The planet-sized problem with Open Banking (and how to solve it)
"Fragmentation is increasing rather than reducing," says Huw Davis, CEO of Ozone API.
Open banking is a world-changing idea born with an inherent limitation. In the UK, it was brought into being following an order from the Competition and Markets Authority (CMA) to stimulate competition in the financial services sector. At first, the big banks saw it as a kind of punishment for the excesses blamed for the great financial crash of 2007.
Over time, many of the CMA9 - Britain's nine largest banks - began to actively embrace this new paradigm, which allows customers to share their account data securely through APIs to benefit from innovative third-party services.
Natwest, in particular, is an innovator in this space, experimenting with clever functionality such as "Customer Attribute Sharing", which sends identification details along the Open Banking rails (API-based infrastructure that enables secure data sharing and payment initiation between banks and authorised third-party providers).
However, the very nature of open banking creates a challenge. Typically, open banking works on a national level and requires two things to function: regulation and technology. The fact that regulators work within countries or regions means that outside of jurisdictions like the EU, the creation of a cross-border open banking ecosystem is still very much an ambition rather than a reality.
Achieving interoperability between national open banking ecosystems is a critical goal of the industry's most ambitious players - particularly as we move further into open finance, the next stage of the journey in which a wider variety of financial data is exposed to APIs and made available for secure sharing.
To find out more about the interoperability challenge and how to address it, Machine spoke to Huw Davis, Co-founder and Chief Executive Officer at Ozone API - a company founded by the creators of the UK's open banking standard, which governs the process of sharing data between banks, customers and third-party providers.
Can open banking and open finance ever transcend borders, or is this a movement that's set to be national in nature rather than truly global?
How close are we to building a transnational open banking ecosystem?
"At the moment, fragmentation is increasing rather than reducing. There is a logical endpoint around global interoperability, but there are still deep questions about how we get there.
"When the UK open banking standard was first developed, there was a focus on making open banking interoperable and scalable. But fundamentally, it was designed around a domestic piece of regulation. As open banking and open finance have rolled out across other markets, the starting point has always been domestic.
"Over the years, markets have built on the UK standard, but have diverged in slightly different directions to cater to local requirements. That might be due to local regulatory frameworks or differences in how local payment infrastructures work.
"It would, I suppose, have been relatively easy for every market to adopt a single standard, but markets typically take a parochial approach, solving specific problems within their own regions."
How have different markets approached open banking and how has this contributed to fragmentation?
"We are now at a point where, while most markets recognize the necessity of a standard for open banking and open finance to work, each still has its own regulatory framework and standard.
"In Saudi Arabia, for example, the focus has been on Vision 2030, driving fintech growth, inward investment, and innovation. The UAE is looking to move in a slightly different direction, even though they're they're very close geographically.
"In Brazil, it's about financial inclusion and driving digital payments as an alternative to cash. The drivers are a little bit different, but they're primarily local in nature. Therefore, you end up with a slightly different framework and set of standards - although there's a commonality between them.
"We've been involved in helping to design all of these standards, which are different and good in their own ways. But ultimately, you end up with fragmentation."
How can we overcome this fragmentation?
"I think the long-term route could follow the example of the card world, where there is global interoperability because the big networks all got together and made decisions such as standardising chips so they are structured in the same way and talk the same language. I think we'll get to the same place. What's hard to know is exactly how we achieve that.
"Do we get there through continued fragmentation as each market does open banking in slightly different ways for their own very specific reasons - and then a big global giant creates an overlay on top that makes it easier to operate? Players like Visa, MasterCard and others are clearly well positioned to do that and create global standards, operating models and commercial frameworks. That's one route.
"The other option is to get the markets working together proactively to connect domestic ecosystems and trade more effectively. Again, there are clear indications that's happening as well.
"There are really good intentions around interoperability. But what I'm not sure which route we'll follow. It will be really interesting to see how it plays out over the coming years."
How can a player like Ozone API influence the next stage of open banking and open finance?
"At Ozone, we play a couple of key roles, and I’d say we’re uniquely positioned in this space. One of our roles is to help banks and financial institutions worldwide implement high-performing, standards-compliant open APIs.
"We’re the only platform that supports all the emerging standards, so whether a bank is in Colombia, Australia, the UAE, or Canada, we help implement APIs aligned with the correct standard. At the same time, because we support multiple standards, we can also help them expose core capabilities from other standards if needed. This allows banks to do what they need domestically but also mix and match the best of what's happening around the world.
"We're also in the fortunate and privileged position of directly authoring and influencing the development of global open banking standards. Each time we develop a new standard, the process becomes faster and more efficient.
"For example, the UAE standard - arguably the most advanced to date - was developed with our team’s input alongside the Central Bank, and the process was significantly quicker than previous markets because of our accumulated expertise. We understand how to collaborate with central banks and industry players to get there more quickly in a collaborative, consultative way.
"This puts us in a position to implement the best existing standards and help shape new ones. While much of our work isn’t in the public domain, we’re often engaged in efforts to ensure new standards are built on interoperable building blocks."
Is the interoperability challenge technical or regulatory in nature?
"The biggest barriers to interoperability are policy-related. Some countries have strict data protection laws preventing data from leaving their borders, while others enforce data residency requirements.
"Many open banking and open finance frameworks stipulate that only players authorised by the domestic regulator can participate, creating additional constraints. These policy and regulatory barriers present a far greater challenge than technical limitations.
"For fintechs, this impacts business models. In many cases, it’s not as simple as lifting an existing model from one country and applying it to another. Regulatory and policy requirements often pose a much bigger hurdle than the technical aspects of integration."
Why is interoperability an opportunity for the wider financial services sector?
"Anyone who travels knows the headache of dealing with different plug types for your devices and worrying about what sockets will be available. It’s the same challenge in open banking. We are increasingly living in a global economy where businesses operate across multiple jurisdictions, trade spans multiple borders, and individuals have different aspects of their lives spread across countries.
"If every time you cross a border, you need to pull out a different plug adapter and figure out how everything fits, the system just doesn’t flow smoothly anymore. Instead, you end up with unnecessary barriers and complications.
"It’s a simple analogy, but like plug adapters, each market doing things slightly differently creates more obstacles for information sharing and money movement. These barriers slow down the processes that could otherwise unlock huge value."
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