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What is interoperability and why does it matter?
Interoperability in open banking and open finance has many different facets and can mean many different things.
At a very basic level, interoperability in the context of open banking means that different financial institutions and accredited fintechs can exchange data with one another using a common standard. This allows customers to view all of their financial information in one place, regardless of which financial institution they use.
However, as open banking moves towards open finance, we are seeing the need for interoperability between different data sets across different industry verticals e.g. transactional accounts, mortgages, pensions etc.
And lastly, as open finance becomes more mainstream, cross border or regional interoperability will be an important component. We have already seen an example of this in the European Economic Area (EEA) via the Second Payment Services Directive, but the EEA has a harmonised legislative framework. Other regions will need to develop common rules, standards and even perhaps technology to support this.
All three types of interoperability are important in different ways. The lack of interoperability can be a fundamental barrier to open banking adoption. But as we move to open finance, it is crucial that third parties are able to scale propositions they have already developed and maximise the investment and customer base they have. Multiple, perhaps conflicting, standards for different financial verticals will be like recreating the wheel all over again. Customers need to easily access and understand their financial portfolio, and interoperability across these different industries is a baseline for success.
When it comes to regional interoperability, we see this in much the same way as instant payments started. Markets developed local instant payment systems but with a view that there would be a need for cross border instant payments. This led to very early efforts to ensure instant payment systems used commons standards around the world and there were collaborative industry efforts to make it happen. We see open banking most likely moving in a similar direction, although common standards will be extremely challenging.
What are the pros and cons?
There are no real cons, only challenges – challenges that are not insurmountable but need real work. The first layer of interoperability should be excluded because for most open banking markets around the world there are common local standards in various forms (perhaps with the notable exception of the EEA). The challenges around interoperability between data siloes can largely be solved with standardisation. For example, open finance in Australia is developed very deliberately with this in mind and the intent was set from the start. The regulator is responsible for setting the API standards (with industry) and mortgages and open energy all adhere to the same common framework. Where this is not the case, it will be difficult to ensure that degree of standardisation without regulatory intervention.
In addition, many smaller and medium-sized banks – as well as the corporates – are unable to keep up with open banking development due to a lack of resources and specialist knowledge. For open finance to really flourish, enhanced products and tools to support these segments are crucial.
On the regional interoperability side, there are many challenges!
Can you give us some examples?/What use cases and examples can you see for regional interoperability?
In reality, most retail banking customers do not have multiple accounts around the world, so the likely requirements in this space are limited. However, there are definite use cases around cross border payments and remittances. There are also niche use cases around servicing the expat communities that have multiple bank accounts, multiple pensions etc. and we may see third party providers enter the market to service these.
The real value will likely be in the business and corporate space. One of the key use cases is facilitating global trade, supply chain and trade finance. Trade finance is mostly paper based despite efforts to digitize. Some banks are already starting to tap into this space with HSBC releasing a new API that enables its partner banks to issue local guarantees in markets where they do not have a presence. But we are only just scratching the surface. I can also see value for corporates/merchants that have presence globally when it comes to bank account management, liquidity, and risk.
Could open banking payments interoperability piggyback off other global initiatives?
Absolutely. There are many cross-border payments initiatives happening out there in the market e.g. BIS and SWIFT. There is space for open banking to feature as part of these programs. Even if at this stage the market is a little immature, there is value in perhaps providing guidelines to third parties who want to get into this space. As an industry, we should not be acting in isolation.
What would a regional interoperability model look like?
We don’t necessarily think there will be one model, there may well be regional models that serve the particular requirements of a given region. However, there are different aspects that will need to be considered irrespective of the location. For example, what are the legal and regulatory challenges, and can these be overcome? In Europe, as there is a harmonised legal framework there is also mutual recognition of licenses across member states – can these really be achieved elsewhere? If not, then what other building blocks are required such as common standards and rules and even shared technology.
Who would need to get involved?
Learning from previous open banking implementations, both the FI and fintech sides need to be involved. It needs to be collaborative from the start. Regulatory input would also be useful as well as supranationals such as BIS and OECD. Existing open banking standards bodies such as ISO, FDX and the Berlin Group could also be advantageous.
Is it really achievable?
As we have seen with other projects, where there is a will there is a way! There needs to be not only a desire from the market side but there may also need to be a political will. Cross border data sharing has often been a challenge due to sovereignty and legal hurdles. That is why I think the focus, at least in the early stages, will be on existing trade corridors. Although work has been done internationally on proving data localization actually undermines cybersecurity, the number of data-localization measures in force around the world has more than doubled in four years. Like-minded nations must work together to build an open, rules-based, and innovative digital economy.
About Open Banking Exchange
Open Banking Exchange (OBE), a fully owned subsidiary of Konsentus, provides specialist advisory services to guide and enable the creation of open data frameworks. OBE supports regulators and central banks in the definition and design of market-level programmes and brings communities together to turn regulatory vision into operational reality through highly successful regional membership programmes.
The Konsentus group is headquartered in the UK and is operational across Europe and selected countries in Latin America, the Middle East and North Africa and South East Asia.
Konsentus is ISO 27001 certified.
