By Adnan Erriade, Chief Commercial Officer, Tarabut Gateway
Open banking is evolving into a catalyst for economic growth and inclusive financial services. By granting greater access to financial data, it’s revolutionising the way we bank and empowering financial institutions to offer enhanced products, services, and customer experiences. While the benefits for customers are many, the rewards for governments and regulators supporting open banking are as significant.
Open Banking involves granting permission for your financial data, typically held by banks, to be accessed by third parties through Application Programming Interfaces (APIs). Access to financial data enables a wide range of products and services to be created. Banks and fintechs gain a deeper understanding of their customers’ financials, allowing them to offer products and services that cater to specific needs. These products include cardless payments, account aggregation, personal finance management, and more.
Crucially, access to financial data is only granted with explicit user consent, ensuring that only legitimate transactions in both data and money can occur.
Regulations for secure and trustworthy financial services are typically determined in the legal jurisdictions of sovereign nations or by the pooling of regulations, as in the European Union. Differing business practices and cultural attitudes means open banking progress varies in each region and market. Although the goals and objectives are consistent, the pace of adoption and the benefits offered by some legal codes compared to others can result in varying outcomes.
Currently, two global markets dominate open banking’s development: the United States and Europe. With the Middle East and North Africa (MENA) region’s growing fintech sector, its tech-savvy young population, and its leadership’s economic visions, the region is in a prime position to leapfrog global markets. While progress in the aforementioned markets is substantial, Gulf regulators are interested in the possibility of MENA taking advantage of the experiences of these markets and advancing more quickly than either.
Executing Open Banking in the United States
The philosophy in the United States is market-oriented and regulations are reactive, responding to established parameters after they have been formed. An example is Plaid, a technology platform based in San Francisco that aimed to create consumer financial management products in 2013. When faced with challenges connecting bank accounts, Plaid shifted its strategy and developed a banking API, allowing consumers and businesses to interact with their bank accounts. The platform is now used in several countries, including the US, Canada, UK, France, Spain, Ireland, and the Netherlands.
Due to the fast pace of technological advancements in open banking, innovation, and technology often surpass regulation. It was always unlikely for Plaid to be regulated as its concept and need were not foreseen before its development.
The market-driven approach involves extensive negotiations between Third-Party Payment Providers (TPPs) and banks to obtain access to data. The extent of data access may differ in each negotiation. While governments may facilitate these discussions, they do not dictate or interfere. Consequently, open banking implementation may not progress as quickly, or be as comprehensive, as some would prefer.
Banks have rapidly recognised the significance of open banking and frequently collaborate with TPPs to develop new offerings for their end users. However, in the absence of regulation, one challenge is the use of ’screen-scraping’ technology – a less secure and inefficient method of data collection incurring significant costs. Banks are concerned about the security of their customer’s data and potential liabilities from data loss or misuse, especially as they can be unaware of screen-scraping.
Open Banking in the European Union
In comparison, Open Banking in the European Union (EU) is regulated, with a broader scope extending beyond the EU’s jurisdiction to include countries such as Switzerland through its Single Market. EU regulators identified a lack of competition in the mature European banking sector and used regulations to open up the market. To ensure secure data sharing, the EU established minimum compliance requirements and introduced the Payment Services Directive II (PSD2) in 2018, due to concerns over potential data security risks.
Europe is regarded as the birthplace of codified open banking and its regulations serve as a model for other jurisdictions implementing regulations. These guidelines provide a foundation for fintech developers to work within.
Outside the EU, the UK remains a highly influential hub in Europe, and its acceleration is clear. UK businesses took ten months to rise from one million open banking users in 2019 to two million in 2020, but only four months to rise from four million in late 2021 to five million in 2022.
In the EU model, TPPs can access banking data with consent, usually via APIs, materially reducing screen-scraping. Market players include True Layer (UK) and Tink (Stockholm), which is now owned by Visa. Since PSD2, the EU has also endorsed further “Regulatory Technical Standards” and “Berlin Group’s NextGenPSD2” and is thus considered the best market for open banking implementation and a framework for others to follow.
MENA’s Open Banking Implementation
Middle Eastern regulators have taken inspiration from the EU and are taking a leadership role in open banking innovation. This presents an opportunity to address the financial exclusion faced by 300 million people above the age of 15 in MENA who are underserved by the current banking system and do not own a financial account. With a tech-savvy population of 580 million and widespread internet access of 98%, open banking has the potential to be transformative and greatly boost economic activity in the MENA region.
Bahrain, the United Arab Emirates and the Kingdom of Saudi Arabia have all adopted open banking more rapidly than Europe. Each jurisdiction has taken its own unique approach, but the Gulf states have successfully shared their knowledge and experiences. Bahrain stands out with several regional milestones, including being the first to have a live Account Information Service (AIS) and Payment Initiation Services (PIS) in operation. Bahrain’s Financial Services Development Strategy already maps out the sector’s development goals up to 2026, including a plan to release an open finance framework.
In 2022, the Central Bank of Saudi Arabia (SAMA) and the Dubai Financial Services Authority (DFSA), key regulatory agencies of the two largest economies in the Gulf, took steps towards promoting unrestricted growth in open banking. In April, the DFSA granted its first open banking license to Tarabut Gateway. SAMA released an AIS framework and established an open banking lab, with plans to unveil its PIS framework later in the year. These initiatives align with Saudi Arabia’s “Vision 2030” strategy to enhance competition in the financial services sector. In 2019, there were four regulatory fintech sandboxes in MENA. Now, there are eleven. Oman has implemented its own open API strategy, and Kuwait, Egypt, and the UAE have announced plans to adopt similar initiatives.
The potential for change offered by open banking has sparked substantial investment from both local governments and international investors in regional fintech businesses. The regional drive to diversify away from oil and gas and the increased competition in financial services is creating new job opportunities and incentives for entrepreneurs and small and medium-sized enterprises. With the post-pandemic era, open banking is propelling MENA countries towards modern and prosperous economies for the future.
Spin-off developments in other tech sectors, such as healthcare and education, are also underway. Significant investments have been made in populous countries such as Egypt, transforming the delivery of public services. The “second mover” advantage of MENA countries enables them to benefit from the progressive regulations established by jurisdictions such as the US and Europe.
MENA’s population MENA is double that of Europe, yet the region has fewer banks than Germany alone. Addressing the needs of the underserved and underbanked is one of the most significant and revolutionary economic challenges facing the Middle East today. By learning from the successes and failures in other markets, the region can transform its demographic and infrastructure realities into advantages. As a result, hundreds of thousands of individuals who were previously financially excluded will benefit from increased access to financial services and improved financial inclusion.
The financial services market in MENA has the potential to surpass the US and Europe and serve as a model for other international markets to follow.