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The Evolution Revolution
The coronavirus pandemic is shaping up to be a crucial turning point in the financial service sector, changing regulators’ perception towards open banking. “The COVID-19 crisis has reshaped the global economy and society as banks face an urgent imperative to reimagine their business models amid a shift in the operating environment which is having an unprecedented impact on their bottom line,” said McKinsey & Co.
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Banks in the Middle East region are cautiously exploring technological innovations and new business models such as digital banking, open banking, predictive banking and modernization of payment systems in a bid to enhance user experience (UX) and personalization of products while keeping an eye on surging cyber-attacks.
Though digital transformation was already apparent in the financial services sector in the Middle East, the outbreak of the pandemic has brought about more than decades’ worth of changes in the way banks do business in just a few months.
Deloitte said that digital technology has been a catalyst for radical innovation, as previously closed industrial systems have become networked and open, providing ideal conditions for open banking to flourish.
The advancements in digital technologies such as artificial intelligence (AI), real-time analytics, machine learning (ML) and blockchain are creating ideal conditions for financial services providers to enhance their services and products from the front, middle and back-office.
Open banking platforms allow financial services customers to securely share financial data in real-time and share account information and transaction history with external parties such as vendors, suppliers, business partners and other banks using Application Programming Interfaces (APIs)—a set of communication protocols used to develop computer applications. It is a paradigm underlying the organisation of the future financial data ecosystem.
The promise of open banking
The GCC region’s financial service sector is unarguably mature when it comes to regulators’ preparedness for open banking compared to other emerging markets though there are some teething problems such as the need to modernize the regulatory landscape. PwC said that open banking has the potential to reshape the financial services landscape and several financial centres in the emerging markets, the GCC region included, are making considerable moves in this space.
By leveraging API’s, open banking platforms authorise retail and enterprise clients to access consumers’ financial data in real-time and share account information and transaction history with external parties such as vendors, suppliers, business partners and other banks.
KPMG said that it expects a rapid uptake of open banking approaches and models over the coming few years as consumers and small to medium enterprises (SMEs) are becoming more aware of the benefits it can bring; the ability to quickly understand their financial position, explore alternatives and make better financial decisions.
The COVID-related restrictions that were implemented to curb the spread of the virus have proved to be a powerful booster for open banking and the fintech ecosystem in the Middle East, as bank customers have been forced to embrace digital channels. New York-based Tiger Global Management led a $12 million funding round for Tarabut Gateway in November last year as the Middle East fintech firm seeks to expand its open banking platform into Saudi Arabia and North Africa.
The Saudi Central Bank (SAMA) introduced its open banking framework earlier in 2021. The move is expected to revolutionize how customers, merchants and financial services providers enhance the value they reap from accessing financial data. The Gulf state is investing in the development of its financial services sector as part of the kingdom’s economic diversification drive under Vision 2030.
Open banking will enhance trust between customers, banks, fintechs and other financial players, and SAMA plans to go live with open banking during the first half of 2022.
Bahrain’s central bank last September ordered retail banks and financial institutions operating in the country to implement the requirements for the second phase of its open banking framework by the end of June 2022. The framework seeks to enhance the reach and quality of services offered by retail banks through digital online and mobile channels. It is part of a broader strategy by Bahrain to advance its financial service sector and remain competitive amid a surge in demand for connectivity within the financial services ecosystem.
PwC said that new open banking platforms are rising with fintechs and lenders moving towards the adoption of open API solutions amid the defining of the roadmap towards open financial markets by national and offshore regulators. The UAE central bank opened a FinTech Office to support financial innovation in the country while the Abu Dhabi Global Market proved its unwavering support towards the open banking revolution having awarded its first digital-exclusive banking license and Category 1 status to Anglo-Gulf Trade Bank in September 2019. Meanwhile, incumbent banks in the UAE have already begun to implement open banking. Mashreq, for instance, launched an active API developer portal in October last year which provides a secure and isolated space where developers can test their applications’ code without touching any real accounts or user data. Emirates NBD says it was the first UAE bank to enable open banking
collaboration with the launch of its API sandbox in 2018.
