Faced with a highly competitive market, Middle Eastern banks are turning to alternative business models that can help them leapfrog their competition.

In 2018, the Spanish multinational bank BBVA reported that its revenues from open banking had grown by more than 50% YoY. The bank had previously incorporated open banking into its business model, developing its own set of open banking services such as the BBVA API Market, which allows third-party providers to access its services and products for a fee, thereby expanding its offerings for customers while generating additional revenue for the bank.

Nordea, the largest financial group in the Nordics, has also been investing heavily in open banking to improve customer experience and increase revenue. Nordea created a range of customer services using open banking, including account aggregation, cash flow forecasting, and financial advice. These services have helped Nordea to increase their revenues, by generating new income streams for the bank and by increasing customer loyalty.

Banks around the world are exploring valuable new opportunities through open banking. Yet in the Middle East, a region that has been quick to adopt technologies in the past, adoption of open banking models has been sluggish.

Now, faced with a highly competitive, overbanked market, Middle Eastern banks are turning to alternative business models that can help them leapfrog their competition. Open banking has already proved itself valuable, and certain changes in the region are creating an environment more suitable for open banking, suggesting that a major transition is on the horizon.

The value of open banking

Open banking is a financial services model in which third-party providers are granted access to a customer financial data using application programming interfaces (APIs). This allows customers to securely share their financial data with authorized third parties, such as fintech companies and other financial institutions, to access new financial products and services.

The goal of open banking is to provide customers with more choice and control over their financial data. It also aims to drive innovation and improve the overall customer experience in banking, thereby increasing competition in the financial services industry.

Banks are currently using open banking to expand their offerings through third-party apps and platforms, providing a growing list of valuable use cases.

• Personal financial management – Third-party apps can use open banking to aggregate data from multiple bank accounts and provide users with a comprehensive view of their finances.
• Payment initiation – Third-party apps can initiate payments directly from a customer's bank account, rather than requiring the customer to log in to their bank's website or mobile app.
• Lending – Third-party lending platforms can use open banking to access a customer's banking data to assess their creditworthiness and approve loans.
• Accounting and bookkeeping – Third-party apps can use open banking to automatically import financial data for use in accounting and bookkeeping software.
• Fraud detection and prevention – Banks and financial institutions can use open banking to access data from other financial institutions to detect and prevent fraud.

Reasons for slow adoption thus far

One reason for the slow adoption of open banking in the Middle East is that the regulatory frameworks surrounding open banking are still in the early stages of development. However, some countries in the region (United Arab Emirates, Saudi Arabia) are taking steps to implement open banking regulations.

In the UAE, the Central Bank has issued guidelines on open banking and has established a regulatory framework for the development of open banking in the country. The guidelines outline the responsibilities of banks and third-party providers, as well as the requirements for data security and customer consent. Similarly, the Saudi Arabian Monetary Authority (SAMA) has issued a regulatory sandbox for fintech companies to test open banking solutions and is creating a framework for data sharing and consumer protection.

Other reasons for slow adoption include banks’ concerns about losing control over customer data and relationships, as well as the potential for increased competition from third-party providers and fintech companies. Banks also need to invest in new technology and infrastructure to comply with open banking regulations, which can be costly.

Building blocks of the open banking foundation

There are several building blocks that need to come together to enable the sharing of financial data between financial institutions and third-party providers (TPPs). These building blocks include:

Application programming interfaces (APIs)
APIs are the primary means by which financial institutions and TPPs share data and services. They allow authorized TPPs to access account information and initiate payments on behalf of customers. Strong API management capabilities are key for banks to setup to provide seamless experience.

Developer portals
Human-centric, content-rich, and well-documented developer portals and sandbox environments help developers be more productive and are key for successful TPPs.

Data standards
Data standards ensure that financial data is shared in a consistent and interoperable format. This enables TPPs to easily access and use the data, regardless of which financial institution it came from.

Security and authentication
Security and authentication protocols such as OAuth and OpenID Connect are used to ensure that only authorized parties can access financial data. Strong customer authentication (SCA) is also used to ensure that only authorized parties can access customer's account information.

Data privacy
Data privacy is an important aspect of open banking, as customers' financial data is being shared between multiple parties. Financial institutions and TPPs must implement appropriate measures to protect customers' data and ensure that it is used only for the purposes for which it was shared.

Cloud
Cloud-based integration architecture patterns with the right caching and security mechanisms to support open banking are key for managing data flow and access requests.

Partnerships can accelerate growth

Aside from engaging fintech companies with developer-friendly API portals and marketing, banks should proactively forge strategic business partnerships with other industries to spur new business models.

• E-commerce – An e-commerce platform might offer its customers the ability to purchase goods and services on credit, by integrating lending services into its platform. For example, MAF’s Carrefour could offer financing options for their appliances/electronics category
• Automotive – A car dealership might embed insurance and financing into the buyer’s journey, thereby allowing customers to purchase seamlessly. For example, a second-hand car dealership can deliver a car at home through a seamless onboarding, credit check, loan application creation and payments into a single journey
• Payments through messaging app – A messaging app like BOTIM can offer payments by linking to APIs of banks to initiate payments.

How Wipro can help

Wipro has a proven track record in PSD2 open API development and testing programs. Our Open Banking API Platform hosts a comprehensive set of offerings spanning regulatory compliance, data standards, governance, open ecosystems, and co-innovation, to enable a seamless transformation journey for banks and financial institutions.

Through a combination of services, platform, and accelerators, we enable ready-to-use capabilities across the value chain to help banks comply faster and create new revenue streams within the open banking ecosystem. The set of offerings is focused on in-house modernization, partner collaboration, and ecosystem monetization. Our extended consulting and design capabilities with Capco further enables us to help banks unlock business potential in this space.

You can learn more about our open banking solutions at Wipro.com.