The need to attract and retain customers will drive open banking acceptance in the region, according to an industry expert.

Financial technologies (fintechs) and the availability of open platforms to develop and deploy them will enable banks to catch up with sectors like retail and travel in delivering better customer experience,” says Wissam Khoury, managing director for Middle East and Africa of UK-based Finastra, the company formed from the merger of Misys and Canadian fintech DH Corporation.

Open banking is a standard and process that allows banks and fintechs to develop new products and services through the use of open application programming interfaces (APIs).

Shared economy

It is compared to the banking version of shared economy, which underpins ride-hailing services such as Uber and hospitality marketplaces such as AirBnB.

In an open banking environment, fintechs supply application and services, which are then consumed by banks, with companies like Finastra providing the platform to enable the marketplace.

Open banking is being driven by the need for banks to become more responsive and stay relevant, says Khoury. “The old trend where banks, with their substantial IT departments and budgets, dictate the technology and experience they want for their clients has changed.

“What happened over the past few years is that technologies have grown outside the banks and are now provided by smaller and more agile technology companies and fintechs,” he says.

The rising influence of fintechs, which are often small companies that can develop solutions in a considerably shorter timeframe and at much lower cost, saw banks’ stance change from fear to one of optimism, according to the executive.

The availability of the pay-as-you-go model in consuming software and applications, which was largely enabled by the availability of cloud infrastructure, also disrupted the business model of traditional financial technology companies, which used to sell million-dollar software licences to banks.

Khoury says open banking allows banks to focus on providing services and fintechs to focus on customer-centric solutions and services. “The only question now for banks is how they are going to embrace that collaboration,” he says.

Regulations

While there are fewer regulations for buying three cars, getting three drivers and enrolling them in Uber compared to getting a banking licence from the central bank, the executive maintains that financial regulations across the region will eventually catch up with the pace of fintech developments.

He says banks will be regulated exactly the same way regardless of whether they acquire an open platform for their banking applications or buy a software licence from a developer.

“What is different today is that central banks know that if they don’t change the regulations and endorse new technologies then they will be hindering growth of the banking sector,” he says. “If we cannot allow local banks to compete with international banks … that’s bad for the economy.”

He says the UAE’s move to appoint a minister of artificial intelligence last year, the first government-sponsored cryptocurrency and the multiple fintech initiatives in the GCC are examples of the region quickly adapting to new technologies.

“There are really two ways for banks to go about this: they can ignore fintechs due to regulations and risk losing relevance, or embrace them because regulations will eventually adapt to these new technologies,” he explains.