Lessons we should learn from the UK on Open APIs
Open Banking and Open APIs (Application programming interfaces) have become some of the hottest buzzwords in the banking industry. This is all thanks to Hong Kong Monetary Authority’s (HKMA) and their new initiative to prepare Hong Kong to move into a new era of Smart Banking. But despite all the hype, it’s unclear to most of the public what these changes mean for us.
In theory, consumers are the biggest winners from the Open API initiative – as it allows us to give secure and efficient access of our banking data to third-parties, like fintech startups and other companies, and this in turn is an excellent development for consumers because data transparency and low switching costs mean more competition for traditional banks and financial companies, and promotes the development of new apps, products and services to help us manage our busy financial lives.
After a 6 month-consultation period, Hong Kong Monetary Authority rolled out the Open APIs framework for the Banking Sector in July 2018, and it suggested that open product and service information APIs should be released in phase 1, which is six months after the announcement of the framework. This means that as of 2019, signing up and onboarding of financial products online will increasingly be done via APIs. This is just the first step in Open APIs, and to see the future we only need to look to the UK where Open Banking was enforced in January 13th, 2018.
1. Government ordered vs Government suggested
Like Hong Kong, the UK has a small number of banks that control the majority of the current account market and offer near identical products to the consumers.
The lack of product differentiation has translated into a lack of switching. The Competition and Markets Authority’s (CMA) research showed that only 3% of all UK banking customers switch accounts, and in general the CMA found “customers do not switch unless they have a problem with their bank and most think they have little to gain financially by moving”, which is what you would expect if the product suite is almost identical. Digital banks like Monzo capitalised on this malaise, and launched products which were financially undifferentiated but with superior user experience – setting a new benchmark in digital banking for many consumers. This innovation is positive, and in order to kick start more of it, the UK implemented Payment Services Directive 2 (PSD2), a European framework for the sharing of transaction data (their version of Open APIs).
PSD2 when implemented in the UK, required the 9 biggest UK banks to allow licenced startups, with the user’s consent, direct access to their transaction data, including current account transactions data by January 2018. Banks were, for the most part, slow to embrace this and only 3 of the 9 were compliant, a few others just missed the deadline and some asked for sizeable extensions. But as full implementation approaches, the hope is the increased competition translates into a better and more differentiated product set for customers.
In HK, the whole Open APIs is initiated by HKMA, aiming to ensure the competitiveness of the banking sector, encourage more parties to provide innovative and integrated services that improve customer experience, and keep up with worldwide development on the delivery of banking services. Unlike the UK, the body only encourages (not enforces) the retail banks to deploy the Open APIs framework. Open product and service information APIs are suggested by the end of this year. If we look at the banks’ announcements so far, only Citi has explicitly launched a few open APIs partnerships on the Citi Pay-with-Points and auto fill personal and payment info. The cynic in me suspects that asking banks nicely will produce slow results, if any at all – but in the UK banks have come to embrace change simply because if they don’t, they know the challenger banks will. In this respect, HK may be no different, and we applaud the HKMA for having the foresight to push traditional banking innovation at the same time as creating a framework for new virtual bank competitors to enter the market.
2. Public awareness
Without doubt, this is a dry piece of financial regulation and, perhaps as a result, it’s been less than energetically marketed in UK. A 2018 survey done by YouGov found that 72 per cent of respondents hadn’t even heard of Open Banking – this is sad! This is despite the fact that in 2016, major banks and the CMA set up The Open Banking Implementation Entity (OBIE), which was meant to deliver Open Banking’s security and messaging standards, and more importantly provide updates and be transparent to the public.
The SAR government doesn’t do much on promoting this initiative, heavily relying on the press to spread the updates. We don’t have any consumer research to support this, but I am worried that there are even fewer people in HK than in the UK that know what Open Banking and Open APIs are. As consumers play a very crucial role in this campaign, we have to make sure we understand and spread the word about the true value of Open Banking, and in turn gain back control over financial data.
In the UK, there are plenty of discussions on security, data privacy and liability issues, and they still remained as the public’s key concern. From a technical point of view, Open Banking is at least as safe as online banking since it is regulated and protected by data protection laws and the financial ombudsman service. The law requires account providers to use strong customer authentication, a procedure which allows the payment service provider to verify the identity of both the user and the service. And only startups that have been approved by the Financial Services Authority (FSA) will be allowed to use the system when they meet a certain level of security.
Looking at Hong Kong, the government hasn’t touched on the security and the approach for fintech startups, whether they will be regulated or assessed. We, gini, are looking forward to the full implementation of Open Banking, but we also foresee lots to do to pave the way to success, both from the government and the banking sector, including public education, regulation, industry support, etc.
2019 is going to be an important year for Hong Kong’s fintech industry, and as the second phase of Open APIs are being rolled out, virtual banking licenses will be also be announced. Several overseas giant fintech players are expanding to Hong Kong, all these key events will help elevate and shape our “Smart Banking,” and personally, I am excited to see the revolutionary change in this long-established banking industry.
Raymond Wyand is the CEO and Co-founder of gini, the first personal financial management app powered by bank-level security in Hong Kong. Prior to this, Ray was a Vice President at Citibank, part of the Global Credit Trading Business based in Hong Kong. His areas of expertise included Regulatory Capital Optimization, CLO Syndication, Securitization and Credit Derivatives.