Unveiling open banking regulatory dance

Our interactions and management of our funds have changed as a result of open banking. Open banking’s regulatory nuances grow more important as banks open their vaults to digital innovation and financial transactions take on new dimensions.

Here, associate partners Akshata Namjoshi and Ratul Roshan of the legal consulting firm KARM Legal Consultants examine the regulatory nuances of open banking with a particular emphasis on the disparate approaches to data-centric regulation and oversight that is focused on payment services across international jurisdictions.

“Open banking: because even your Grandma’s secret cookie recipe deserves a digital vault,” responds Chat GPT when you ask why you need it. If you go deeper, they/it will tell you that “every transaction is a sweet, harmonious dance, and open banking is like a love story between your finances and innovation.”

Open Banking: Money and Creativity Unite

The wealth of information that banks and other financial organisations hold is the recipe for cookies. The power that payment services produce is the love affair between money and creativity. The two primary tenets of open banking are financial services bridging and data sharing.

Financial institutions that own client data can share it with third parties with the approval of the customer thanks to the open banking environment. Account details, transaction histories, credit histories, direct debit histories, savings and investment histories, and other data may be shared.

The primary question in regulating open banking is: what is being regulated, the payment service providers who enable this sharing/processing or the financial data that is handled as part of these services? When it comes to regulating open banking, most governments have used these two regulatory strategies. There are notable distinctions in addition to the overlaps. KARM Legal has had the chance to speak with several regulators in-depth about these distinctions.

Strong regulations on open banking

Strict data protection and privacy measures, such as explicit rules for consumer consent and compliance with data protection regulations, are required by the data-led strategy (Data Led strategy). On the other hand, the method that focuses on payment services (PSP method) requires, among other things, adequate licencing, strong security standards, and fraud prevention.

Players in the open banking ecosystem, such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), are regulated by regulators using the PSP Approach. Several jurisdictions, like the EU, UK, UAE, and Saudi Arabia, are excellent examples of those that have adopted this strategy and subsequently issued strict legislation. Even within this category, certain authorities have published open banking-specific legislation on their own, while others have integrated open banking within their payment services frameworks. The latter strategy is more typical.

Without managing client cash, PISPs and AISPs access, process, and send data pertaining to their financial services. Primary use cases include things like comparing credit and loans, managing personal finances, gathering financial data, and launching immediate fund transfers. Transactions involving several beneficiaries become more frictionless as a result.

under contrast, the regulations governing open banking under a data-led approach are data-focused. They are therefore more comprehensive and provide a wider range of financial services—and occasionally even non-financial ones. Here, authorities control the interaction between service providers and financial data recipients in a variety of industries, including payments, insurance, investments, utilities, and so on, rather than the payment services themselves.

In India, Account Aggregators (AA) are defined as organisations licenced by the RBI that offer the service of obtaining or gathering customer information about financial assets, then organising, consolidating, and presenting that information to the customer or another individual per the customer’s instructions.

Features of banking

In addition, the government launched the Unified Payment Interface, a payment system that has established a solid foundation for combining a number of banking functions, such as bill payment, merchant payment, and instantaneous payment transfers. Under this regime, consumers can pay bills, manage rebates and promotions, and access a simplified payment interface using mobile applications like BHIM.

Australia has been the jurisdiction that has broken new ground in this area. Open banking is part of the Consumer Data Right (CDR) Act, which was introduced to provide customers more access over their financial data. The CDR covers more than just banking; it also includes industries like telecommunications and energy. India and Australia have created separate frameworks for the obligation to share data. In response to the lawsuit, the Financial Data Exchange platform was joined by the US and Canada, allowing financial firms to freely exchange financial data.

Therefore, one of the most important questions from a regulatory standpoint is: Whose domain is it to regulate? The UAE and Saudi Arabian central banks, among others, have taken the initiative and released laws. Central banks, as the principal regulators of monetary policy, payment systems, and financial stability, have expanded their sphere of influence in Open Banking with relative ease. Financial regulators in the EU, UK, and “UAE-Free zones” (DFSA & FSRA) oversee open banking.

The Australian Competition and Consumer Commission and the Office of the Australian Information Commissioner are principally in charge of overseeing the rollout of open banking in Australia.

Data exchange

There is a superior strategy from the standpoint of the market, even though there is no right or wrong answer on which regulator should have the most authority. When compared to the PSP Approach, the Data Led Approach offers a wider range of use cases. Services like budgeting tools, credit score services, and personal financial management apps can give customers a 360-degree perspective of their financial health thanks to data sharing.

Although there is discussion to be made on the difficulties in implementing large-scale data sharing programmes, the goods significantly improve user experience. It provides customers a sense of financial control, which is more significant. It goes without saying that consumer financial well-being on an individual basis influences the state of the whole economy.