The unevenly paced shift from open banking towards open finance ‘increasingly coincides with a consensus that some degree of centralised control is required’, according to a paper published by the Arab Monetary Fund (AMF).
Open banking aims to boost innovation and competition by enabling third parties, such as fintech companies, to use customers’ financial data (with their permission) to develop new apps and services. Open finance is the extension and deepening of such data-sharing principles across the financial services playing-field, for example taking in insurance and investments. Both open banking and open finance are global trends, with state authorities across the world adopting different routes to incentivisation and regulation.
The AMF’s paper, ‘Open finance: A framework for the Arab region is more than a question of scope’, examines the transition from open banking to open finance in the context of the diverse Arab region.
Promoting open finance frameworks, it states, generates ‘great opportunities’ for enhancing digital financial services and financial inclusion. It addresses the challenges of data fragmentation and helps to ‘maximise the potential value’ of financial data.
Market forces, however, are unlikely to deliver optimal outcomes, according to the 26-page publication, which provides sets of guidance on the areas and depth of regulatory interventions that it believes are needed to optimise open finance’s possibilities; the types of tech standards that are required; operational standards covering system responsiveness; and also the ‘cultural shift’ that would ensure ‘extensive participation among stakeholders’, notably data providers and citizens.
Open finance entails ‘additional considerations’
‘While many such regulatory controls are familiar from open banking, the shared cross-sector functionality of open finance calls for additional considerations,’ the paper, which summarises the results of a study by the Arab Regional Fintech Working Group and MENA Fintech Association (MENA: Middle East/North Africa), concludes.
Degrees of regulation should be dictated by market structure and ‘cross-sector technological maturity’ while types of regulation will be influenced by ‘distinctions between sectors and by the assorted roles of specific government agencies and self-regulatory organisations’, according to the paper.
‘Associated requirements for standardisation will affect approaches to licensing, consent and privacy, user experiences and operational specifications,’ the paper states. ‘And while support from regulatory sandboxes and broad-based cloud computing will continue to spur business participation, success will ultimately hinge on the emergence of a level playing-field, all-party data sharing and an ecosystem mentality.’
The paper’s publication comes one year after the AMF’s ‘A Vision of Open Banking in the Arab World’ paper, with open finance’s growing prominence meaning that it now ‘merits a report of its own’, the new report states in its introduction.
The report also includes three case studies: Abu Dhabi Global Market (ADGM), whose Financial Services Regulatory Authority (FSRA) issued a regulatory framework on third-party fintech services in April 2021; the Dubai Financial Services Authority (DFSA) of Dubai International Financial Centre (DIFC), which issued a regulatory framework on money services in April 2020 and worked with other United Arab Emirates (UAE) authorities, including the central bank, to jointly issue (in November 2021) guidelines for financial institutions on adopting enabling technologies in areas including application programming interfaces (APIs, which are pivotal to open banking/finance), cloud computing, cyber-security and distributed-ledger technology (DLT); and Bahrain, where the central bank issued comprehensive rules on open banking in December 2018 and an open finance framework is being developed.
Fintech’s importance surges during pandemic
The AMF, which has 22 members, has also just published a report on how nations have scaled up fintech and fintech-related activities in response to the Covid-19 pandemic and its repercussions.
‘The Role of Fintech in Post-Covid Era’ is based on the contributions of ten Arab central banks and monetary authorities. It identifies the encouragement of cashless transactions, progress in ‘remote’ customer on-boarding and eKYC, strengthening of cyber-resilience frameworks and use of Big Data as among the main financial innovation-related developments during the pandemic.
‘By reducing the dependence on physical financial interactions and the need for cash, fintech can facilitate co-ordinated responses and enable secure ways for governments and providers to reach vulnerable populations quickly and efficiently,’ the 31-page paper states. ‘The pandemic will have a lasting impact on future habits and practices [that] will lead to further accelerating digital transformation.’
In conclusion the document states that ‘fintechs are essential in providing sustainable financial services as they are agile, digital and can withstand shocks that have disrupted traditional banking service providers’, adding that the fintech sector ‘will further expand as technologies continue to evolve, thus accelerating investments in digitalisation and innovation’.
But it adds that fintech companies face challenges to success that include ‘entrenched’ incumbents (established financial services companies) and high barriers to entry, as well as ‘security issues, remaining in line with regulations, and organising Big Data in alignment with data governance laws’.
*** Separately, the AMF has announced that it has signed a Memorandum of Understanding with Mastercard to achieve ‘strategic interoperability’ between AMF-owned cross-border multi-currency payment platform Buna and the US-headquartered company’s own systems. Mastercard’s division president for the MENA region, Khalid Elgibali, said that the partnership would “serve to boost cross-border trade in the region and connect governments, businesses and consumers faster than ever before”.
‘Arab Monetary Fund issues blockchain adoption guide’ – our news story (31 August 2021) on a 70-page publication entitled ‘Strategies for Adopting DLT/ Blockchain Technologies in Arab Countries’
‘Arab Monetary Fund highlights regional fintech progress’ – our news story (6 Aug 2021) on the AMF’s publication of the second edition of the ‘Arab Region Fintech Guide’
‘Arab Monetary Fund launches regional fintech development index’ – our news story (5 May 2021) on the ‘FinxAr’ index
‘Open finance: phased rollout better than “big bang” launch, UK’s FCA told’ – our news story (9 April 2021) on responses to a Financial Conduct Authority ‘call for input’ designed to inform the watchdog’s regulatory approach to open finance in the UK
‘Arab central banks: governments must “open up” to open banking’ – our news story (1 Dec 2020) on an AMF ‘A Vision of Open Banking in the Arab World’ publication