When the Hong Kong Monetary Authority (HKMA) declared its intent to mandate open APIs last September, few people in the city knew what the term meant. Even many bankers had to look it up.
Application programming interfaces are bits of software that enable two applications to communicate, making it possible to transfer information from a database (like data on a bank’s customer) to someone else’s app (like a fintech’s banking doodad).
This is new to Hong Kong, but it’s old news in other markets. The U.K. in particular has had open banking for 10 years, and it remains the global benchmark for doing it well, with an independent government agency tasked with policing banks’ behavior under competition laws.
Imran Gulamhuseinwala, global head of fintech at EY and implementation trustee at U.K. Open Banking—an independent implementation entity governed by the Competition and Markets Authority (CMA) and funded by banks—told the audience at last week’s Hong Kong Fintech Week that open APIs are inevitable. But: “Don’t underestimate the difficulties of implementation.”
Banks have responded to HKMA’s directive, with 20 of them detailing to the regulator their intentions to implement open API. The HKMA has set out a four-stage path for all institutions, and by January, all banks will offer some 500 API connections, covering around 100 bank products and services, including deposits, loans, and forex, as well as including branches and ATMs.
Convenience is critical
Customers will enjoy convenience and lower cost. APIs should allow banks or fintechs to give people apps where they can get a holistic look at all of their balances across institutions, from banks to brokers to asset managers. Fintechs can tap the data to create products; banks can attempt to build a world of services around their customers’ accounts, embedding themselves in financial transactions across many services, from children’s education to buying a home.
As players scramble to adapt, here are Gulamhuseinwala’s three lessons, for banks, fintechs and regulators:
1. Don’t ignore customer onboarding
Customers are winners from open API – in theory. In practice, they have to be convinced to agree to share their data. In the U.K., onboarding processes remain clunky. A cottage industry of intermediaries has arisen to provide crude solutions, such as screen scraping.
UK Open Banking has responded by setting standards for customer experience, with the first guidelines released in September. The aim is to build APIs so customers can interact with their bank via a third party in 10 to 15 seconds and a handful of clicks. “Convenience is critical” to making people use open-API services, he said.
2. Centralize infrastructure
The U.K. government underestimated the need, and the required work, to build a central infrastructure for open banking. Although in theory open API can be left to financial institutions and fintechs to sort out, the reality is that the system is vulnerable to hacks and forgers. Therefore the government has to protect the entire system.
“We created the central certificate authority,” Gulamhuseinwala said. “Essentially, only authorized parties can use open banking.”
3. Embrace the change
Gulamhuseinwala says that creating such a complicated ecosystem from scratch means neither banks, tech companies, nor regulators can use existing business models to manage the process.
This meant that in the U.K., five of the country’s biggest nine banks missed their deadline for being operational for open banking on Day One. Authorities need to find the right balance between forbearance and cajoling banks.
“Many banks have no idea how to develop an API community,” Gulamhuseinwala said. “They have never done this before.”
His advice to banks: open banking is inevitable, so they’re better off embracing it to ensure a smooth implementation. This requires a very different business model regarding customer data, customer experience, and partnerships.
And for regulators: prepare a public awareness campaign, so consumers are reassured that this is a change that will help them. Many people will react to this with suspicion and confusion. Everyone – authorities, banks, fintechs – will benefit if the populace comes to understand the benefits open banking should provide.