(Published in Aurora)
Banking 4.0 is here. It’s disruptive, it’s ubiquitous, and it’s marked by innovation.
Go back to the times when there was a long wait required at what we now refer to as ‘brick and mortar banks’ and cumbersome paper-based processes. It took decades to evolve to the next phase when electronic banking was introduced, ATM Machines were installed and basic online services were offered. Slowly, banking facility was accessible from the comfort of mobile phones. Offering digital services was no longer a choice or a value-added service by some banks but fast became a necessity. If you could have a Facebook account, you could use mobile banking too.
Where the above three phases were transitionary in nature, Banking 4.0 challenges the existing banking models, compelling stakeholders – regulators, financial service providers, and technologists to reframe, that is, change the lens with which banking has been viewed as a service altogether.
The shift is in the approach - from simply digitising old-age practices to re-engineering the way of doing banking. From a focus on capturing value to now offering data-driven customer experience via optimum channels, Banking 4.0 embodies a transformative shift towards digital first, customer centric and collaborative banking models that leverage technology to deliver enhanced value and experiences to customers and stakeholders alike.
To be more specific, banking now requires and will be driven by the use of virtual facilities and emerging technologies including cloud based storage, blockchain, and artificial intelligence to offer tailored financial services.
Banking 4.0 can be largely seen as based on the following key components:
- Open Banking
It entails the secure sharing of financial data among authorised third-party providers. This approach fosters innovation, competition, and interoperability within the financial ecosystem, empowering consumers with greater control over their financial information and enabling the development of innovative products and services.
- Technological Advancements
Banking 4.0 leverages a spectrum of transformative technologies, including artificial intelligence, machine learning, blockchain, and the Internet of Things (IoT). These technologies enable banks to streamline operations, enhance risk management, personalise services, and deliver real-time insights to customers, thereby driving efficiency, agility, and innovation across the industry.
- Customer Centricity
In Banking 4.0, customer experience takes centre stage, with banks prioritising personalised interactions, intuitive interfaces, and seamless omni-channel experiences. By harnessing data analytics and predictive modelling, banks can anticipate customer needs, tailor offerings, and deliver value-added services that foster long-term loyalty and engagement.
Open Banking – The API Economy
A now USD 65 Billion industry, Open Banking implies sharing a bank’s customer data, by consent, with authorised third parties via Application Programming Interface (APIs) to develop customer-centric, innovative and customised services and products. For example, Citi’s Developer Hub, which enables developers to connect to Citi via API, is being used by Intuit to authorise data sharing with QuickBooks and Mint.
To make this happen, the main elements of Open Banking are:
- Ownership of Data – shifting ownership of data from institutions to individuals,
- API Connectivity – creating API connectivity for financial service providers,
- Consent Management – user consent management for user’s KYC and financial data, and
- Payments Initiation – initiating payments from third-party applications.
Globally, nearly 100 countries have adopted or are considering adopting Open Banking in some form. For instance, in European Union (EU) and GCC, Open Banking regulations have not only come into force, the testimony of which is a large number of fintech startup emerging in the two regions at a very fast paced, particularly in KSA. Whereas, in countries including Pakistan, USA, and Egypt, the Open Banking regulation is currently under-development.
The concept of Open Banking varies across different jurisdictions. In EU, for example, PSD2 (payment legislation) sets guidance on both account information and transaction data sharing with third parties, as well as payment initiation by third parties. It is similar for frameworks in some other countries, including KSA, Bahrain, United Kingdom, Brazil, and Singapore. Whereas, the regulatory scope varies in other markets. For instance, Open Banking frameworks in Malaysia, India and Mexico focus on data sharing only and excludes third-party payment initiation. In contrast, Indonesia’s Open Banking standards cover payment initiation and not data sharing.
Despite the difference in models, the underpinning global API economy trend is marked by:
- Regulatory Development:
The adoption of Open Banking is being driven by regulatory developments in different markets, promoting competition and innovation. For example, EU’s PSD2 has mandated banks to open their APIs to third-party providers.
- API Standardisation:
As the network of stakeholders in the Open Banking market expands to include non-bank financial institutions, fintech startups, and other third-party providers, API standardisation becomes more critical than ever. In simple words, by offering a common language for banks and third-party providers to communicate, API Standardisation reduces development costs and simplifies compliance requirements. NextGenPSD2, an initiative of the EU under the Berlin Group, is an example of this.
- Artificial Intelligence:
With the growth in Open Banking, and an increase in the number and volume of transactions, AI-powered systems are playing a pivotal role in analysing large volumes of data in real time to detect and prevent fraudulent transactions, and provide personalised product recommendations and financial planning tools.
With these elements coming together, data-driven, customer-centric and personalised financial solutions become possible by leveraging customer permissioned data. The most common use cases of Open Banking include personal finance management, multi-banking, intelligent savings, identity verification, income verification, affordability check, creditworthiness assessment, payment reconciliation, tailored insurance and customers’ buying trends. To give an example, for payment service providers, it means unified banking APIs, consent management and compliance requirements being met, whereas for end users, it means smart invoicing, expense tracking and insights for more informed decision-making.
It’s Coming Home: Open Banking in Pakistan
The existing digital landscape with 80% of the population as mobile users, 37% internet penetration rate and 6 % Year-on-Year growth rate of digital banking, underscores that Pakistan is ready to embrace Open Banking.
As a pretext, RAAST, a fully interoperable instant payment system gateway, was launched by the State Bank of Pakistan (SBP) in 2021, followed by the introduction of merchant payment system module. Recently, by establishing a regulatory sandbox and opening it for public consultation, SBP has taken a revolutionary step.
With the regulation coming into action, the finance and technology sectors will benefit in two ways. Firstly, it will completely alter the financial landscape of Pakistan as it will allow fintechs to test their products in a controlled, simulated environment before going live. This will give them an edge in the form of offering refined services to customers as soon as they launch.
Secondly, with regulation setting into place and required infrastructure available, global financial technology companies will enter Pakistan for the future it promises. However, it’s the early adopters that will reap the first movers’ advantage.
To give an example, BenchMatrix, one of the fastest growing financial technology solutions and services company in the MENAP region, has already tested and implemented its Open Banking solution in the Middle East, and is now venturing into Pakistani market with global knowledge and deep industry expertise. With 17 financial-tech enterprise solutions provided to 100+ financial institutions across 16 countries in 5 regions, the company is ready to not just disrupt the existing financial landscape of Pakistan but ‘create an Open Banking ecosystem’ in the country.
As Banking 4.0 unravels and transforms the global finance sector with Open Banking, 2024 is the year of disruption. Pakistan has all the potential to become a regional hub of Banking 4.0 but the question is, are Pakistani financial institutions ready to adopt Open Banking?