Bold 'open banking' concept prompts bigger questions on transparency

A FEW weekends ago, this reporter was spending time hunched over a laptop, trying to figure out the reason behind certain exorbitant fee charges that had been imposed over a switch in certain banking accounts.

When she finally looked up after an arduous search, the sun had retired for the day, and she remained none the wiser at that point. (She emailed the banks and agencies involved, and then reached for a beer - yes, in that order.)

While this grievance is a personal matter - and resolved somewhat through a few cash vouchers - it does bring to mind the bigger, broader trend of "open banking" that banks are looking at closely.

The over-arching idea behind the "open banking" concept is for banks to open up their services to partners, typically through the use of application programming interfaces, or APIs - a set of commands that allow software applications to speak to one another.

In the UK, the methods of implementing "open banking" have gone to the extent of giving consumers an easy switch to turn on and off access to their banking information that is given to banks and other financial firms such as fintech companies. It also implies that consumers should be allowed to more quickly switch their primary accounts from one bank to another.

The change has been sparked in part by the European regulations in the payments space, as regulators there sought to give account holders the clear option to hand over banking information to authorised third parties - such as fintechs or smaller banks - and to make payments through these third-party firms that are presumably charging lower fees than that of the banking incumbents.

The UK's Competition and Markets Authority has said that this "open banking" model will help to create more innovative services by new entrants and technology companies, with banks meant to offer APIs, such that brands, corporates, fintechs and software developers can "talk" to the bank to access a breadth of services.

The "open banking" initiative will also prompt the banks to "publish trustworthy and objective information on quality of service", the authority added.

In doing so, customers can assess their banks on their service standards and charges, giving them an option to switch financial providers based on the available information.

Consumer angst

In theory, this is an achingly beautiful concept. Unfortunately, there are practical hurdles.

Firstly, information shared by banks is varied and hard to compare. A fee charge statement should be, by now, a simple and comparative piece of information. Yet, as this reporter's personal experience a few weekends showed, it is just not the case.

Consumers still have to jump through hoops to figure out how much one transaction would cost. It is worse when the front-desk staff tells you there is no charge, when actually, there would be. Heavy remains that damning paper statement that arrives after the transaction has been finalised and completed.

Secondly, that damning paper statement is not digitised, which means consumers would have to take time to transfer that information on paper onto a spreadsheet, in order to make worthwhile comparisons. (At this point, the benefits of a second beer begin to outweigh the risks of poor data entry from inebriation.)

Finally, there are security concerns. For example, as the regulators here look to raise the cyber hygiene standards of banks here, it remains less clear how fintech firms would be assessed against such higher standards.

So while there is overall irritation with banks over poor services, consumers would not necessarily be better served in having fintech firms control an outsized portion of sensitive banking data at this point, if start-ups are not held to the same cyber-security standards as banks, and as there remain practical challenges behind UK's version of "open banking".

But the prevalent angst of consumers is precisely the reason that the "open banking" philosophy is not to be scoffed at. The bigger lesson to take from the "open banking" experiment is that banks should be expected to be transparent about information such as fees, and in a way that is accessible and comparative.

Notably, should regulators ensure that banks have standardised terms and conditions to make them effectively machine readable, so consumers can have that crucial information at a glance through a digital portal? If the industry is to pursue the "open banking" concept, it's worthwhile thinking about such standardisation as a start.

The bottom line is that banks' certain failings in working to the consumers' best interest will only add fuel to the criticism of banks being fair-weather in nature.

The "open banking" model is still at its infancy, but the bigger takeaway from it is that banks that still do not embrace the notion of transparency and value-added service will trail far behind not just their traditional peers, but also their Big Tech foes.

And in the era of runaway competition, especially given the open competition in Asia's financial sector, that disadvantage could tomorrow bring a bank to its dusty - but deserving - end.