At last week’s FDX Virtual Spring Global Summit, I received a glimpse into the huge strides being made by the Financial Data Exchange in the adoption of their data sharing API for the US market. In the context of minimal centralised regulation in the US, progress is driven by industry. This marks a substantial move away from screen scraping, which has historically been prominent in the US market. While the API approach provides value in terms of security and standardisation, many organisations still depend on screen scraping to support their business model.
In this context, it was great to hear that API adoption has reached something of a tipping point, having grown dramatically over the past year. This represents real benefits to the ecosystem: scale and robustness from an increase in participants. In addition, as each participating organisation achieves greater maturity within the ecosystem, they benefit from increased efficiency. They are able to explore more innovative and interesting initiatives, building on the stability of their existing infrastructure.
In principle Open Banking has existed for years in the US and at a reasonable scale but, as it has not been mandated, the detail has always been problematic. In the US, transferring bank accounts is inconvenient, so many people don’t close their old account, just open a new one and manage all their transactions there. There may be friction around migration, so many just leave their previous account to wither, with minimal activity. The information from that account then becomes effectively useless in Open Banking terms.
The Open Financial Exchange (OFX) has been promoting data sharing for twenty-five years, however it has now been agreed that OFX and FDX offerings will be harmonized in a drive for standardisation in implementation. The term Open Finance is widely used and seems to be less contentious than Open Banking in the US market. There is much talk of reciprocity, with the recognition that nobody owns the data but the data subject themselves. The five principles of data sharing championed by the FDX are:
Control: Consumers should be able to effortlessly grant, modify and revoke access to their financial data for applications or services they desire to use.
Access: Account owners should have access to their data and the ability to determine who will have access to their data.
Transparency: Individuals using financial services should know how, when, and for what purpose their data is used and know who they have permissioned.
Traceability: All data transfers should be traceable. Consumers should have a complete view of all parties that are involved in the data-sharing flow.
Security: Service providers need to ensure the safety and privacy of data during access and transport and when that data is at rest.
With many thousands of active financial institutions, the US banking sector is very different from other markets, where the majority of the market is taken up by a small core of major institutions. The situation in the US was contrasted with the Open Banking regime under the OBIE in the UK. This is viewed by many as the most advanced implementation in the world, although there are also examples of highly developed ecosystems across Asia.
The role of PSD2 in Europe was also widely recognised as representing an advanced regulatory context for Open Banking. Although Europe appears advanced on the surface, there are major issues with the quality of available APIs, with some estimating that only around 20% have any real practical value. The Australian Consumer Data Right initiative has also been influential in affirming the individual’s right to control their own data. This approach is often cited by practitioners across the world as best practice.
While the UK and Europe both offer important examples of Open Banking in practice, there are now some fascinating developments in the Americas. Apart from the market-driven approach in the US, there are signs of an emerging Open Banking infrastructure with strong regulatory underpinnings in Canada. Given the history of co-operation between the relatively small number of major banks in Canada and its history of pioneering privacy legislation, this approach will be interesting to watch.
Perhaps the most striking activity in the Americas at present is taking place in Latin America. While Brazil is the outstanding story of the past year, there are also nascent ecosystems across the continent, notably in Colombia, Peru, Chile and Argentina. The story of Brazil’s implementation of Open Banking is one of uncompromising pragmatism.
In 2020, based on the outcome of a public consultation, Brazil started on the path to Open Banking. This began with the publication of an ambitious timeline for Open Banking to be fully implemented by the end of 2021. The first delivery date was in February, with the final one due in December. To their European counterparts, such an aggressive schedule would be unthinkable. We have become so accustomed to watching deadlines fly by, as the challenges of harmonisation pile up and expectations slip. Still, the Brazilian instant payment system, Pix, which was built to provide widespread access to QR code payments, offered an example of their ability to deliver at scale and to tight deadlines.
Brazil would seem to typify the adage, ‘if you want something done, ask a busy person’. No matter what the challenges, they battled through to deliver on time. It may not have been an easy experience but it is an impressive outcome. It is reported that their Open Banking system is already achieving significant scale, with millions of users and dramatic growth month-on-month. Having delivered Open Banking in 2021, they are now proceeding to implement Open Finance in 2022.
There has been some scepticism in the market about the ultimate value of Open Banking. It may turn out that there is greater value to be had in offering business to business services, rather than having to deal with the complexity of consumer-facing services. In any case, it seems likely to remain a moving target.
For anyone interested in adopting the FDX API, access is available free of charge. This is intended to drive adoption and standardisation. For more active involvement, organisations from within and beyond the US can become members and contribute to future developments.
Consult Hyperion works with organisations across globe who are looking to exploit opportunities presented by the changing regulatory landscape. If you’d like to know more follow our social discussions @chyppings or get in touch here.