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Wednesday, April 17, 2024

API and Open Banking: Way for New Service Innovation for Banks and FinTech Companies

The people who gathered at a hall room of a city hotel in last month had one thing in common—they all are working in a tech fields. Their conversation centered on payment ecosystem, future API and open banking. Those however were bolstered and started after Jayant Kumar Bhowmik, a Senior System Analyst of Bangladesh Bank made his presentation—a sharp and poignant one.

High officials from around 20 commercial banks and over 30 Fintech Entrepreneurs got a plethora of food for thoughts from his presentation. Arranged as a roundtable discussion titled “API and Open Banking: Way for New Service Innovation for Banks and Fintech Companies”, these people also had the opportunity to share their two cents—which not only enriched the conversations but also enhanced the overall outcome of the meet-up.

Doyens of Bangladesh’s banking and tech sectors such as Md. Khurshid Alam, executive director of Bangladesh Bank chaired the roundtable while Selim R F Hossain, Chairman of Association of Bankers (ABB) attended the event as Special Guest. The whole event was moderated by Fahim Mashroor, Chairman of BASIS Committee on Fintech and CEO of Bdjobs.com

FiNTECH had the opportunity to talk with Mr. Jayanta on the topics and discussed the possible roadmap of API based open banking in Bangladesh. What we learned from our discussion with him is presented here for our readers.

Excerpt of the presentation:

During last couple of years, Bangladesh Bank has successfully completed couple of IT projects which has made significant contribution in transformation of Banking system of the country

  • Automated Cheque Processing
  • Electronic Fund Transfer
  • RealTime Gross Settlement
  • Interoperable ATM, POS and QR Transactions
  • Instant Internet Banking Fund Transfer
  • Mobile Financial Services
  • Bilateral Arrangements with Banks for different payment products of MFS Wallets
  • Billers and Merchants Integrations with Banks and MFS
  • ECommerce, Online Merchant Payments and Bill Payments
  • MFS Interoperability (Upcoming)

Payment Ecosystem in Bangladesh

  • Payment ecosystem is fairly equipped to serve the nation effectively and efficiently.
  • COVID19 pandemic was an automatic stress testing for our payment platforms amongst all clutches.
  • Digital exchange of financial data can become the building block for emerging service models, removing inefficiencies in the system and opening new product possibilities.
  • So, it brings in front the new horizon of Open Banking landscape to transform the financial systems and may lead to product innovation and better facilitation of financial services.

API and Open Banking, What is it really?

  • Open banking is a banking practice that provides third party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).
  • It provides the technological infrastructure and the legal frameworks to make such consent driven sharing happen.
  • In the new ecosystem of Open Banking, APIs are a channel for doing business. Adopting and deploying APIs, banks can extend and enhance their native services and offerings.

There are some myths about open banking, for example

  • It is erroneously believed that open banking makes the customer’s data openly available to anyone.
  • Actually it puts effort on controlling both the circle of eligible third parties and letting the customers control sharing of their financial data, by requiring their explicit consent.
  • What is “open” in open banking?
  • With open banking, the digital value chain of banking gets opened up, allowing third parties to participate in the previously closed value chain.

What Data does Open Banking open up?

  • Account Data – Personal information of the account holder and transactions on the account
  • Product Data – Products and services a financial institution offers
  • Payment Initiation – Authorization of payments

Participants in the regime convention can extend the scope to other types of data and services. Prior customer consent is required for all data sharing except public product data.

Challenges of Banks

Traditional banks already observe customers switching completely or move a part of their banking activities to a Digital Bank or Neo Bank, which offer better digital services.

  • Changing customer needs on more digital solutions
  • Lead to increased competition and increased pressure to innovate
  • Banking as a Service (BaaS) in the form of APIs to third party product companies

Leveraging Open Banking APIs to face the Challenges of Banks

Open banking can make life easier for a bank’s customers. But why is open banking strategically interesting for banks? Won’t banks need to give up a lot of their control? To face the challenges, banks use APIs for:

  • System modernization to become more agile
  • Regulatory compliance (worldwide trend but laws are regional)
  • Ecosystem play to create innovative opportunities

Open Banking Ecosystem (Picture)

Open Banking Ecosystem

 Technologies that Power Open Banking

Financial services are built on trust, and it is vital for banks that their clients trust them. By using APIs and surrounding technologies correctly, you can establish yourself as a trustworthy ecosystem participant with partners and clients.

  • Security all ecosystem players need to be properly authenticated & authorized, and the FinTech receiving the data need to be trustworthy.
  • Consent customers must stay in charge of their financial data, with final say over when their data is shared and with whom.
  • API specifications and standards – easy to adopt in the form of implementationready OpenAPI Specifications (e.g. Open Banking Specifications in the UK).
  • Documentation and Onboarding  Banks need to provide documentation of their APIs, and a straightforward onboarding process

Risks Associated with Open Banking

Open banking also potentially poses significant risks and concerns around:

  • Transfer of Trust
  • FinTech Vulnerability
  • Financial privacy and data security
  • Customer liability
  • Cybersecurity and Operational Risks
  • Compliance and Reputational Risks
  • Grievance Redressal

What can be achieved?

  • An efficient payment system which can absorb shocks in extreme situation like Covid19;
  • Simplified KYC Process;
  • Overcoming lack of documentation;
  • Customer centric product;
  • P2P Lending, Crowd funding;
  • Encouraging healthy financial behaviors;
  • Responsibly expanding access to credit;
  • Supporting debt rehabilitation;
  • Increase competition on the financial services market

Key Questions to Address…

These questions should be addressed to create an enabling Open API platform:

  • Who is required to share data and who can access the data?
  • What types of data are shared?
  • Which industries are covered (banking only or utilities and telecoms)?
  • Whether payment initiation is enabled in the regime?
  • Who bears the cost of the regime (including data exchange and setup of the relevant infrastructure)?

At the end, Mr. Jayant said – there is a lot of work to be done yet, and the time is now!

  • Types of services
  • Participants
  • Types of data
  • Payment initiation
  • Mandatory vs. voluntary
  • Technical specifications of API standard
  • Staged implementation
  • Lead regulator/policy mandate
  • Governance
  • Cost distribution
  • Data privacy and portability
  • Liability and consumer protection

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