Open finance key next step in reaching world’s unbanked

Amid growing demand for digitized and interconnected financial services, open finance has emerged as a revolutionary innovation that offers significant potential not just in bringing more unbanked into formal financial services but also by keeping them in a system that is more convenient, safe, sound and sustainable.

For AFI members – who hail from developing and emerging markets –, open finance promises to harness data to create a wider range financial services and products tailored to lower income populations, particularly women and micro, small and medium enterprises, who remain disproportionately financially excluded.

At the core of the “open” concept lies the exchange of data between interoperable platforms and, therefore, the ability of financial regulators to collaborate with market stakeholders to find their own equilibrium in the seemingly contradictory priorities of regulation and innovation.

If done correctly, experts say that consumers will have greater control and a consolidated view of their own data, empowering their ability to make more informed financial decisions while fostering progress in cyber resilience, digital identity, data governance and data protection.

Less desirably, an absence of comprehensive regulation risks leaving consumers exposed to a host of legal and operational risks – from cybersecurity to data integrity – that can chip away at users’ trust in a burgeoning system.

Achieving this middle path, where consumer data benefits customers and financial services providers alike, Executive Director Dr. Alfred Hannig told AFI’s Second Global FinTech Dialogue that “it also holds immense potential in enabling access and improving the quality of financial services”.

Addressing representatives from nearly 50 countries from AFI’s Europe Representative Office in Luxembourg, Dr. Hannig added that “this is why we see open finance as a convergence topic that needs to be addressed by both developing and developed economies.”

Co-hosted with the government of Luxembourg, AFI’s Global Fintech Dialogue on Open Finance – Innovations and Inclusion, held on 26-29 October, was a week of events that centered around three days of member training on leveraging opportunities and minimizing risks for inclusive open finance, including a tailor-made regional training for AFI members in Eastern Europe and Central Asia.

Training was designed to complement AFI’s upcoming policy framework on open finance and financial inclusion, which will provide technical guidance to regulators on key policies and regulatory considerations, including gender-sensitive principles.

Peer exchange to stay ahead

With each AFI member institution at different stages of policy and regulatory maturity for FinTech and digital innovations, individual contributions added valuable insight and understanding into a rapidly evolving topic, helping regulators stay ahead of innovative trends and adopt a forward-looking approach.

Among those in the earlier stages of regulatory development was Central Bank of Nigeria, which has issued – but not yet operationalized – a framework on open banking. Further along was Mexico, where a landmark financial technology (FinTech) law mandates financial entities and financial technology to established standardized application programming interfaces and connectivity with access to other platforms.

Similarly, the Philippines has an open finance framework that provides supervisory institutions and third parties with permissioned access to personal information for product design and delivery, in accordance with industry standards, data security and privacy. Built on the principles of consent-driven data portability, interoperability and collaborative partnerships, it embraces an ecosystem mindset that is value-proposition orientated and creates a culture of creative confidence.

In Pakistan, meanwhile, significant strides have been made in digitizing financial services and promoting electronic wallets – with 75 million active accounts as of June 2021. While the country does not yet have a dedicated FinTech law, relevant operations are covered under regulations for electronic money institutions, payments, payment service provider and branchless banking.

While each experience offers a different perspective into unique local challenges, they share the common aim of using open finance to overcome various challenges faced by lower income groups to enhance financial inclusion. Here, the possibilities are endless.

For regulators just starting on their regulatory journey into open finance, Stefan Staschen, senior financial sector specialist at CGAP encouraged a staged implementation approach that was not “too overambitious”. At the same time, other regulators – such as insurance or mobile money – must be involved depending on their prevalence in local markets.

Impacts would also be felt by supervisors. Prof. Dirk Zetzsche, ADA Chair in Financial Law and Inclusive Finance at University of Luxembourg said that the dominance of technology highlighted the need to reassess operations. This, he added, could mean more investment in internet technology staff, fewer traditional bankers and more risk modeling.

Karen O’Sullivan, the head of innovation, payments, market infrastructures and governance at Luxembourg’s Commission de Surveillance du Secteur Financier, meanwhile, brought discussions back to the importance of data and, crucially, how market players have obtained, what they are using it for and how it is being shared in the financial sector. Here, she reiterated the need to put the customers first.

“It’s critical to make sure that consumer consent to accessing and using the data is there,” she said.

Offering additional perspectives from developed economies, where populations are often overbanked, Michal Vodrazka, a director of financial market regulation at Czech National Bank, noted that tighter regulation can also yield unexpected positive repercussions.

Referencing a recent European Union payment services directive designed to create a more integrated payments market, he recalled expecting the move to result in greater levels of security. He had, however, not anticipated that banks would use the push for standardized application programming interfaces to develop innovative and consumer-focused responses, including those that would improve the use of electronic identification systems in government services, such as tax filing.

AFI’s Global Policy Dialogue kicked off in 2018 in Prague when Czech National Bank co-hosted first global convergence meeting between financial regulators from developing and developed countries.

Despite these changes, speakers remained upbeat. Anatoly Gusto from Bangko Sentral ng Pilipinas’ Technology Risk and Innovation Supervision Department, summarized the overwhelming optimism towards open finance and its potential to achieve AFI’s financial inclusion mission.

“Open finance is the future of inclusive banking and is an essential building block that will enable the financially excluded and vulnerable groups to participate in formal financial systems,” he said.

Developed-developing platform for global convergence

No longer just about access to finance and bringing vulnerable groups to formal financial services, financial inclusion is now becoming more about maintaining high levels of safe and sound financial access, while focusing on increasing usage and quality of financial services.

“Financial inclusion also embraces important issues such as financial health and financial resilience, with the ultimate objective to ensure financial stability. This is the point of global convergence among financial regulators,” AFI’s Dr. Hannig underlined.

Aimed at leveraging innovative digital financial solutions to serve 1.7 billion unbanked globally, the Sochi Accord on FinTech for Financial Inclusion, endorsed by AFI members in 2018, has provided overall guidance to the network on different segments of continually evolving inclusive FinTech.

The Second Global FinTech Dialogue was organized as part of AFI’s 3D Platform and implemented under the umbrella of the Sochi Accord to bring together AFI member institutions and their policymaking peers from developed economies. The 3D platform advances policy understandings on topics of converging priority for developing and developed country authorities, including open finance, inclusive FinTech, cybersecurity, digital financial literacy, data privacy and consumer protection.

In recognition of the significant learning benefits that stem from this knowledge exchange, AFI members adopted a new category of “observer” at the annual general meeting in 2020. This category enables developed country policymaking institutions to engage formally and systematically with AFI in the years ahead.