Open Banking – China...............................

While China has achieved high levels of digitization of its banking sector, open banking is still in its infancy:

Open banking’ as a concept is relatively new in China, but it does not mean the country has not embraced it. In early 2012, Bank of China had initiated what is called an open platform for banking and in fact implemented such a concept, making several applications like mobile payment, investment and wealth management and cross border financial services available through some 1600 interfaces. It went ahead and created APIs to establish connections between financial services and users. While being responsive to the concept, the country was also aware of the risks involved on account of the openness.

In spite of the early start, open banking is considered in its infancy still in China and it is yet to have counter measures for risks and hurdles like differing standards, lack of mechanism for access, weak data security protection and malicious calls in the interface. It is in the process of observing how open banking in countries like the UK and Australia is evolving, especially through international collaborations for regulatory supervision and for establishing unified technologies, data standards and norms, as well as the data security protection.

BANK THAT LEADS

China’s first digital bank, WeBank, promoted by Tencent, is today a true initiator of open banking in the country. At the Money 20.20 in Singapore, the bank’s CIO Henry Ma showcased the future ‘Open Banking’ that the bank is adapting and revealed the ‘3O’ paradigm of open banking services. While the traditional definition of open banking is that it is a platform where data, algorithms, transaction records and procedures are shared within the ecosystem to provide services to partners including c us t o mers, e mployees, t hi r d par t y developers, fintech companies and vendors, Ma maintained that it is more than API technology and is characterized by the ‘3O’ Paradigm, namely ‘Open Platform’, ‘Open Innovation’ and ‘Open Collaboration’. He told the audience that the open banking model his bank visualizes enables banks to embed their product, risk and technology capabilities into specific industries, while in turn banks are able to approach their target customers more directly. Banks can then provide context-based financial services where customers need them most under various scenarios, while partner businesses without financial expertise and capabilities can better serve their customers. As a result, banks can reach the traditionally unbanked or underbanked long tail market and effectively promote inclusive finance.

Ma revealed that WeBank has taken measures to counter security threats that come up in the wake of the openness of the system and has initiated end-to-end cyberrisk assessment mechanisms and apply innovative technologies such as ‘Open Consortium Chain’ to simplify connectivity with partners, establish comprehensive business continuity plans, introduce blockchain-based distributed identity and privacy protection solution.

KEEN RESPONSE

‘Open banking’ has attracted tremendous attention from banks in China in 2018 and many of them have launched open banking platforms based on API technologies. Until recently, much of the growth has occurred without any mandates, API standards or regulatory protection of customer data. But this is changing, with Chinese regulators stepping in to control many of the practices that border on threat to security. The government has been proactive in this even as it does not want to slow down innovation. It has created frameworks that ensure growth and at the same time protect consumers. It is now in the process of enacting regulation that is akin to Europe’s General Data Protection Regulation (GDPR) and regulation of the open banking sector is on the anvil.

Another fillip for open banking in the country is the demand from the country’s ever expanding, digitally connected middle class. Most of the Chinese people do not carry cash or cards and they prefer to use mobile banking. This high digital adoption rate is the result of Chinese consumers’ willingness to share data with institutions. Research in this area has shown that unlike banking customers in many western economies, Chinese consumers are more positive and happier to share their transactional data with fintechs.

REGULATIONS YET TO COME

While Chinese regulators are yet to roll out regulations for open banking, the country’s private sector is pursuing the use of open APIs on its own. Added to this is the active involvement of Chinese fintech companies. Companies like Ant Financial and Tencent leverage open APIs to allow third parties to offer services to their customers and make data more portable within their ecosystems. For example, the countr y ’s leading insurance company Ping An Insurance has introduced ‘Smart Insurance Cloud’, which is a platform through which Ping An offers open-source APIs to its partners. These developments are bound to motivate the regulators to frame rules governing open banking in the country.

It will be interesting to see how open banking in China will evolve. Today the country’s financial services sector is at a crossroad. Regulators need to take critical decisions about how to put in place the frameworks that support open banking, ensuring that there is no demotivation for innovation and there is security of the personal data and that the systems are ever safe from infringements.