What are the top challenges for Open Banking Regulators?

Open Banking

Open banking is a revolution that comes with several long-term benefits for an economy, such as financial inclusion and education. Open banking is set to provide more transparency in the sector while driving competition, reducing costs, and paving the way for broader implementation across the globe.

However, the herculean task of implementing an open banking platform also comes with establishing global frameworks and regulations. Several challenges need to be considered by government bodies for an efficient framework that is in accordance with global standards.

  1. Data

Financial regulators have ample experience when it comes to handling huge volumes of data. For instance, there are stringent policies in place for handling customer data in banking institutions. However, in this day and age, the rules for data sharing need to be scrutinized such that there are no loopholes left for the threat actors to take advantage of.

Giving the customers the power to choose how their data is used also creates a constant fear of making the wrong decision. For example, in the Cambridge Analytica scandal, users who took part in surveys gave consent (intentionally or unintentionally) for the data of their connections to be extracted as well. The scandal provoked an extensive debate in the industry and awakened a sense of privacy.

Regulators, thus, need to analyze the implications of data sharing that would be unavoidable in the given API infrastructure along with the surrounding system architecture to avoid data misuse.

  1. Security

The security that doesn’t hinder growth and innovation is the need of the hour for an open banking framework. The big data thus produced from banking institutions and APIs are going to be lucrative for cybercriminals.

Data-sharing frameworks have robust security solutions that consider every risk and security measures post careful vetting. Scrutinizing third-party vendors and defining liability management also need to be considered. However, this is going to be a long shot.

A solution to the unpredictability of risks once open banking is rolled out is the Sandbox Technique. A regulatory sandbox can protect customers and stakeholders by providing a platform to test products, services, and business models. That will further allow regulations to relax, foster innovations and test standards before adoption.

  1. Ever-changing technological landscape

As is evident, there is a need to innovate and deliver solutions at break-neck speeds. Technologies that do not keep up with consumer demands will be left behind in the digital dust. For instance, the advent of cloud tech has bid goodbye to the legacy enterprise systems that needed the user to be present physically on site. Thanks to cloud tech that  enabled equal access for all, most of us could work from home during the pandemic.

Thus, a necessary and speedy implementation of cloud throughout the industry has also left regulators behind on innovation. It is a pertinent concern among regulators that the frameworks dependent on one technology will be obsolete before they are ready to be implemented.

Also Read: Five Ways to Meet the Security Challenges of Open Banking

As innovation will always be a step ahead, it is crucial to be a step further ahead! Consulting industry experts and developing frameworks that are independent of technologies are a few ways of doing that..

  1. Fierce competition

Tech giants are racing to ride the open banking, and so are fintech organizations. That may lead to the blurring of lines between financial and non-financial regulations, which will require a broader framework that is independent of sectors.

Similarly, fintech companies that work on a smaller framework compared to tech giants, such as neo and challenger banks, will also need to be included in the open banking framework and regulations to offer services. There may be a possibility that smaller fintech faces fewer regulations in comparison to larger enterprises, thereby creating an imbalance. Thus, a uniform regulatory framework should be in place to adapt to the fast and flexible processes of fintech.

An interesting example in this regard has been observed in Germany, where the government bodies decided to have no regulatory exceptions for the fintechs. On the other hand, in some regions, fintechs have implemented sandboxes to ease the regulations and deliver quick solutions.

The third stakeholders in the open banking economy are the traditional financial institutions that will need  a different set of regulations. Including all financial institutions will be a long-term target that would need one step at a time. Regulators will also have to segregate categories and tread cautiously when deciding which institutions to be regulated.

For instance, PSD2 applies to banks and e-money providers whereas, the Australian Consumer Data Protection is only being introduced in the banking sector to be  implemented later in other sectors such as energy and telecommunications. The Fintech Law in Mexico, on the other hand, includes financial institutions such as credit bureaus and clearinghouses.

  1. Combining terminologies

As the open banking technology is new and the market is abundant with several players,  several terminologies have come up for different platforms. The primary task of regulators would be to reconcile a glossary that works across all sectors. For instance, Banking as a Service and Banking as a Platform are two different terms that can be used interchangeably.

Further, there is a growing need to translate these terminologies to be understood by different sectors, yet mean the same. For instance, there would be different interpretations for the IT, compliance, and end-users.

Steps for the Future

To begin with, regulators will have to consider the existing frameworks in place and scrutinize what works and what doesn’t. Regional insights into consumer patterns will enable further development of potential regulation. While examining existing frameworks, it would help to study the foundation of the frameworks, requirement analysis, and regulatory guidelines. Regulators will also need to understand the shortcomings and carve out a plan to overcome them. 

Views expressed in this article are the personal opinion of Satyajit Kanekar, Co-founder & CEO, Mobileware Technologies.

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