In the first part of this feature, we introduced the concept of open banking. Here, we take a closer look at the regulatory landscape.
Open banking has progressed in two ways around the world: regulations that have forced the traditional banks to embrace it and work with financial technology (fintech) startups, or the fear of falling behind in the technological race to innovation. The former is true of the European Union where regulations for open banking have been mandated by the governing body whereas in the US where no such requirements exist, the incumbent banks have partnered with open banking providers to keep pace with the innovation.
There are scattered initiatives in the Middle East and North Africa (Mena) to support fintechs in the open banking space, however, regulators across the region are yet to develop and implement open banking frameworks – with the exception of Bahrain.
“Whenever one reads reports or news around fintech in Mena, you sort of get the impression that it is booming. There is investment in startups and the picture is very rosy in terms of the way it is presented,” says Samir Satchu, public policy advisor to Mena fintechs. “However, the region is made up of many jurisdictions and some jurisdictions are moving faster than others.”
Open banking regulatory frameworks set standards by which banking is effectively democratised and financial innovation is encouraged for the benefit of consumers. Due to regulatory divergence, progress towards banks sharing data has differed by country depending on market structures and consumer attitudes towards privacy and security.
“Open banking comes down to a regulator telling banks you have to open up your systems to the policy providers by a certain date. That captures the question of the jurisdictional uncertainty,” says Satchu.
Bahrain was the first country in Mena to introduce regulations that stipulated the adoption of open banking by all retail banks. The Central Bank of Bahrain (CBB) mandated open banking, gave the traditional banks six months to comply and they have now gone live. In contrast to other jurisdictions, every bank in the country has had to open up their application programming interfaces (APIs), as CBB required banks to publish every piece of data they hold on customers through these APIs.
The first company to receive an open banking licence in Bahrain was Tarabut Gateway (TG) and it took the startup three years to plug in all the financial institutions in the country.
“TG is a common infrastructure API base that connects every single financial institution on a single platform – it aggregates data from all the financial institutions and creates a marketplace between financial institutions,” says Abdulla Almoayed, CEO and founder of Tarabut Gateway. “In Bahrain, regulation is leading the innovation. When they loosen up regulations they allow innovation.”
Today, TG has expanded outside of Bahrain and has established an office in Abu Dhabi under the Abu Dhabi Global Market (ADGM) and in the Dubai International Financial Centre (DIFC), although it has yet to onboard or partner with any of the banks in the UAE.
“We are creating a more competitive customer-centric proposition and we have no intention of launching an independent app to compete with banks,” says Almoayed. “It’s a platform play from every perspective – banks on one side and fintech on the other. This new infrastructure will allow banks to create real, customised products that suit people based on their habits.”
TG’s current success is proof that once the regulator likes an idea, they can drive it forward quickly.
“Bahrain is a beacon in the region in terms of how they operate, but the issue is it is a country with a small population. From an investor or a startup perspective, if you're trying to scale, Bahrain might not be the market for you. It may be an interesting market to showcase innovation across the region,” says Satchu.
The Saudi Arabian Monetary Agency (SAMA) launched the Fintech Saudi initiative to uphold the financial technology system and define payment initiation and account information services as licensable payment services.
“Over the last 12 months, Saudi has taken big steps forward in terms of enabling new types of payments companies via its new payment service provider regulations,” says Satchu.
Kuwait’s central bank has issued regulatory guidelines for companies wishing to experiment with new financial technology products and services. Egypt’s Central Bank’s launched a regulatory sandbox as a live testing ground for startups that are developing new banking models but are currently hindered by stringent authorisation requirements and regulatory uncertainty.
A recent survey by Finastra found that legacy systems, complex regulations, change in culture and reduced control in decision making are among the top barriers to collaboration in the UAE fintech space. The UAE Central Bank has outsourced innovation on regulatory frameworks to two offshore regulators, the Financial Services Regulatory Authority (FSRA) and Dubai Financial Services Authority (DFSA), but these offshore jurisdictions have no authority over banks licensed by the Central Bank. As such, FSRA and DFSA’s licensing were viewed as advisory guidelines rather than regulations, creating jurisdictional uncertainty that poses a question to both fintechs and investors.
