Open to change: Starting with Open Banking

Traditionally prudent to adopt new tech, banks are now exploring how Open API can benefit their businesses – with the support from tech and regulatory partners, who are encouraging the industry’s adoption of third-party tech which can immediately springboard banks’ offerings to their customers. Proponents of API are confident that banks’ partnering with fintech firms won’t compromise data security, while supercharging customer-facing innovation.

?    “We are keen to drive the development of new smart banking initiatives and industry partnerships, making banking more accessible for our customers,” says Daniel Chan, HSBC’s Head of Business Banking, Commercial Banking, Hong Kong.

?   From the banks’ perspective, the objective is “to serve our customers better, the objective is not to bring in technology for the sake of technology…. we think there is potential for open banking to help us to do that better,” says Gilbert Lee, Head of Strategy & Planning and Chief of Staff to the Chief Executive of Hang Seng Bank.

?   “Part of the push is predicated on utilising banks’ vast troves of customer data for creating new revenue streams and better customer experiences” says Marc Entwistle, Principal of Digital Financial Services at Oliver Wyman, and a Co-founding director and board member at the FinTech Association of Hong Kong.

As Hong Kong – and the world – becomes a more digitised place, the tech-led economy is having a profound effect on the city’s banking landscape, with game-changing developments like the Faster Payment System (FPS), transactions moving increasingly mobile and the rise of virtual banking.

Innovations like an instant payments infrastructure via FPS, along with new and upcoming initiatives such as e-wallets, virtual banks and digital insurers, are showing the industry and their customers what is possible, and what banking is capable of by creating easier to use, accessible platforms and services.

One majorroute into this new, more connected world, encompassing a tech overhaul of the industry, is the use of open banking, or Open API. An API - Application Programming Interface – is a construct that exists to share data when coding software platforms and an interface for a safe and secure means of sharing data.

While relatively underused in banking, they have been common for building technology platforms, and now their true potential for the banking industry is becoming more and more apparent. With Open APIs, there is a focus on externalising much of banks’ technological development – a simple example of Open API could be the embedding of a Google map, showing an office or shop’s location, for example, in a third-party website.

Across Asia and the globe, financial regulators are encouraging the financial institutions under their watch to enhance digital offerings and are enthusiastic supporters of Open API as a way for banks to get the most out of what tech solutions are available. 

Encouraged by regulatory bodies, the industry is pursuing greater tech integration through Open APIs, including the European Payment Services Directive (PSD2) and equivalent legislation in the UK. Closer to home, the Hong Kong Monetary Authority (HKMA) is undertaking a four-phase plan for banks based in the city to implement Open API solutions.

The HKMA’s involvement cannot be understated and is one of the main drivers of encouraging third party collaboration via Open APIs. Hong Kong’s regulator unveiled its four-phase strategy to develop Hong Kong as a smart city and further strengthen its status as an international financial centre and fintech hub in July 2018.

The four-phase plan to explore the possibilities is underway, with phases one and two – allowing third parties to originate customers and product sales – have been completed; with phases three and four- allowing access to customer data and processing of transactions- are slated for the near future.

The data gold rush

“Banks have a wealth of historical customer data at their disposal and yet have not been well equipped to translate that information into actionable insights and better personalised services,” says Marc Entwistle, Principal of Digital Financial Services at Oliver Wyman, and a Co-founding director and board member at the FinTech Association of Hong Kong.

Ultimately, Entwistle says, the industry is aiming for a level of change that “all banks know needs to happen, yet for many banks the commercial upsides have yet to outweigh the transformational complexity and potential risks.” However, the customer data that they possess could be a powerful competitive driver, if not for the banks themselves to use, then for the third-party services that Open API will enable.

“In theory, banks should know a lot about their customers – and yet historically this potential has underwhelmed when considering the lack of personalisation in current products and services. One solution, to spur innovation and move that market forward, is to level the playing field by opening up access to consumer data, introducing both competitive dynamics and collaborative opportunities with digital partners.” 

He says that whilst third-party handling of customer data continues to require scrutiny, if anything, the banking world’s adoption of Open API would strengthen security.

