“When financial institutions open up their [application programming interfaces] it enables collaboration, particularly between the new fintechs as well,” he says. “Having governments that don’t sanction the use of some of those fintechs can stifle the competition.”
“There are multiple aspects where [regulators] could stifle as well, where they don’t provide a central forum to enable the connection of financial institutions to third parties and fintechs both in terms of the standards, but also not enabling the right regulation to allow that collaboration to take place.”
A Finastra survey published on May 26 found that 48 percent of banks believe that regulation is too constrictive, while the same percentage believe there is not enough government support to foster open banking innovation. The results were higher in EU countries than in the UK: 50 percent of French banks believe there is not enough government support versus 38 percent of UK banks.
But Jaffer is optimistic of future harmonisation between European regulators.
“There are big forces at work to make sure that customers get the experience that they want. And the regulators are coordinating much more on a European level to make sure the standards are similar, to make sure that they’re approaching the opportunity in the same way,” he says.
According to Jan van Vonno, research director at European open banking platform Tink, regulation has lent itself to open banking progress within the EU.
“[The second Payment Services Directive] acknowledges that open banking has existed for many years and it is now giving [third party providers] (TPPs) the opportunity to be properly licensed under the relevant financial authorities in order to operate in a transparent and secure way. The regulations have provided the opportunity for open banking to thrive,” he said in an email.
Recent research by Tink found that 63 percent of European financial institutions have increased their open banking spend in the past year. Given this growth, van Vonno believes there are risks involved with progressing open banking without specific regulation, such as the UK’s Open Banking Implementation Entity (OBIE).
“Ultimately, the success of open banking will depend entirely on the ecosystem of TPPs and trust from the end-users. If open banking evolves without specific regulations for it, there are risks that TPPs do not adopt the open banking services offered by banks, because there may be alternative ways to get access to financial data,” said van Vonno.
Jaffer says the greatest risk of open banking developing without regulation is a loss of opportunity for banks.
“If financial institutions don’t recognise the opportunity it provides to them to really drive better services with different segments of their market, they may feel that they lost an opportunity … I think regardless of regulation, you will see some financial institutions that bring the future forward by taking a much more assertive approach to open banking, because it’s good for their business ultimately.”
As interest rates drop globally, he believes banks will be further incentivised to capitalise on API offerings.
“This is particularly acute now because as interest rates continue to fall, interest rate income is going to be severely reduced and therefore focusing on further value-added services for their customers – which open banking and API adoption is going to enable – is going to have a continued focus,” says Jaffer.