Blog by Aswin Antony, Business Consultant, Surecomp

26 November 2020

Open banking: The beating heart of trade finance digitization – part I

Open banking is an initiative close to our hearts, with our API architecture APIsure™ offering customers complimentary access to the sandbox testing environment, we consider ourselves to be setting the new open banking standard in trade finance digitization and connectivity. So what is open banking and what exactly does it do? Let’s explore…

Allowing third-party financial services companies to access user bank data through the use of application programming interfaces or APIs, the primary goal of open banking is to put the power back into the hands of customers, enabling them to securely use third-party financial products and services that rely on banking data or functionality.

An API acts as an interface between two different applications so they can communicate with each other. APIs are beneficial because they allow developers to add specific functionality to an application, without having to write all the code themselves. APIs also allow developers to access data from other applications.

You might have come across another term called ‘web service.’ The major difference between them is that a web service facilitates interaction between two machines over a network.  We could easily say that, all web services are APIs but not all APIs are web services.

There are four main types of APIs:

  • Open APIs also known as public APIs; there are no restrictions to accessing these types of APIs because they are publicly available.
  • Partner APIs; need specific rights or licenses from a developer in order to access them because they are not available to the public.
  • Internal APIs; also known as private APIs, only internal systems expose this type of API. These are usually designed for internal use within a company. The company uses this type of API among the different internal teams to be able to improve its products and services.
  • Composite APIs; combine different data and service APIs. They are a sequence of tasks that run synchronously as a result of the execution, and not at the request of a task. Their main uses are to speed up the process of execution and improve the performance of the listeners in the web interfaces.

Open banking trends across the globe

There are too many open banking initiatives to list them all, and they cross several dimensions, including implementation timelines; the range of products and services; the type of institutions and third parties in scope. However, they all fall broadly into one of two categories; market-driven or regulatory-driven.

Regulatory-driven: Europe might reasonably claim to be the ‘cradle of open banking’ – after all, Payment Services Directive (PSD2), General Data Protection Regulation (GDPR) and the UK’s Open Banking Standard pioneered it. But, look around now and open banking initiatives are popping up everywhere.

Outside the EU, two major jurisdictions that have opted for a regulatory-driven approach are Hong Kong and Australia.

The Hong Kong Monetary Authority issued an open API framework in July 2018, setting out a four-phase approach for banks to implement open APIs, starting with information sharing on products and services, and ending with sharing of transactional information and payments initiation services. Contrary to the EU approach however, while banks will be required to develop APIs, they will be able to restrict access to those third-party providers with which they choose to collaborate.

However, it is Australia that stands out for its innovative approach and scale of ambition. Like other open banking initiatives, the Consumer Data Right Act (CDR) which is currently being finalized, will allow consumers to share their data with whichever authorized third parties they choose. The key difference however is that the CDR is a data policy initiative and not a financial service one. While it will apply to banks first, the CDR will subsequently apply to the energy and telecommunication sectors as well, and eventually it could be applied to any sector. The CDR is also the first open banking legislation to introduce the concept of ‘reciprocity,’ which is “anyone accredited to receive data must also respond to requests from their own customers to share data.”

Market-driven: A number of countries including India, Japan, Singapore and South Korea, do not currently have formal or compulsory open banking regimes, but their policy makers are introducing a range of measures to promote and accelerate the take-up of data sharing frameworks in banking. In Singapore, Monetary Authority of Singapore and The Association of Banks have published an API playbook to support data exchange and communication between banks and fintechs. In Japan, the Financial Services Agency has established an authorization process for third party providers, introduced an obligation for banks to publish their open API policies, and encouraged banks to contract with at least one third party provider by the end of 2020. The US has also opted for a market-led approach, but without any material government initiatives to support the development of open banking products and services.

According to the 2019 Open Banking Report published by The Paypers, more than 87% of countries had some form of open APIs in place, reaching over 10,000 institutions around the world. This shows open banking becoming a robust phenomenon that is being replicated across borders.

The report ranked countries by four different factors; the spread of open APIs; regulatory requirements; standardization initiatives and the presence of a central third-party provider regulatory body.

In this way, we can identify five different types of countries:

  • Pioneers – regulated open banking environments
  • Followers – working on regulations
  • Converts – unregulated but with open APIs and standards
  • Risers – unregulated but with evolving open APIs and standards
  • Beginners – small or no progress on regulation or standards

The pioneers in the world include the United Kingdom, Australia and the European Union. Follower countries are Japan, Hong Kong, South Korea and Brazil. Mexico, Singapore, Malaysia and Canada are converts. Some of the risers are Switzerland, India and China. Beginners include the United States, New Zealand and Chile among others.

According to the new 2020 Open Banking Report, the Covid-19 pandemic has only accelerated the need for digital services as companies have had to adapt their operations to working remotely. Many corporates have turned to simple and secure open banking to meet their needs and remain operational during these unprecedented times….

In part II of this blog, we will explore the advantages of open banking, any associated risks and how it relates specifically to the world of trade finance.