Open to change: Starting with Open Banking
Traditionally prudent to adopt new tech, banks are now exploring how Open API can benefit their businesses – with the support from tech and regulatory partners, who are encouraging the industry’s adoption of third-party tech which can immediately springboard banks’ offerings to their customers. Proponents of API are confident that banks’ partnering with fintech firms won’t compromise data security, while supercharging customer-facing innovation.
- “We are keen to drive the development of new smart banking initiatives and industry partnerships, making banking more accessible for our customers,” says Daniel Chan, HSBC’s Head of Business Banking, Commercial Banking, Hong Kong.
- From the banks’ perspective, the objective is “to serve our customers better, the objective is not to bring in technology for the sake of technology…. we think there is potential for open banking to help us to do that better,” says Gilbert Lee, Head of Strategy & Planning and Chief of Staff to the Chief Executive of Hang Seng Bank.
- “Part of the push is predicated on utilising banks’ vast troves of customer data for creating new revenue streams and better customer experiences” says Marc Entwistle, Principal of Digital Financial Services at Oliver Wyman, and a Co-founding director and board member at the FinTech Association of Hong Kong.
As Hong Kong – and the world – becomes a more digitised place, the tech-led economy is having a profound effect on the city’s banking landscape, with game-changing developments like the Faster Payment System (FPS), transactions moving increasingly mobile and the rise of virtual banking.
Innovations like an instant payments infrastructure via FPS, along with new and upcoming initiatives such as e-wallets, virtual banks and digital insurers, are showing the industry and their customers what is possible, and what banking is capable of by creating easier to use, accessible platforms and services.
One major route into this new, more connected world, encompassing a tech overhaul of the industry, is the use of open banking, or Open API. An API - Application Programming Interface – is a construct that exists to share data when coding software platforms and an interface for a safe and secure means of sharing data.
While relatively underused in banking, they have been common for building technology platforms, and now their true potential for the banking industry is becoming more and more apparent. With Open APIs, there is a focus on externalising much of banks’ technological development – a simple example of Open API could be the embedding of a Google map, showing an office or shop’s location, for example, in a third-party website.
Across Asia and the globe, financial regulators are encouraging the financial institutions under their watch to enhance digital offerings and are enthusiastic supporters of Open API as a way for banks to get the most out of what tech solutions are available.
Encouraged by regulatory bodies, the industry is pursuing greater tech integration through Open APIs, including the European Payment Services Directive (PSD2) and equivalent legislation in the UK. Closer to home, the Hong Kong Monetary Authority (HKMA) is undertaking a four-phase plan for banks based in the city to implement Open API solutions.
The HKMA’s involvement cannot be understated and is one of the main drivers of encouraging third party collaboration via Open APIs. Hong Kong’s regulator unveiled its four-phase strategy to develop Hong Kong as a smart city and further strengthen its status as an international financial centre and fintech hub in July 2018.
The four-phase plan to explore the possibilities is underway, with phases one and two – allowing third parties to originate customers and product sales – have been completed; with phases three and four- allowing access to customer data and processing of transactions- are slated for the near future.
The data gold rush
“Banks have a wealth of historical customer data at their disposal and yet have not been well equipped to translate that information into actionable insights and better personalised services,” says Marc Entwistle, Principal of Digital Financial Services at Oliver Wyman, and a Co-founding director and board member at the FinTech Association of Hong Kong.
Hungry for ideas
“To serve our customers better, the objective is not to bring in technology for the sake of technology…. we think open banking could be one of the approaches to help us improve that,” says Hang Seng’s Gilbert Lee, Head of Strategy & Planning and Chief of Staff to the Chief Executive of Hang Seng Bank.
Primed for partnership
“We are keen to drive the development of new smart banking initiatives and industry partnerships to better support our customers,” says Daniel Chan, HSBC’s Head of Business Banking, Commercial Banking, Hong Kong.
Collaborate to excel
In the age of smartphones and an ‘always-on’ culture when it comes to services, there is a strong customer expectation now around what digital experiences should be like. The banking world has been expanding their digital capabilities to make sure their customers experience the same levels of convenience that they do with other online services.
The global movement toward open banking has arrived. Regulators and industry players are very supportive of the changes that need to occur in order to create a more connected and open banking ecosystem, even while playing catchup in the era of “big data” to create new value to their customers.
New initiatives such as Open APIs and Faster Payment System are lowering the barrier for smaller fintech firms to offer consumer facing services. We are now at a tipping point where Hong Kong opens a new level playing field for a diverse range of market players. Incumbent banks and other traditional market players need to monetise on these opportunities given there are clear advantages and even clearer downsides to standing still.
The essence of Open Banking is being opened and connected, and the key to this is through working with partners – taking cues from regulators and reaching out to third-party firms like fintechs to leverage the capability.
Ultimately, consumers stand to benefit, as the shift to more digitised processes leads to more consumer-orientated banking. More and extended services, driven by competition amongst an increasingly diverse range of players -- both banks and non-banks partnerships – are on the horizon as these elements look to capture share, improving customer experience through a wider offering of services.
Case Study: Regtics
Regtics Limited is a Hong Kong-based fintech startup developing an AI and big data-based solution for banks and other financial institutions which is designed to enable compliance with international and local anti-money laundering and counter-financing of terrorism (AML/CFT) regulations.
The Regtech solution brings together domain expertise, artificial intelligence (AI), machine learning and robotic process automation (RPA) to help organisations stay alert and recognise potential risks.
The company is “focused on compliance, from customer onboarding, due diligence and review… to fulfil the regulatory requirements, not just for Hong Kong but to worldwide standards,” says compliance lead Wallace Chow.
Regtics’ software comprises three main modules: transaction monitoring, customer due diligence and name screening.
“We provide solutions to help banks be more effective, up to the world standards, and from the point of view of the HKMA, they want banks to embrace the tech – the machine learning, the AI. It is not really easy for those customers to adopt this new tech, as they don’t have access to data scientists, they don’t know the technology they have. They’re very experienced in tackling these [AML/CFT] operations but they’re not running them very effectively and senior management always reports difficulties to the regulators.”
“Right now what we are doing for banks is all on premises, so the data doesn’t leave the premises, so no data leaking. We use data from their production without any personal data, including name, address, ID, what we need to use is to learn customers’ behaviour patterns, so we can use unmasked data to train up the machine learning model.”
Using AI-based algorithms, in a test case for a local bank, Chow says that his firm’s software reduced false positive rates of suspicious transactions by 30-50% depending on data size.
“It helps the bank reduce the cost, the resources, and more importantly helping the bank relocate or allocate those resources to their day to day compliance operations,” he says.
“When you run a bank, you want to be safe and you need to tell the regulator that our tech, what we’re doing is up to standard, that they have a track record for vendors like us. We have the technology and the knowhow but the most difficult thing for us is to build trust.
He says that the ecosystem, including the end-user banks, the fintech providers, the regulatory body and organisations like HKSTP are working together well to provide a better understanding of what is needed, what is wanted, and what is possible.
“We try to work with the HKMA to introduce what we can do, how we can help the bank and how we improve the bank’s operation. Open banking is one of the topics they are pushing over the past two years, they have been doing some regtech (regulatory technology) forums, so the banks understand how they can adopt the technology and what kind of areas the banks are actually looking for.”
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