“API level sharing data is already vastly more secure than the volumes of unencrypted data shared over common forms of file transfer. A basic traditional banking analogy could be after signing up to a new bank, the customer typically receives an ATM card and security code. These items are shared somewhat securely by sending in different envelopes, yet easily intercepted due to the clear sender and recipient information marked on the envelope and transmission via the public postal mail service. Remarkably in many markets this is still viewed as secure.”

“Undoubtedly this is far less secure than provisioning digital payments functionality directly within the customer’s app, on the phone they already own and requiring biometric (face or fingerprint) authentication. In this way APIs are somewhat similar in that we’re now enabling direct data sharing between different authenticated parties.”

While banks are being eased out of their comfort zone, there may be an initial reluctance to do so given that this upheaval could introduce short term risks, even while moving towards a less risky means of operating in the longer term, which, many agree, should be the ultimate goal.

“There will inevitably be new risks to mitigate because Open API development is still relatively new to financial services.  There are ongoing implementation details to be ironed out but fundamentally we’re moving to a far more secure means of data sharing with third parties. Some of the lag is more to do with the inherently risky nature of financial services, where we handle a lot of sensitive customer data, in what is rightly a carefully regulated industry,” Entwistle says.

Banks have been previously “relatively siloed” with different banks providing their own services directly, whereas “now we’re moving towards a future where banks are more modular and open to servicing customers both directly and indirectly through partnership based relationships,” which can include integration of different products and services.

This has created new opportunities for fintech players, who are not always necessarily going to be the provider of these new services to end customers, but may simply be looking to provide the building blocks to help banks get there themselves.

“As Hong Kong opens the door to new virtual banks, robo wealth advisors and digital payment players, banks are facing new competitive dynamics and a big shift in what was previously a traditional consumer banking market. The development of open banking provides an opportunity for incumbents to rapidly launch and scale a holistic range of additional services and maintain consumer relevance.”

Hungry for ideas

“To serve our customers better, the objective is not to bring in technology for the sake of technology…. we think open banking could be one of the approaches to help us improve that,” says Hang Seng’s Gilbert Lee, Head of Strategy & Planning and Chief of Staff to the Chief Executive of Hang Seng Bank.

Regulators play an important role in advocating the core ideas behind open API adoption, putting forth a framework for the banks and setting the rules and regulations for the industry to follow - banks are supportive of the development, says Lee.

“Banks need to think about how best to leverage this new development,” to strengthen the relationship with the bank’s customers and regulatory partners, he says.

“So, when we see technology and innovation like API and open banking, we see it as a tool to improve customer services. If we can work with more partners externally to enrich the experience that would be great, if we can take on-board more products that can serve our customers better that would be great too.

“The way Hang Seng defines digitisation is that we want to serve our customers… on a digital [level], so we define digital as a distribution channel. The objective is for Hang Seng to facilitate our customers to do business and transactions with the option of not visiting us physically, that we can serve our customers better, we can talk to them better.”

The concept should ultimately be a win-win for banks and third-party developers. “Fintechs have brilliant ideas and we are hungry for those ideas, so we want to work with them,” says Lee. “And I believe the fintech companies want to work with us to learn about the global standards, reporting requirements and regulatory specifications required by a regulated business and a listed enterprise, so that’s one option and another potential option for the newcomers is to do things very differently and create a different market than the incumbents.”

There are some key decisions that the bank’s strategic management needs to make to move forward on this “transformational journey,” he says. “The first one is who do we ask to undertake these transformations, who will lead this transformation. We can decide to have the existing teams in our business units to take it. We can decide to bring in new people to move forward the organisation, or we can decide to have the CEO office centrally execute these ideas.

“Our experience is, for those capabilities that can easily or quickly bring in results, we usually assign them to the business because the business will have incentives and motivations to quickly execute and they can enjoy and see the benefits themselves … but we monitor, we motivate, we moderate.

 “There are other initiatives that we need to bring to the central team, those are areas where you would expect a medium-to-long term result and would probably will drag down your short-term P&L … so we need to invest and build these capabilities centrally while make sure the rest of the organisation is supportive of the initiative but they are not accountable to the short-term negative potential financial result.  As the capabilities become mature, we can integrate them back to the business.”

Given the regulators’ enthusiastic support of a tech overhaul of the banking industry, and client’s expectations that Hong Kong’s incumbent banks will adapt to fulfil their needs, Hang Seng’s Lee suggests that the adoption of Open API will be a gradual change in the market, rather than an epochal shift.

