Middle East needs to prepare for open banking as the trend catches up

In the Middle East and elsewhere, open banking regulations do not exist yet. Initiatives are underway – the issuance of guidelines by Saudi Central Bank (SAMA) earlier this year, which plans to launch Open Banking in the first half of 2022. Bahrain’s Open Banking Framework in 2020 by the Central Bank of Bahrain is another initiative paving the way for open banking opportunities in the future.

The region will soon witness more countries gradually embarking upon this fast moving and important element of the financial sector. Many banking establishments are considering open banking as a new revenue generation model without the regulatory boundaries (for the time being) as well as offering enhanced customer experience. Hence, banks must prepare for its arrival.

Several key drivers such as Saudi Arabia’s cashless agenda, infrastructure projects, internet penetration, elevated collaboration in the finance and banking segment, Project ‘Aber’ and much more are all factors gradually driving the adoption. While open banking is still in its infancy in the region, traditional banks face a serious challenge as their enterprise IT was historically designed to protect data, with a lack of sharing capabilities. Layers of security walls safeguard and protect the crown jewels of their banking information as well as personal information of customers.

The new potential directives, however, compel them to open the ‘secure data fortress’ while maintaining tight security of their data. The manner in which banks’ use data will determine their future in this ever-growing online business world.

Yin and Yang

Banks undergoing open banking initiatives should ensure balance between securing data - and liberating it at the same time to third-parties. Balance is key, as unwarranted liberation of data could lead to fraud risks. On the other hand, if data security is too rigid, it defeats the purpose and benefits of the revenue potentials and enhanced customer service that open banking brings.And of course, only data that is meant to be exposed and only to accredited and verified third parties should be permitted.

Historically, financial institutions have been hesitant to share data with third parties even with customer approvals. Relinquishing control over customer data, banking experiences, and their funds created a hurdle for banks in partnering with fintech’s over the recent years. However, they are now realising that fintech’s are a smaller threat compared to that from the big tech giants such as Amazon, Apple and Google, to gain traction as big fintech players. Utilising the power of customer analytics, excellent user experiences, these big tech companies stand out from traditional banking products. And, it is only a matter of time that customers will demand more personalised services such as real time interest rate management, real time spending, budgeting tools, etc. Therefore, banks have to assess the value they deliver in the present times else risk becoming disintermediated from customers and will get relegated as a backend utilities provider compared to the nimbler customer facing digital tech competitors mentioned earlier.

For banks to succeed in open banking, the key aspect is utilisation of ‘data’. In the past, banks were monoliths, focused on keeping client completely safe inside, banks are compelled to share the data externally, and their future will now depend on utilisation of this data to generate revenues.

Lessons learnt from companies in the midst of its transformation journey to Open banking/ Actions that businesses in the Middle East need to take on their journey to Open Banking

1. Getting the house in order first

There is no point in fixing the outside world of open banking if your own systems are not up to date. It is vital to examine the IT enterprise from a people, processes, and technology perspective and how they interact; efficiently or otherwise. For instance, evaluating a bank’s current technology base; does it have old legacy systems strangling innovation, that are batch oriented in nature which is hampering its transition into all access open banking (Open Banking by its nature is all about real time access to information). Contrary to popular belief that ‘Open banking is all about APIs’, although true to a certain extent, it is imperative to achieve the internal order first, even before you get to the API management stage.

2. Have a unified strategy

In continuance to getting internal house in order, a unified strategy approach is key. A piece meal approach would be detrimental to an Open Banking model – a unified bank wide strategy is essential rather than departments creating their own solutions.

3. Ensure that enterprise is connected

If a bank is not connected internally and operates in silos, open banking initiatives will not be efficient and will struggle. Therefore, having a connected enterprise with data that is instantly accessible regardless of the number of back-end systems.

4. Ensuring internal operations are efficient

Internal efficiency has to be instilled before external services are offered to customers. As an inherent nature of financial institutions traditionally, they are not used to frequent operational changes. This, however, will become the norm, where banks will be ready to adapt to multiple frequent iterative changes and requests from third parties and will need to be agile to adopt to changes.

5. Customer journey mapping

In addition to the regulatory aspects, open banking is all about enhancing customer service. Many Banks in the region have already started mapping customer journeys in order to enhanced the customer experience. This aids in accurate targeting and selling of open banking future services. As witnessed from PSD2 experiences in Europe, one aspect of fraud prevention under PSD2 is authentication for transactions over a certain limit. While this is frustrating for some customers, these checks are designed to protect them and builds in additional security and safety. Once again the balance needs to be correct here.

6. Plan/ Execute the plan

Plan your execution and execute your plan. This is self-explanatory

7. Monetisation

Many European customers feel strangled by the PSD2 regulation so banks should not be embroiled in a ‘compliance only’ angle. Open banking is a great new source of revenue. It is heartening that most of the Middle Eastern banks foresee open banking as an opportunity and a new innovative/ inhibitive way to increase revenue and improve their customer services.

8. Harness Fintech’s

While fintech are competitors, they are also partners. Leading FSIs are building ecosystems that can include fintech’s as well as other third parties. The bigger threats are from big tech players mentioned earlier.

-- Vijay Jaswal, Chief Technology Officer, Middle East and Turkey, Software AG.