How solving interoperability will unleash cross-border Open Banking innovation

The opportunities that a truly global Open Banking ecosystem would create for businesses and consumers are almost limitless. The more interoperable the ecosystem is, the greater the possibilities are for innovation and growth to snowball as new ideas collide on the international stage. 

The potential market is huge. In the UK, the number of Open Banking users is around eight million. By contrast, the number of global users is expected to hit 132 million by the end of this year, according to Statista. Being able to tap into that global user base is clearly a much more attractive prospect.

The issue right now is that Open Banking mostly starts and ends at national borders, restricting those opportunities to a domestic audience. This means fintechs with an eye on global growth would have to adapt to the vagaries of each local market if they want to widen their horizons - potentially making any expansion uneconomical.

Solving this challenge is not going to be easy, and it goes well beyond simply agreeing on technical standards. It’s also going to require buy-in from politicians, regulators, banks and other market participants about what interoperability for Open Banking means and how it’s going to work in practice.

At  our recent Open Banking Excellence (OBE) Campfire, Mastercard’s Vice President for Open Banking Products, David Head, said that for interoperability to work, there has to be a collective willingness in those respective markets to embrace Open Banking. 

“In markets where the regulators and the banks are committed to it, you get much better adoption,” compared to markets where the “regulator maybe isn’t so bothered”, he said. Achieving interoperability between actively regulated markets and ones with a more casual approach will be tough, he added.

The small details matter

Even in regions such as the European Union where Open Banking has been designed with cross-border interoperability in mind, there are often country-specific nuances that can make a big difference to how cross-border Open Banking works. For instance, one Mastercard client was operating in France using data from French banks to make credit decisions. It wanted to take the same model to Spain, but it wasn’t possible because the data collected by Spanish banks is slightly different.

There is also the added challenge that Open Banking is already up and running, meaning any significant operational changes would be expensive and disruptive for banks to implement.

“If we start talking about interoperability, the way we do that has got to be in a way that minimises the amount of change needed, otherwise it’s a bit like trying to change the engine on an aeroplane when it’s already in flight,” David said.

Agreeing what cross-border means in an Open Banking context is also important. Lauren Jones, SVP for Global Advisory at Konsentus, said there is growing acceptance that the definition of cross-border data sharing is when a bank and a Third arty Provider (TPP) are located in different countries. But cross-border Open Banking doesn’t need to mean that all countries are on board.

“As we’ve seen primarily in the instant payments space, cross-border initiatives have tended to focus on where there are strong trade corridors or where it makes sense from a volume or value perspective,” she said. “So I don’t think when we talk about cross-border, we should automatically assume it’s every country in the world, I think it’s more that you’ll see regional pockets of activity taking shape.”

Identifying cross-border use cases

The use cases cross-border Open Banking will create are also likely to be very different to the use cases that have been adopted in domestic markets. Tom Bull, a Partner at EY, believes it will lead to more collaboration globally and open up new business building opportunities, while Lauren believes areas such as trade finance and logistics are ideal candidates for cross-border Open Banking data sharing.

Combining remittance payments with portable data holds the  potential of a transformative use case given that, currently, a person’s data typically remains siloed in each individual country.

Another benefit cross-border Open Banking could unlock is greater financial inclusion by improving access to credit for people or small businesses with no credit history in areas of the world that have been underserved by traditional financial institutions. Open Banking data can help change the way lenders assess credit worthiness, while cross-border interoperability will allow lenders to more easily provide loans to borrowers in different countries, said Simon Lyons, Chief Strategy Officer at obconnect.

“The historical way that we look at credit is basically on failure,” he said. “You can’t get a business credit score unless you’ve got a P&L, and you can’t get any personal data until you fail payments or until you’ve made payments - but with Open Banking data we have a chance to give a real view of people’s financial health, which is cash flow.”

To open up these cross-border opportunities, there first needs to be international regulatory and legislative cooperation to align data sharing rules and ensure Open Banking regimes are interoperable across borders. Once that’s achieved - and be under no illusion, the journey to get there will not be easy- the prospect of a truly global Open Banking ecosystem where users can seamlessly share their financial data across borders will become a reality.