We are about to witness the creation of two pieces of regulation that provide a catalyst for much improved banking services for consumers. In the short term, its impact will arguably be larger than the much talked-about block-chain and AI revolution. We are talking about Hong Kong’s policy frameworks for digital open banking and online financial advice. Open banking (https://openbankproject.com) is a global regulatory trend. While the UK and the EU are leading the way with legislation, many South-East Asian markets are following suit. Similarly, the popularity and widespread availability of digital advisory platforms has prompted many regulators to define and clarify the rules in this new space.
Separate pieces of legislation working towards a common goal
Recent guidelines from two different government agencies are compatible, complementary and mutually reinforcing.
The Securities and Futures Commission’s guidelines on online distribution and advisory platforms (http://www.sfc.hk/web/EN/assets/components/codes/files-current/web/guidelines/guidelines-on-online-distribution-and-advisory-platforms/guidelines-on-online-distribution-and-advisory-platforms.pdf) highlight that digital wealth management platforms are subject to the Suitability Requirement, as set out in paragraph 5.2 of the SFC Code of Conduct. Such platforms must ensure the suitability of investment or trade recommendations considering the client’s risk preference and financial position. In a fragmented financial landscape, a complete picture of a client’s financial health is near impossible to construct, leading to an inaccurate suitability assessment. A holistic view of personal finances considers financial statements and transactions from various sources, including broking and bank accounts from different institutions, the norm in a market like Hong Kong, as well as loans, credit cards, insurances and other relevant assets or liabilities. This is where open banking comes in.
Towards an informed decision
For the reasons cited above, one of the most successful examples of recent financial services technology are aggregators that pool client data from several banks into one consolidated view. Presently, most aggregators rely on clients providing their login details to online banking services, and data is retrieved in a non-standardised and unstructured way between different institutions. Open banking facilitates, if not mandates, aggregation of dispersed financial data in a structured manner.
The full picture – open banking requires APIs and standards
Electronic sharing of financial data between different parties is best done through a set of rules that allow different types of software to communicate with each other, known as an Application Programming Interface or API. Banks cannot restrict access to a client’s data once permission has been given for it to be shared, securely, with other institutions. Open banking creates its own financial ecosystem when all banks and third parties rely on the same technical specifications, i.e. standards regarding architecture, security and data definition. To quote the HKMA “the maximum benefits of Open API could be obtained if, ideally, all banks offered exactly the same set of Open API functions so that third party service providers (TSP) only need to develop their software once, and then it could be used to connect to all banks without the need for further customisation.” (www.hkma.gov.hk/media/eng/doc/key-functions/finanical-infrastructure/infrastructure/20180111e1.pdf)
The separation of financial services and banking
The advent of open banking together with a legal basis for digital advisory platforms herald the arrival of third party providers concentrating on delivering a superior online experience and enabling better financial decisions across custodians, banks and brokers.
One example of existing third-party services include specialised personal budgeting and money management applications. These services operate at a more comprehensive and detailed level than consumer banks can offer. Another example is the analysis of portfolio risk and positioning across multiple investment accounts. Closing the circle between open banking and online advisory will be the aggregation of financial data, followed by centralised analysis and order generation, and, finally, decentralised execution through banks – all done on one single integrated platform.
Banks on the other hand benefit by extending to their clients an enhanced range of specialised services through external providers, while retaining the core banking functions of safeguarding assets, lending and transacting. While technological complexities and concerns regarding security might not make open banking in Asia a reality overnight, the first step is about to happen.