Saudi Arabia establishes its open banking framework

New legislation, regulatory guidelines and technical standards have been developed in Saudi Arabia as part of a new open banking framework.

Barkha Doshi of Pinsent Masons, who specialises in technology-driven innovation in financial services in the Middle East for Pinsent Masons, said the move should encourage fintech innovation and improved data-driven services for consumers.

Open banking is a concept that is gaining increasing traction globally amongst policymakers, regulators, and financial services firms. It involves liberating the data held by financial institutions so that it is made available to third parties for the purposes of providing rival products or services.

The most mature open banking regimes globally are in Europe, where the conversation has already turned to the establishment of broader 'open finance' frameworks.

In the EU, account information service (AIS) providers and payment initiation service (PIS) providers can obtain access to payment data held by banks and other account servicing payment service (ASPS) providers under the terms of the second Payment Services Directive (PSD2).

Regulatory technical standards that build on the PSD2 provisions around access to data aim to enhance the security of payments and limit fraud by ensuring there is a secure mechanism for sharing payments data.

In the UK, a similar open banking framework has been developed that aligns in many ways with the PSD2 regime. The UK framework was initially a product of a review conducted into retail banking by the Competition and Markets Authority but has evolved subsequently. There are long-term plans to develop a new regulatory framework for open banking in the UK. Other open banking regimes have been established in other jurisdictions too, including Australia, Bahrain and Hong Kong.

The new open banking framework in Saudi Arabia was announced by SAMA, the Saudi Central Bank, which said it is based on "international best practices". SAMA said its "tracking the development of banks and fintechs to ensure their readiness to launch open banking services within the first quarter of next year 2023". The initial focus will be on the delivery of AIS, with PIS to follow, it said.

Like in other jurisdictions, the Saudi open banking framework sets out requirements that both banks and fintechs must adhere to, to support open banking services. The new standards that have been developed consist of customer experience guidelines as well as specifications for the application programming interfaces banks must provide third party access through.

The Saudi open banking framework is an output of the open banking program, which is itself a part of a broader fintech strategy in Saudi Arabia that is linked to the Saudi Vision 2030. Some fintechs have already been testing open banking services through SAMA's regulatory sandbox.

Doshi said: "Saudi Arabia has positioned itself as a front runner in the Middle East fintech market through its new open banking program.

Through the program, new partnerships can commence between banks, financial services firms and customers. From the customer's perspective, the new program also guarantees better use of their financial data. It goes without saying that open banking, and open finance in general, will improve Saudi's existing financial infrastructure and fuel fintech growth in the region."