Asia Pacific’s Vast Open Banking Opportunity

Open banking is the use of application programming interfaces (APIs) to streamline the sharing of customer bank data with third parties. It “opens up banks” in the sense that it enables customers to have greater control and ownership over their personal information used by financial institutions. In theory, an optimal open banking system would be bespoke, allowing customers to select the services from different financial institutions they liked best, in contrast to the traditional one-size fits all model that remains dominant today.

Globally, the open banking market, consisting of sales of open banking services by entities (organizations, sole traders, and partnerships), is expected to grow from US$15.13 billion in 2021 to US$123.70 billion by 2031, expanding at a CAGR of 23.4% from 2021 to 2031, according to a recent report by Allied Market Research. The Far East region and China (China is defined as a separate market) is forecast to be the second largest market for open banking after Europe.

Across the Asia-Pacific region, open banking is being adopted widely, but approaches different countries and regions are taking vary considerably. They may be market led, regulator led or a hybrid that blends aspects of both.

Light-touch and hybrid approaches

Southeast Asia was one of the last regions to embrace open and its adoption in Southeast Asian countries is very much market led. Here, the core driver has been demand from customers, which has led to an increasing number of banks becoming API-ready.

Though regulators in Southeast Asia have generally not mandated banks to implement open banking, the Monetary Authority of Singapore (MAS) has nonetheless played an important role in the city-state’s open banking process. In 2016, the MAS became the first regulatory body in Asia Pacific to publish guidelines on open banking and to outline a plan for banking data to be made available through open APIs. The MAS also operates the Financial Industry API register, which tracks open APIs in the country’s financial industry by functional categories.

In Malaysia, open banking adoption remains low as banks see little incentive to share their data openly with third parties. That could, however, change, with the Malaysian central bank’s announcement of its five digital bank license winners in April 2022.

For its part, the Philippines, which had initially been something of a laggard in adopting open banking, has made good progress in the past few years. Notably, the Philippine central bank in October 2020 introduced a digital payments transformation roadmap which included open finance and open banking.

Regulator-led approach

In contrast to Southeast Asia, regulator-led jurisdictions such as Australia’s are those where there is a legal obligation for banks to link to third-party providers. Australia is unique in that it is one of the only markets in Asia Pacific that is unambiguously regulator-led.

Australia’s Consumer Data Right (CDR), launched in July 2020, legalized and made mandatory open banking across financial institutions. The CDR is, however, part of a broader move to empower customers with their own data. It is designed to be an economy-wide consumer data right under a single technological, legal, and regulatory framework. Open banking is seen as the first step towards an open data economy, with the energy sector and then telecommunications to follow.

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In January 2022, the Australian Treasury released its “Strategic Assessment Outcomes” report identifying the non-bank lending sector, merchant acquiring services, and key datasets in the general insurance and superannuation sectors as the next priority areas to expand the CDR – collectively known as “open finance.”

Open finance

Open banking is the first step towards an open data society, a data-driven world that will connect ecosystems from finance to tech, permitting consumers to fully own their data streams and derive benefit from them. A stepping stone on that journey is open finance, the extension of open banking that allows the exchange of a much broader range of consumer financial data, creating a more holistic and accurate assessment of an individual’s digital financial footprint.

While open banking and the broader open finance movement puts competitive pressure on banks it also enables them to compete with new digital-first challengers, satisfy customer demand for friction-free, seamless digital services, and improve their margins. That is facilitated in turn by modern, API enabled architecture and what the open finance model then allows financial institutions to do.

The necessity of digital transformation

Core banking legacy systems and their closed architectures are often incompatible with the demands of the digital era and obstruct banks from achieving the full potential of open banking and the broader open finance movement. Digital transformation is an essential prerequisite if banks want to successfully open up new business opportunities and take advantage of the latest technologies to stay relevant in the ever-changing digital world.

However, many banks are reluctant to upgrade their core systems given how central these systems are and the widespread impact changes would have on the bank’s channels and operations. In many cases, lenders have chosen to focus on the technological front-ends, including websites, mobile apps, and channel experiences rather than risking disruptions that could be caused by modernizing their core systems.

That approach, however, ultimately amounts to delaying the inevitable, as a more flexible back-end is required if banks want to support the latest digital products, services and applications that they want to provide their customers.

Three options for system modernization

When it comes to system modernization, banks effectively have three options available to them: Rip-and-replace the existing core; take a gradual journey-led transition approach; or build a standalone greenfield cloud-native stack alongside their existing core. Whatever approach a bank decides to take will be dependent on its stakeholder decision-making, its resources, culture and mindset, and how it sees itself competing in the new digital era.

As the Asia-Pacific region moves beyond the exchange of banking data to an open finance, open data regime, the opportunity will be characterized by what can be built on top of the data – the different applications’ infrastructure and products. Many types of innovative new business models will emerge on the back of the provision of these enriched data sets, which will also enable banks to build individual relationships with each customer and address their real needs.

Alistair Brown, Global Head of EPAM’s Open Banking & Payments group notes, “Once we have got this wonderful treasure trove of better data accessible in one place, we can actually see it all lining up for making informed management decisions based on that. That’s the new beginning we are looking forward to.”

For more information on Open Banking in Asia, please take a look at the latest report from Kapronasia in collaboration with EPAM on the readiness of legacy systems for open banking.