An interview with Ariadne Plaitakis — Senior Financial Sector Specialist, CGAP
1. Tell us a little about CGAP, your objectives, and what work you do in relation to open banking.
CGAP is a global partnership, housed at The World Bank, of more than 30 leading development organizations that works to advance the lives of poor people, especially women, through financial inclusion. For 2 years we have been focusing on open banking and open finance from a financial inclusion perspective. We started looking at 12 different jurisdictions with an open banking framework. After carrying out our analysis, we concluded that there are 12 different design elements to an open banking framework and that there are 7 open-banking-powered use cases that can help low-income customers in an emerging market. You can find the results of our work here.
2. You have a global mandate working with the World Bank, when you were picking the 12 regimes, what was your criteria for picking those 12?
When we started 2 years ago, there was not much work done on Open Banking, so we needed to find countries with sufficient documentation of a legal framework. The initial ones were the UK, the EU, and Australia who had legislation passed. Next, we looked at emerging markets; Mexico, India, Brazil, Indonesia, and then Bahrain, Japan, Malaysia, Singapore, and Hong Kong, what I would call the 2nd wave of open banking.
3. Is open banking more about helping the unbanked i.e. financial inclusion or is it deepening the products available to the banked population?
It depends on the contours of your legal framework. With open banking in a highly banked country, we are talking about increasing the products available and their usage. However, beyond that, with open finance or even open data, which is basically access to data that’s not in the financial sphere that can support a financial digital data trail (such as social commerce data, utility data, and telecoms data, such as the usage of your phone with airtime plans and the like), you can support access for the unbanked. With open finance and/ or open data frameworks, it does not matter whether a user has a bank account as they can also transfer e-money, utility, and airtime datasets. Non-transactional data such as KYC data or any other data used to create a bank account can also be used. This makes it easier to either access a bank account or gain access to another financial product. What is necessary for this to work, however, is that any given user must have a digital ID.
4. With the current struggles of bringing banks together to facilitate open banking, how will open data be made possible given one has to bring together data providers from different sectors i.e telcos, utilities, and social media data?
This is country-dependent and need not be set by the financial regulator. There are two examples of this. In Australia, open banking was co-opted into their consumer data rights law which relates to their entire digital economy and is a law passed by their government. Meanwhile, in Brazil, we saw a two-pronged approach. First, it has a data protection law akin to the GDPR with a data portability provision that facilitates data sharing even outside open banking. The second was the Central Bank’s implementation of open banking, which included all regulated financial institutions and encompassed a list of financial products, some over which the Central Bank did not have direct oversight such as insurance and security products, and as a result, other regulators relating to those products got on board.
5. What acts as the north star in helping guide the different regulators when it comes to building a framework for open data?
One of the main drivers of open banking in Europe and the UK is supporting competition in the financial services sectors. The sharing of data enabled by open banking reduces the informational asymmetry that exists in the banking market. In the African context, who implements open banking and why depends on the country’s institutional infrastructure and on whether there is data protection or a competition authority. From my experience of the continent, financial sector regulation tends to be more advanced than data protection and competition law, so you will probably have the financial sector regulator leading an open banking initiative.
6. When it comes to the types of approaches used by different regulators, which one do you favor between the voluntary approach and a mandatory approach?
The general trend we have observed is that voluntary-led approaches have been less successful than mandatory ones. We have seen this in Asia, where most take a voluntary approach. Then you have places like Brazil & the UK where the mandate was mandatory for only a few key players, and after that, the other players also joined voluntarily.
7. In your paper you mentioned financial inclusion by design. How does that fit in together with a hybrid framework where some of it is voluntary, some mandatory?
Whether to go mandatory or voluntary is for the regulator in each market to choose based on the country's context. In some countries, there can be cultural elements at play such as in Asian countries where the regulators often work with moral suasion. The decision is also a political one, as the decision can also reflect to what extent the regulator is susceptible to regulatory capture. We did not take a position on whether a mandate should be implemented but rather looked at how a mandate could boost inclusion. We looked at issues like who will be the participants? Will it be solely banks or arete money issuers going to be included? Will it be broader, to include other financial products (what we call Open Finance)? These issues are important as the more areas that are covered in an open finance framework, the more use cases for the poor that are enabled.
8. In your research you identified the 12 jurisdictions, and then you focused on the five use cases. So, what are the five use cases? Furthermore, if one is building a system for financial inclusion, what are the things that they need to focus on?
There are actually 7 use cases, which can be broken into 3 groups.
- You can improve access to credit by using alternative data sources, accessed through open banking, that have nothing to do with a bank account. Another type of service is called debt rehabilitation, where debt charities help renegotiate a user’s debt schedule to match the user’s repayment ability. The debt counselor will give the borrower a loan that they payback, and the debt counselor will pay off the creditors, who will take a lower amount as they get something rather than nothing. This can be done digitally through open banking. The last use case is pre-empting expensive debt such as an overdraft. Here, when someone is about to go into an overdraft, they are offered a pre-approved loan at a much lower interest rate which they can pay off easily, and this loan can be automatically triggered based on open banking data sharing.
- The second bucket is improving financial management and financial behavior. One of my favorite use cases surrounds savings products. An example is an open banking app that when you spend, let’s say $1.49 on an item, it rounds the value to the nearest $ and takes the balance into a savings account. There are other open banking-based products that help people detect when they are overpaying for goods such as utilities and help them find better deals.
- The last group is the ability to share customer identity information for KYC purposes. This is an early use case. This allows those whose ID is in the system to be able to share their identity information digitally with a new financial provider and not have to constantly provide a copy of the ID themselves, thus reducing the paperwork. As a result, this would bring down the cost of onboarding customers.
9. As you build a segment out, how early do the fintechs need to be involved in the framework to enable them to build infrastructure to pull data out?
In a lot of these open banking regimes, fintechs are participants in that they can get the data once they are accredited. In some contexts, however, data sharing is only allowed between financial institutions and in this case, a fintech would have to first be regulated to participate. Most of the open banking models we have seen are really about facilitating fintech’s access to data.
10. How do you measure the success of an open banking framework, and is it any different from how you measure financial inclusion?
We would love to see how much uptake of these financial inclusion promoting use cases there has been. In the UK for example, the OBIE, which is the governing trustee of open banking, maintains metrics on the number of participants, how many successful API calls were made, and the number of transactions, but no metrics on financial inclusion. Specific to financial inclusion, you would want to measure the adoption of the use cases we discussed by low-income individuals.