s podcast, could you give us an example of any other country where open banking payments have gained significant traction?

Marcus Hughes: Certainly. I think if we want to understand what the future of open banking and open finance will look like, especially in terms of digital payments, I’d suggest we look at what’s been achieved in India and in a very short space of time.

India’s Unified Payments Interface known as UPI is a single mobile app for accessing multiple bank accounts and making payments to any other bank account in the country, in real time, 24/7. But although this UPI programme is not specifically denominated as an open banking initiative, it has many parallels with open banking programmes. And indeed, UPI is arguably streets ahead of the pack especially in terms of the scale it has achieved.

Impressively, UPI was only launched in 2016 running on India’s Immediate Payment Service or IMPS. And yet, 150 banks are already live processing more than a billion payments per month and for a value of more than $30bn per month.

A systems customer base has also grown rapidly to over 100 million people and small businesses achieving the fastest adoption rates of any payment system anywhere in the world. What’s more, this user base is expected to grow to 500 million within the next three years.

The rapid popularity of UPI is explained really by its simple, safe and hassle-free system. Instead of using bank account numbers, UPI enables payments using email identifiers and QR codes. It also has the advantage of a single click two-factor authentication.

But a key ingredient of UPI success is Aadhaar, India’s biometric system which provides over a billion Indians with a digital identity. This makes it the world’s largest biometric programme. The Aadhaar system has become ubiquitous since its introduction in 2010. It consists of a biometric card with a unique 12-digit number and a fingerprint or iris scan. With this digital ID, people can even open bank accounts instantly using Aadhaar’s EKYC capability. This is surely a model which should be followed in other countries.

In recent months, India’s big banks have made another significant step in open banking and open finance by launching account aggregator data sharing systems. This gives customers the ability to share their financial data with other firms to an API based repository.

Account aggregator will open to firms that obtain licences from the Reserve Bank of India. The system connects account aggregators, financial information providers and financial information users. The Central Bank and the government hope that increasing access to data is going to boost financial inclusion, in particular, by making it easier for people and small businesses to access finance.

Just before finishing on India, it may be helpful to distinguish between India’s UPI and China’s mobile payment giants. That’s Alipay and WeChat Pay. On the one hand, these well-known Chinese payment platforms provide e-wallet payments using a closed loop system.

Its highly successful apps are now accepted in 30 countries and they’re growing extremely fast. On the other hand, UPI works with any bank account in India and uses the country’s real time payment system known as IMPS. So, there’s quite a difference between China and India and what they’ve been doing with their digital payments.

Jacqueline Powell: Yes, it’s great to hear what they are up to. Thank you.

Let’s expand on this across the pond then. What can you tell us about open banking developments in the US, another major economy?

Marcus Hughes: Well, there are several important developments in the US which are really quite exciting. As there is currently no UK style government mandated programme, the evolution of open banking in the US over the last few years is a market-led approach. That’s because US banks and fintechs are very much aware of the strategic importance of open banking. And they’ve been developing API-based offerings for some years now.

Fortunately, this drive is supported by a number of US initiatives to develop common API standards for sharing customer data, provided the customer gives their authorisation, of course. Probably the most important of these initiatives is the Financial Data Exchange or FDX, which is a not-for-profit organisation with a large membership of 200+ US and Canadian banks.

In September, the Financial Data Exchange published very compelling information or evidence that the principles of open banking are gaining strong traction in the US because the number of consumers and accounts using its API has risen rapidly to 22 million now. I know the US is a big country, of course, with a population of 320 million. But 22 million is still a very reasonable percentage.

The FDX API is now being used by more than 100 financial institutions. And the API calls using this protocol have reached two billion per month. That’s four times more than the European Union combined.

The main driver for this increase in FDX adoption is that banks, fintechs and consumers want a better way to access and share data through applications that connect securely to bank accounts. That’s instead of using the outdated and insecure method of screen scraping which historically has been widely used in the US.

A separate initiative is that NACHA is partnering with Accenture to create the API Standardisation Industry Group or ASIG. They’re developing a tool for financial institutions, the businesses, fintechs and other industry stakeholders to standardise the use of APIs in US financial services. So, there is plenty of positive work underway in the US, I’d say.

Another very important step towards actually formalising open banking in the US was taken just a few months ago in July 2021 when President Joe Biden signed an executive order aimed at increasing competition in the economy. Biden’s 9th July order includes a provision for the Consumer Financial Protection Bureau or CFPB to issue regulations that would make it easier for consumers to access their bank data and transfer it to other banks and third-party providers.

President Biden’s intervention here does give a fresh impetus to a move that has been open to the CFPB since the 2010 Dodd-Frank Act. In fact, under Section 1033. After years of studying the issue, in late 2020, the CFPB finally began crafting rules which cover consumer privacy, data breach liability and how information can be shared under the scheme.

But to be practical, this US Consumer Protection Agency undoubtedly faces an uphill challenge as it needs to balance the compelling demands from banks, fintechs and a growing number of API aggregators. They also face the difficult task of developing an open banking model among a labyrinth of old consumer finance laws.

But at least, Biden’s executive order about open banking now means the topic will get higher profile and with Biden pushing for rules, open banking has certainly received an important push in the right direction.

