Regulatory foundation critical for open banking and finance

Today

• APIs
• Centralised Models
• Fintech news

Ben Goldin, Founder & CEO Plumery

By Ben Goldin, Founder & CEO Plumery

The advent of open banking has sparked innovation worldwide since the UK pioneered the concept of allowing bank customers to share transaction data with FinTechs and other banks in 2018. Application programming interface (API)-driven banking is expected to help financial services become more accessible and contextual.

Sixty jurisdictions have now rolled out open banking legislation, according to Cambridge Centre for Alternative Finance. Another 16 nations have passed rules implementing the broader concept of open finance, which expands the scope beyond payments to areas such as lending, wealth management, insurance, and pensions.

Overall, 54 jurisdictions have followed a regulation-led model, including the UK, the EU and Australia, while 28 are primarily market-driven, such as India, Japan and the US. Whether regulation-led or market-driven, a more centralised and standardised regulatory approach is critical for the success of open banking and open finance.

Regulators need to create a centralised framework that combines strict business rules with detailed technical guidelines, including defining application programming interface (API) standards and protocols, authentication standards, availability requirements, and standardised processes for addressing failures. Without clear and uniform technical standards, for example, both regulated financial institutions and third-party providers (TPPs) may interpret requirements inconsistently which, in turn, could lead to uneven service levels and delayed adoption.

The UK regulators, for example, focused on establishing clear technical guidance, defining responsibilities and requiring service level agreements to ensure the reliability and performance of the open banking ecosystem. These measures enabled deeper collaboration between regulated financial institutions and TPPs, as well as laid the foundation for open finance.

Current fragmentation, particularly in Europe, reveals the consequences of loose regulatory frameworks. While some countries demonstrate promising development with stronger frameworks, others remain in an exploratory phase, with only abstract regulatory directives. This inconsistency limits the scalability and reach of open banking, and will present even greater challenges for open finance adoption in future.

API challenges

Open APIs underpin both open banking and open finance, allowing TPPs and banks to access and exchange customer financial data in a secure and uniform way. However, while the complexity of APIs has diminished over time as standardisation improved, banks still face challenges when developing and making APIs available to external developers/TPPs.

The primary difficulty lies in integrating legacy systems typically designed around closed architectures that do not natively support APIs. Such outdated infrastructure makes it difficult to expose robust and scalable APIs that can handle the demands of open banking and open finance.

Some progress has been made, particularly among large financial institutions that usually have more resources to modernise their systems. However, small and medium-sized banks are lagging behind due to significant barriers to adoption, including limited budgets and technical expertise. Their delayed participation contributes to the fragmentation of the open banking ecosystem.

Addressing this issue will involve decoupling legacy core banking systems from the digital engagement layer, allowing banks to modernise incrementally. Additionally, partnerships with technology providers that specialise in API exposure can help banks move forward faster. While progress is evident today, particularly in regions with strong regulatory support and advanced financial ecosystems, achieving widespread API integration will require sustained effort and collaboration across the financial sector.

The next frontier

After seven years of open banking in the UK, there are 11.7 million active users of open banking-enabled products and more than 22.1 million open banking payments made monthly, according to Open Banking Limited. The next 12 months will be pivotal as the Data (Use and Access) Bill begins its journey through parliament, which will establish a long-term regulatory framework for open banking and the evolution into open finance.

Likewise, other jurisdictions are also embracing open finance, which will require continued and even expanded state involvement. Without state intervention, there is a risk of inconsistent implementation, which could hinder adoption and dilute the potential benefits.

Additionally, a more collaborative and inclusive ecosystem will help drive open finance adoption. While the focus has been on enabling end users (consumers) to share their financial data with third parties, the needs of small and medium-sized enterprises (SMEs) and software providers also deserve attention.

Actions that could support adoption include:

• Engaging SMEs and enterprises: Many SMEs rely on third-party software, such as accounting or customer relationship management tools. Collaborating with these software providers to integrate open banking/finance APIs seamlessly into their platforms could simplify adoption for businesses. Treating software providers as critical partners in the ecosystem will expand access and usage, creating a chain reaction.
• Consumer/SMEs awareness and education: Individuals and businesses need to be educated on the benefits of open banking/finance, such as improved financial insights, better lending terms, and streamlined services. Campaigns to build trust and awareness about data privacy and security measures can also address end-user concerns.
• Standardised infrastructure: As mentioned, establishing uniform technical guidelines and APIs across institutions can minimise implementation friction by introducing clear service levels, error-handling protocols, and consistent documentation.

Open banking and open finance have the potential to fundamentally transform how individuals and businesses manage their finances by embedding banking services seamlessly into their daily activities. They will provide better access to financial services, improve financial health and mainstream the concept of “invisible banking”, where consumers access financial services without consciously engaging with a bank.

Previous Article

The Future of Central Bank Digital Currency

Read More

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}