The Shift to Open Banking
In November 2018, the Central Bank of Bahrain (CBB) mandated the adoption of open banking by banking licensees with a deadline of 30 June 2019. This article explores the concept of open banking, the market leaders in Bahrain and what this means for the future of the regional banking sector.
Financial institutions have long been innovative in the offering of technological financial solution services. However, with the reality of individuals holding accounts in several different banks, it has no longer become competitive for banks to remain cloistered hoping that customers stay loyal. Open Banking refers to the concept of sharing personal information of customers between several organisations in a standardised manner.
Making customer information accessible both by the individual customer and third parties has enabled banks to gain a competitive advantage in the market, by allowing an individual access to aggregated financial information in one place. This allows the individual to carry out activities such as budgeting, financial planning and even enabling payment transactions via a single interface rather than logging into numerous banking portals.
How does Open Banking work?
Open Banking can be made available by banks in different ways. A bank can permit the sharing of customer information with licenced third party applications. Alternatively, a bank can offer its own application where a customer can link their own accounts held with other banks.
Through an Application Programming Interface (API) banking institutions can provide services in two ways, through an Account Information Service Provider (AISP) or a Payment Initiation Service Provider (PISP). The former would allow customers to aggregate all their information and view it for the purposes of budgeting or financial planning. The latter would allow customers to enable payment transactions from different accounts from the same place.
What is the impact of Open Banking?
A culture of open banking culture will encourage competition between banks, and also allow them to provide faster and more tailored services to customers. Banks would have the opportunity to develop new products and services based upon the data, habits and information received as a result of open banking. Third party providers - which require consent from either the customer or a data provider to gain information – will not have a large database of customer information to work with, but will be able to be more nimble to provide solutions that customers want involving a number of different financial institutions. In addition, banks will be able to rely upon their reputation as a financial institution with established practices in securely dealing with customer data in order to introduce customers to new services, products and ways of doing business.
Customers will take advantage of a streamlined, efficient platform for viewing and using their financial information, including an aggregate of their information to track their own habits, budget, financially plan and pay for goods and services online.
How has Bahrain responded?
The CBB set open banking regulatory mandates in 2018 with a deadline of 2019 in line with its long term objective for the Kingdom to become a pioneer in the Middle Eastern FinTech scheme. This deadline presented an opportunity to either aim for compliance or attempt to gain a strategic advantage. National Bank of Bahrain adopted the Open Banking Infrastructure from Tarabut Gateway (Bahrain's first licenced open banking provider). They revealed the first phase of their service, the "Aggregator" phase, in December 2019. This initial phase will allow customers to view all their financial information across all their accounts. The Kingdom put itself as one of the first states in the region to mandate that these standards are incorporated into the financial sector. Notable examples include NBB (as above) as well as BBK and BISB.
How can we help?
We have assisted a number of financial institutions on the adoption of open banking standards as well as assisting with the documentation between banking institutions, AISPs and PISPs.