Jacqueline Powell: It’s fascinating to hear how different countries are adopting different approaches to open banking. So, let’s move to another region. How about Southeast Asia? And from what I am seeing, fintechs and innovation is booming in that region.

Marcus Hughes: A great question, yes. Let’s start with Singapore which is one of the world’s most exciting fintech hubs. Singapore was an early adopter of open banking with the Monetary Authority of Singapore acting as a key driver. Although they’ve not passed any specific regulations mandating its adoption, they’ve been actively encouraging the development of a collaborative open banking ecosystem between banks and fintechs.

One of the most important initiatives by the Monetary Authority to support open banking is the API exchange. This is the world’s first cross border open architecture platform which was designed to support financial innovation and financial inclusion across ASEAN which stands for the Association of South Eastern Asian Nations.

Launched back in 2018, the platform is where financial institutions and fintechs can connect easily and collaborate on APIs. Even before APIX, the Monetary Authority of Singapore had published an API 00:10:00 playbook. This is a comprehensive guide for banks and fintechs to develop and adopt open API-based systems and architectures.

The playbook includes more than 400 recommended APIs. And, in addition, the Monetary Authority also operates the financial industry API register which tracks open APIs in the Singapore finance industry, all divided into functional categories.

Another major milestone in Singapore’s open banking journey was the launch in December 2020 of the Singapore Financial Data Exchange. This platform consolidates financial data from banks and government agencies in a single platform. The Exchange uses Singapore’s national digital identity, Singpass, which citizens can use to retrieve their personal financial information such as deposits, credit cards, loans and investments from participating banks as well as details of loans and balances at government agencies.

Consumers can grant access to banks to share this information. So, in this way, the Singapore Financial Data Exchange is one of the world’s first public digital infrastructures to use a national identity and a centrally managed online consent system. For me, this is a great example which Western countries could consider and emulate hopefully.

Jacqueline Powell: Wow. That is an impressive level of sophistication in open banking and open finance in Singapore. What about Hong Kong which is a strong rival to Singapore in finance and fintech innovation?

Marcus Hughes: Yes, as you’d expect, Hong Kong is also making progress in open banking. Over the last few years, Hong Kong has been developing an open API framework and proposing a scheme and set of APIs all of which are based on the UK’s model. However, the adoption of open APIs is merely being encouraged rather than being imposed by a government mandate.

More recently, in an innovative step to drive faster adoption of open banking, the Hong Kong Monetary Authority is now developing a commercial data interchange. The Monetary Authority’s traditional role has been to regulate financial services and secure the movement of payments through its clearing and settlement systems. But now it’s expanding that role into securing the exchange of data in order to support new financial products and to reduce risks and make it easier to access finance.

So, as part of the commercial data interchange programme, the Hong Kong government is actually building its own platform to accelerate open banking. That’s instead of relying on the private sector. It’s hoped that this initiative will jumpstart open banking and open finance initiatives which so far have been quite slow to take off in Hong Kong.

This is partly due to banks’ concerns around liability and data protection as well as their reluctance to share customer data with third party providers. But under the commercial data interchange system, each bank and authorised fintech has a single connection to make data sharing more efficient and scalable.

With the customers’ consent, they can access a comprehensive set of data including merchant point of sale information. So, this means banks can forecast the business’ future cashflows and they can identify cashflow patterns and understand counterparty risks better and therefore make finance available more easily.

Merchants that outperform their projected sales can then begin to improve their credit standing. And this will enable many customers, especially small and medium-sized businesses to use their own data to enhance their access to financial services.

The Hong Kong Monetary Authority is also conducting a proof of concept using trade-related data to support businesses seeking trade finance facilities from their banks. This commercial data interchange system shows that Hong Kong is now driving their own form of open banking arguably way beyond the model first developed in the UK and they’re entering an exciting new phase of open banking.

Jacqueline Powell: So, like Singapore and Hong Kong, are there any other European countries which have adopted a centralised approach to open banking then?

Marcus Hughes: Well, yes. Switzerland is another example of this approach. The Swiss originally decided not to participate in PSD2 despite having the option to do so. But they’re now creating their own version of open banking. A Swiss infrastructure provider, SIX, has launched a centralised platform with a standardised sharing of account data between financial institutions and third parties.

As a first step, providers of accounting systems in Switzerland can connect to bank APIs via a new B link interface. This platform means corporate customers and small business customers can process account information and multibank payments instructions directly through their accounting software.

SIX, that Swiss infrastructure provider, has also partnered with LUXHUB, an open banking enabler from Luxembourg with the objective of accelerating the adoption of open banking principles in Switzerland. Together they’ve established a standardised and efficient central platform for account information services and what they are calling payment submission services.

But their product offering is also being expanded with exciting new APIs such as wealth management functionality just as you might expect in a country so well known for private banking and asset management. So, Switzerland is also moving into open finance.

Jacqueline Powell: Thank you, Marcus. It’s great to hear what Switzerland are up to as well. Unfortunately, that’s all we have time for today. So, Marcus, firstly, I’d like to thank you for taking the time to bring us up to speed on how countries across the globe are dealing with open banking.

Marcus Hughes: My pleasure, Jacqui, thank you.

Jacqueline Powell: In our next episode, I’ll be joined by Marcus again and we’ll look at the impact and benefits of open banking across businesses of different sizes so do tune in for that. But for now, that’s all we have time for. See you all next time.


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