However, amid these developments, KPMG said that the challenge facing policymakers and regulators is how to structure an open banking regime that balances the need for innovation, information security and privacy, and does not inadvertently create an uneven playing field for both traditional and nontraditional players.
– Deloitte
A global approach
Open banking is playing a significant role in the rise of the digital economy as it makes payments easier and more transparent. Despite fundamental commonalities, there are now as many versions of open banking as countries or jurisdictions are using it.
“In practice, open banking can take many forms including standards and directives such as PSD2 in Europe and Open Banking in the UK,” said KPMG. The GCC region is one example of an emerging global open-banking microcosm. Bahrain is implementing a European-style regulation-driven approach and the UAE has adopted an American-style marketdriven approach under the guidance of the Abu Dhabi Global Market and Dubai International Finance Centre.
Saudi Arabia is also implementing a market-driven strategy, but the kingdom’s approach is inclined towards a more formal regulatory framework though its regulations don’t follow Bahrain in requiring the opening up of APIs which
facilitate data sharing, or in mandating security standards.
Outside the GCC region, several countries including India, Japan, Singapore and South Korea are implementing a market-driven approach. These countries do not currently have formal or compulsory open banking regimes, but their policymakers are introducing wide-ranging measures to promote and accelerate data-sharing frameworks in the financial service sector.
Meanwhile, outside the European Union two major jurisdictions, Hong Kong and Australia, have adopted a regulatorydriven approach. The Hong Kong Monetary Authority issued an Open API Framework in July 2018 while in Australia, Commonwealth Bank of Australia last May became the first lender to allow customers to check account balances from other banks through its mobile app following the passing of the Consumer Data Rights Act.
Open banking requires a robust, agile, and scalable IT architecture to enable API integrations with multiple entities. Its implementation promises to create a new data-sharing infrastructure, which will form the basis of a much richer range of services and products across the whole of financial services.
Digital payments
Consumers’ increasing desire for frictionless, more seamless and intuitive value-added banking experiences amid a surge in fintech firms and ‘challenger banks, who are seeking to capitalize on these development, are driving incumbents to develop open, collaborative financial ecosystems. French multinational group Thales said that whether buying groceries on Amazon or ride-hailing on Uber, customers are increasingly relying on the convenience of online services globally.
Payment initiation service providers (PISPs) offer end consumers payment solutions giving online retailers such as the Middle East-based noon and Careem a convenient way to make direct fund transfers for online transactions. The process mandates banks to provide open APIs to allow software at third-party companies to access payment account information and payment initiation from another.
“There are two fundamental trends shaping this ecosystem around the world at the moment, one being acceleration in the speed and availability of payments, the other being the democratisation of access to data,” said Mastercard.
Hence, open banking means the removal of barriers between competitors as it requires banks to allow their account details and transactions to be shared with third parties through APIs.
PwC projected that 71% of SMEs and 64% of adults will adopt open banking by 2022, which reflects a significant adoption of open banking technology across the financial services sector.
Collaborations between banks and fintech companies are a valuable addition to the internal innovation programs of the financial institutions that seek to foster the development of innovative services based on open data in the banking payment landscape.
GCC banks are leading or participating in several accelerators, incubators and training programs to advance their access to financial technologies. For fintechs and startups, such partnerships provide easy access to resources, data, funding, space and networking opportunities to test and showcase their prototypes.
Treating payments as a stand-alone entity for instance in the case of Emirates NBD’s Network International allows for the expansion of services across the financial services sector and opens the service to a broader array of customers, thereby driving scale and improving profitability.
“Carving out the payments business allows a more flexible approach to growth while also establishing a currency that makes subsequent consolidation possible, as carve-outs can tap into the higher valuation afforded payments companies,” said McKinsey.
UAE’s First Abu Dhabi Bank (FAB) completed the carve-out of its existing payments division into a stand-alone operational entity called ‘Magnati’ in April last year. Aside from its payment services, Magnati seeks to provide enhanced capabilities to partner with fintechs on product and service innovation.
The nexus between banks and digital payments service providers is no longer about competition but is now about collaboration through adopting cuttingedge technology services to meet customer needs and expectations.
– McKinsey & Co.
– KPMG
