Open APIs: What we can learn from the United Kingdom?
By Raymond Wyand | Open Banking or Open APIs (application programming interfaces) have become some of the hottest buzzwords in the banking industry, thanks to Hong Kong Monetary Authority’s (HKMA) new initiative to prepare the city for a new era of Smart Banking. In spite of the hype, it’s unclear to most of the public what these changes mean.
In theory, consumers are the biggest winners of the Open API initiative, as it allows us to give secure and efficient access to our banking data to third parties, such as fintech startups. Data transparency and low switching costs mean more competition for traditional banks and financial institutions and promote the development of new apps, products, and services to help us manage our busy financial lives.
The HKMA rolled out the Open API framework for the banking sector in July 2018 and announced that open product and service information APIs would be released in six months. As of 2019, signing up and onboarding financial products online will increasingly be done via APIs–the first step for Open APIs. To see the future of this new system, we only need to look to the United Kingdom, where Open Banking was enforced on January 13, 2018.
Government ordered vs government suggested
Like Hong Kong, the United Kingdom has a small number of banks that control the majority of the current account market and offer near identical products to the consumers. Lack of product differentiation has led to a lack of account switching by customers.
Research conducted by the Competition and Markets Authority (CMA) found that only 3% of all banking customers in the United Kingdom switch accounts and “customers do not switch unless they have a problem with their bank and most think they have little to gain financially by moving.” This situation is expected when the product suite is almost identical across the board.
Digital banks like Monzo capitalized on the lack of diversity and launched products that were similar but with superior user experience, setting a new benchmark in digital banking for many consumers. To further encourage this type of innovation, the United Kingdom implemented Payment Services Directive 2 (PSD2), a European framework for sharing transaction data, which is their version of Open APIs.
When PSD2 required the nine biggest banks to allow licensed startups direct access to consumers’ transaction data with their consent by January 2018. For the most part, banks were slow to embrace PSD2, and only three of the nine were compliant. Others just missed the deadline, and some asked for long extensions. However, as full implementation approaches, the hope is that increased competition will translate into better products for customers.
In Hong Kong, the Open API initiated by HKMA encourages more parties to provide innovative and integrated services that improve customer experience to keep up with global delivery of banking services. Unlike the United Kingdom, the body only encourages, rather than enforces, retail banks to deploy the Open APIs framework.
HKMA suggests open product and service information APIs to be implemented by the end of this year. If we look at the banks’ announcements so far, only Citibank has explicitly launched a few Open API partnerships on the Citi Pay-with-Points platform and for auto-filling personal and payment information.
The cynic in me suspects that asking banks will slow or halt results. In the United Kingdom, banks have come to embrace change simply because if they don’t, they know their competitors will. In this respect, Hong Kong may be no different down the road, and we applaud the HKMA for having the foresight to push for traditional banking innovation while creating a framework for new virtual bank competitors to enter the market.
Open API regulation is admittedly a dry piece of financial regulation and, perhaps as a result, has not been widely marketed in the United Kingdom. A 2018 survey done by YouGov found that 72% of respondents have never heard of Open Banking. This finding is unfortunate because the CMA established The Open Banking Implementation Entity (OBIE) in 2016, which was meant to deliver Open Banking’s security standards, and more importantly provide updates and transparency to the public.
The Hong Kong government doesn’t do much to promote Open Banking and heavily relies on the press to spread updates. While there’s no consumer research to support this statement, it’s likely that even fewer people in Hong Kong than in the United Kingdom know what Open APIs is. Since consumers play a crucial role in the campaign for Open Banking, we have to work to spread the word about its value and, in turn, gain back control over financial data.
In the United Kingdom, the public is keenly aware of and concerned about issues around banking security, data privacy, and liability. From a technical standpoint, Open Banking is at least as safe as online banking since it is regulated 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 service. Additionally, only startups that have met a certain level of security as dictated by the Financial Services Authority (FSA) will be allowed to use the system.
The Hong Kong government has yet to assess or regulate security measures for fintech startups. We at gini are looking forward to the full implementation of Open Banking, but we also foresee hurdles on the way to success, both from the government and the banking sector, such as public education, regulation, and industry support.
2019 is going to be an important year for Hong Kong’s fintech industry, and virtual banking licenses are expected to be announced this year. Several overseas giant fintech players such as Revolut are also expanding to Hong Kong, so these key events will help elevate and shape Smart Banking in the city. I am excited to see the revolutionary change in this long-established banking industry.
About the Author
Raymond Wyand is the CEO and Co-founder of gini, Hong Kong’s first personal financial management app powered by bank-level security. Before this, Raymond was a Vice President at Citibank and was part of the Global Credit Trading Business in Hong Kong. His areas of expertise include Regulatory Capital Optimization, CLO Syndication, Securitization, and Credit Derivatives.