??? The incentives dilemma in Open Banking

The introduction of open banking APIs in the UK aimed to spur competition and innovation in financial services, but progress has been slower than hoped.

This week's newsletter will examine the background goals of open banking, the current status of adoption, and potential next steps to drive further innovation.

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Now let’s dive in.

?? The incentives dilemma in Open Banking

The Background

• In 2016, after an investigation into retail banking, the UK's Competition and Markets Authority (CMA) ordered the 9 largest banks to open up APIs for third parties to access customer data.

• The CMA Order focused specifically on enabling third-party access to account information and payment initiation services, as outlined in the report The (unmet) potential of Open Banking by Oxera.

• Parallel regulations in the EU's Second Payment Services Directive (PSD2) also mandated banks to provide open APIs giving access to customer data.

• The goals were to increase competition and innovation in banking by empowering consumers with open data control and enabling fintech challengers to build new services.

• It was hoped open banking would catalyse the unbundling of banking products, growth of personalised financial apps, better deals for consumers, and digital disruption through bank APIs.

• There were similar open data policy initiatives in other sectors like energy and telecoms happening in parallel.

Today’s State of Affairs

• So far, over 300 regulated third parties are using open APIs to provide services like financial apps and data aggregation to consumers.

• However, Open Banking adoption remains niche compared to traditional banking, with most consumers not yet using it regularly.

• The majority of services rely on read-only data access, with write capabilities like payments seeing lower uptake.

• This limited progress highlights the need to better incentivize banks under the current model.

• Banks must provide open API access but receive no share of the value created by third parties using their data and infrastructure.

• With no revenue opportunities, banks have little incentive to go beyond the minimum mandated APIs.

What’s Next?

• Enabling the next phase of Open Banking innovation requires solving the incentives dilemma for banks.

• Potential approaches include premium APIs, new commercial models, business partnerships, and redistributing value created back to banks.

• Premium APIs could provide rewards for banks to charge third parties for additional functionality while managing risks beyond free requirements.

• New commercial models like those in other countries could coordinate standards and enable revenue flows between banks and third parties, balancing risks and rewards.

• Banks and third parties could also forge partnerships around premium add-on services built on top of open APIs, sharing in the rewards and risks.

• Industry bodies or regulators may be able to redistribute some of the value created back to the banks providing the open data, compensating them for risks taken.

• The optimal model will likely balance free access with opportunities for banks to monetize investments in open APIs, weighing risks and rewards.

What are your views on the challenges and rewards in open banking?

?? Fintech & Payments

? Starling, the British digital bank, has announced its intentions to expand beyond Europe and make its first foray into the Asia-Pacific region.

? Digital banking platform Revolut has is targeting Latin America as a key strategic region for its expansion.

? 79% of Indonesian financial institutions are adopting advanced analytics for a competitive advantage in decision-making.

? Wefox, Klarna, and N26 have received the lowest employee CEO approval ratings among Europe's most valuable fintech firms.

? A SmartSearch survey found that many UK fintechs, including challenger banks and crypto firms, frequently overlook verification checks on new clients and partners.

? Mastercard has announced its acquisition of a $5.2 billion minority stake in the fintech division of MTN Group.

? African fintech company, Enza, has announced a partnership with Wema Bank of Nigeria to enhance e-commerce payment acceptance across Africa.

? SAMA has granted a license to "Loan" enabling them to offer consumer microfinance solutions through fintech.

?? Open Banking & Open Finance

? The UK government is planning on exploring open banking for online payments in public services.

? The UAE is pushing its open banking agenda , implementing clearer regulations and standards, keeping pace with regional peers.

?? Embedded Finance

? Leading global EmFi provider Epos Now is expanding its operations with a new launch in Malta.

?? The World of Web3

? Dubai is offering a 90% subsidy on commercial licenses to AI and Web3 businesses, aiming to establish the largest tech hub in the MENA region.

? Oman's financial regulator is working on a draft framework for digital asset regulation .

?? Crypto & Defi

? Sam Bankman-Fried has been detained ahead of his October trial on multiple financial crime charges after a federal judge revoked his bond.

? Sam Altman's Worldcoin initiative intends to iris-scan the global population of eight billion for cryptocurrency distribution, raising privacy concerns.

?? The Future is AI

?? Amazon is introducing generative AI to summarize customer reviews on product detail pages.

?? The State of Investment

? The Nigerian Exchange is collaborating with the Central Securities Clearing System and Euroclear to create a dollar settlement platform , simplifying dollar fundraising for tech startups.

? African mobility fintech Moove secures $76 million in funding to offer vehicle financing solutions to ride-hailing drivers on platforms like Uber and other gig networks.

? Saudi Arabian fintech Wadaie has secured pre-Seed funding at an undisclosed amount.

?? In Other News…

? Telecom: UAE's leading carrier, du, is rolling out new technology that could triple internet speeds for its users in the country.

?? Report of the Week

European Innovation Scoreboard 2023: In this report by European Commission, the European Innovation Scoreboard 2023 provides an annual assessment of innovation performance across EU member states and selected countries. It shows most EU countries have increased innovation over the past 8 years, though some are progressing slower. Between 2022-2023, EU innovation grew at a slower pace. To download the full report, click here .

?? The Podcast for Fintech Enthusiasts

Join me in the latest episode of Couchonomics as I explore Web3, the carbon economy, and more with Prakash Somosundram, the Co-Founder & CEO of Enjinstarter. Prakash, a beacon in digital advertising, startups, and blockchain, discusses the shift to Web3, the importance of digital ownership, and Enjinstarter's position in this tech revolution. We dive into investment trends, the potential of AI, and the emerging decentralized financial system. Prakash also highlights the importance of carbon credits in today's rapidly warming world and their potential as a major asset class. Listen to the full episode above.

?? This Week’s Payments News

This week?we have news from?Shopify ,?Mastercard ,?Nirvana Travel & Tourism ,?allpay Limited ,?flynas ,?Tabby ,?Circle ,?Greenlight ,?Dwolla ,?Walmart ,?PayTabs Global ,?Middle East Payment Services - MEPS ,?talabat ,?Abu Dhabi Commercial Bank , and more.

??? Thanks for reading the Crunch!

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