“While there are undeniably and unavoidably innovations coming to market, that will be a gradual process for new and incumbent players to find out what gaps in customer needs exist in the market and how innovation can address them,” he says.

Primed for partnership

“We are keen to drive the development of new smart banking initiatives and industry partnerships to better support our customers,” says Daniel Chan, HSBC’s Head of Business Banking, Commercial Banking, Hong Kong.

Open API is a “new trend” in Hong Kong and in markets around Asia and beyond, says Chan.

“We’ve seen a lot of digital transformation in the business community in HK in line with the increasing aspiration to become a smart city. Customers are keener than ever to transform and stay competitive.”

“Over the past few years, HSBC has consistently rolled out digital initiatives and we’re always open to new ideas. As a bank we have the advantage of knowing our customers’ needs well and having their trust, and with that, we’re exploring more fintech solutions to accelerate open banking.”

For Hong Kong’s banks, the shift to Open API is a natural progression for providing their customers’ needs and desires in an era where individuals and businesses are increasingly digital-savvy.

“We continue to up our digital game to strengthen services to existing customers as well as establish new banking relationships. So, it’s not at all a reactive stance. Digital has become a key element in enabling them to do their business better,” he says.

“What we’ve been doing is continuing to create value for our clients. We need to see things from a customer angle, and assess how our current solutions provide the right help or whether there are any gaps. That is where we see a space for partnerships with different industry players to really drive additional value and better address their pain points,” he says.

As the industry comes to realise the importance of a tech overhaul and embrace the use of third-party tech, making connections between banks and fintechs is increasingly important, and alongside the regulator, organisations like HKSTP are crucial in acting as intermediaries.

As one of the city’s prime incubators of tech and fintech startups, HKSTP is primed for building links with the banking industry, making introductions and ensuring that there is a supply chain of third parties aware of regulations and can provide tech solutions for the specific needs of that industry. It plays a strong role in terms of the technology side and nurturing the fintech startups in its incubation program, and is set to benefit all parties. 

“Combining our expertise and understanding in banking, with the innovative minds of tech specialists, we’re coming up with new solutions that cater to customer needs in a simpler and faster way,” Chan says. “This new-found synergy with tech ventures and specialists has opened up limitless possibilities. With more collaboration and exchange of viewpoints, there will certainly be a lot more co-creation along the way that brings breakthroughs to Open API development.”

The API EcoBooster program, co-hosted by HSBC and HKSTP, invites application developers from Hong Kong and around the world to build Open API solutions for the banking industry, creating opportunities for new products and services for areas such as loan services, transactions and operation, credit cards, digital payments and customer record management.

The program has given the bank an “opportunity,” says Chan. “We have come across a number of fintech companies with great aspirations and ideas. Based on our understanding in the SME community and ongoing communication with our vast customer base, we’re looking at particular use cases best suited for us to co-create solutions and together bring enhancements to.”

“The program provides the right kind of environment and mentorship from our digital banking specialists in nurturing some of these great and innovative startups. We look forward to seeing the creation of successful use cases that could make banking more customer centric,” he adds.

Collaborate to excel

In the age of smartphones and an ‘always-on’ culture when it comes to services, there is a strong customer expectation now around what digital experiences should be like.  The banking world has been expanding their digital capabilities to make sure their customers experience the same levels of convenience that they do with other online services.

The global movement toward open banking has arrived. Regulators and industry players are very supportive of the changes that need to occur in order to create a more connected and open banking ecosystem, even while playing catchup in the era of “big data” to create new value to their customers.

New initiatives such as Open APIs and Faster Payment System are lowering the barrier for smaller fintech firms to offer consumer facing services. We are now at a tipping point where Hong Kong opens a new level playing field for a diverse range of market players. Incumbent banks and other traditional market players need to monetise on these opportunities given there are clear advantages and even clearer downsides to standing still.

The essence of Open Banking is being opened and connected,and the key to this isthrough working with partners – taking cues from regulators and reaching out to third-party firms like fintechs to leverage the capability.

Ultimately, consumers stand to benefit, as the shift to more digitised processes leads to more consumer-orientated banking. More and extended services, driven by competition amongst an increasingly diverse range of players -- both banks and non-banks partnerships – are on the horizon as these elements look to capture share, improving customer experience through a wider offering of services.