“While we are currently regulated by Abu Dhabi Global Market, the mainland banks completely disregard them as regulators. They only look for some sort of an approval from the Central Bank,” says Mohammed Aziz, co-founder of UAE-based DAPI, which provides financial infrastructure and API to enable other fintech and neobanking services to operate. The startup has faced difficulties in the region due to the lack of regulatory consolidation and Aziz wrote an open letter to the UAE Bank Federation Advisory Council to encourage the adoption of open banking.
“[Banks] see us as the cause for them losing customers to fintech apps, but this is the smaller picture, the bigger picture is a collaborative approach. Ever since we launched, we've had banks coming to us, trying to have us shut down. Banks have always lobbied against open banking in Europe, UK and pretty much everywhere. So this is not like an abnormal trend, it just comes down to the regulator supporting the cause,” says Aziz.
While there is no piece of regulation that says open banking is illegal, there aren’t clear guidelines in the region for companies and investors to confidently enter the space and receive the required support.
“The risk is if a regulator takes actions against the technology at this stage. However, we are not just reliant on one market. We have already built connectivity in six countries, including Pakistan, and we're on the verge of launching in Egypt right now, we're also quite far along in Saudi Arabia,” says Aziz . “Given the fact that the UAE is our launch market, we're hopeful that the regulators will recognise this and things will work out. Otherwise, it's not a huge deal for us because we're hedging our risks with alternative markets anyway.”
For Mohamed Okasha, founding partner of Disruptech, the recently established Egypt-focused fintech fund, it is not entirely down to regulators to move the sector forward.
“Considering regulations to be the main challenge facing startups in the space is sort of an excuse. The real issue is that when companies innovate, they look for new ways of doing things, which will not necessarily have clear regulations in a timely manner, there are always grey areas for companies to operate until they reach a stage that they need to be licensed. There is always room for innovation prior to reaching this stage,” he says.
Taking into consideration factors such as population size like in Egypt and Saudi Arabia, Okasha believes that in some countries, open banking companies are able to scale on their own, while other countries present a good opportunity for startups to conduct proof of concept to test their model, but they have to eventually expand elsewhere to be able to scale.
“Central banks take time to put together regulatory frameworks that cover all use cases, they would usually check what solutions are working well for consumers, then start developing frameworks for them. This takes time amid the hype of innovations happening. The practical solution is to allow companies working in this space to launch and experiment, whether through sandbox or observation,” Okasha adds.
But scaling is one of the most difficult things for fintechs to do in the Middle East mainly due to regulatory hurdles.
“The biggest obstacle that any founder has is scalability,” says Almoayed. “It is extremely difficult to passport techs across the region. If they harmonise regulations, fintech will become an extremely powerful sector in the region in comparison to the rest of the world.”
Role of Awareness
The open banking industry is set to reach a global market size of $43 billion over the next five years and while there are only a handful of open banking providers in Mena, they have strong hope that it will eventually take off.
“Fintechs need to invest into public awareness. The level of financial awareness in our region comes down to companies in the fintech space,” says Ahmad Hammouda, founder of Thndr, a Cairo-based mobile-first equities trading platform. “Regulators have a sense of conservatism that works in favour of protecting consumers in general, so our job is to showcase to them how technology enhances the overall security of the process.”
For DAPI’s Aziz, it’s the banks themselves that need to be shown the benefits of open banking ot their business.
“A lot of financial institutions feel like it's unclear what is in it for them. As a company, we are actually quite open to discussing with financial institutions on identifying potential synergy and opportunities for them,” says Aziz. “The ecosystem around open banking has been allowed to develop across the world prior to the development of full open banking regimes. Standards need to be developed inclusively and be adopted by all ecosystem participants, including banks and third party providers [TPP]. If different banks and TPPs adopt different standards, adoption would be limited and the costs of integration becomes high. The ecosystem would not thrive.”