Open Banking Standards are being implemented across the world. UK is one of the leaders pioneering the radical transformation of its moribund banking sector which is dominated by the Lloyds Banking Group, HSBC, Barclays and Royal Bank Of Scotland. India has for long tried to ape the western banking system but with limited success. Banks in India are bracing for a Rs 2.4 Lakh Crore bad loan write off in 2017.
Bank account portability has for long been discussed among Indian policy makers but there is no implementation road-map in place. The UK on the other hand is all set to roll out the future of banking products. The Competition and Markets Authority (CMA) which has jurisdiction over banks in the United Kingdom has released a timeline for the banking sector, under which banks would have to standardize their products and customer data. This would enable most banks to swap their customer information and would increase competition leading to better products and services.
This new functionality which allows individuals to transfer their bank account number from one bank to another is commonly referred to as bank account number portability. Only a few countries all over the world have initiated banking reform in this direction.
The use of Application Program Interfaces (API’s) would allow for banks to serve as App stores like Google Play. The open banking platform would also enable third party financial companies to offer their products to the banks clients. January 13th, 2018 is the deadline for UK’s nine largest banks to fully operationalize the new open banking standards and support API’s on their banking platform.
The Legal Issues and Risks facing this transformation are: –
System Security: The implementation of API’s in the banking system making the core banking solution accessible to third parties will present cyber criminals and hackers a new opportunity to exploit. Without adequate security and safeguards it could lead to huge financial losses for customers through fraud and phishing attack.
IP Regime: Open banking will invoke pertinent questions about who owns the database rights. How third parties are going to access bank customer data and what processes will be used to access the data.
Data Implications: Customers need to be made aware about how the system is changing and how it will impact their bank account. When they authorize a third party to access their bank account they need to understand the full consequences of their actions. For instance, enabling an auto-debit feature in bank accounts would mean a fixed amount would be debited at fixed time intervals.
Trust & Fraud prevention: Banks should ensure there is proper screening of third party solutions to ensure no fly by night operators enter the system. Only trusted providers should be allowed access to the open banking platform after a thorough vetting process. Minimum eligibility requirements and accreditation should be put in place for firms wanting to offer financial products to bank customers.
Open Banking in Other Countries
In India, the regulator has initiated discussions about bank account portability but banks have so far been reluctant to adopt it. Many of the public sector banks run on legacy banking software this is not compatible with core banking solutions of their peers. There are also numerous hurdles in account number formats varying from 10 to 14 digits across banks. For example : ICICI Bank has a 12 digit account number and this increases to 14 in the case of HDFC Bank.
Many of the Indian public sector banks fear they will lose their customers who have been banking with them for decades, hence they are not keen on adopting this feature. In the United States every bank account number includes information about it’s branch and geographical pin code but number portability is still some years away.
UK will indeed be the pioneer in this field and as account number portability rolls out in January 2018, it is something for startups and investors to keep a close watch on.