Open banking: Lessons from the UK and the road ahead

Open banking has revolutionised the financial sector globally, with the UK setting a prime example of successful implementation. Despite this, Malta lags. JP Fabri explores how Malta can learn from the UK's experience to foster innovation, enhance efficiency, and understand the pivotal role of the government in overcoming potential market limitations.

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The advent of open banking has been nothing short of revolutionary for the financial sector worldwide, with the United Kingdom emerging as a beacon of successful implementation. By fostering innovation, enhancing efficiency, and expanding consumer choice, open banking, supported by regulatory frameworks like the European Union's Payment Services Directive (PSD2) and the upcoming PSD3, promises to transform the financial landscape. However, despite these global advancements, Malta has yet to fully seize this opportunity.

The UK has been a trailblazer in the realm of open banking. Launched in January 2018, the UK's open banking initiative mandated nine of the largest banks to open their data to third-party providers (TPPs) securely. This initiative has led to a burgeoning ecosystem of fintech innovations, creating more competitive and customer-centric financial services.

By 2023, over 4 million consumers and businesses in the UK were using open banking services, leveraging benefits such as more accessible access to credit, better financial management tools, and streamlined payment processes. The UK's proactive regulatory environment, characterised by creating the Open Banking Implementation Entity (OBIE), played a critical role in this success. The OBIE was tasked with developing the technical standards and ensuring compliance among participating institutions, thus providing a clear, unified framework that facilitated rapid adoption and innovation.

The lost opportunity in Malta

Contrasting sharply with the UK's experience, Malta has yet to fully embrace the potential of open banking. While Maltese financial institutions technically comply with PSD2, adoption and innovation levels remain significantly lower. The lack of a comprehensive national payment strategy has left Malta behind its European counterparts, missing out on opportunities for economic growth and enhanced financial inclusion.

One of the core issues is the limited size of the Maltese market, which poses unique challenges. Smaller markets can often lead to market failures due to insufficient competition and investment. Without a robust and competitive environment, financial institutions may lack the incentive to innovate, and consumers may not reap the full benefits of open banking.

The need for a national payment strategy

Malta urgently needs to implement a national payment strategy to overcome these challenges. This strategy should create a conducive environment for open banking by addressing regulatory and infrastructural barriers.

Key elements of this strategy should include:

1.     Regulatory Support and Clarity: The government must provide clear guidelines and support for implementing open banking. This includes not only compliance with PSD2 but also preparing for the upcoming PSD3, which aims to further enhance the open banking framework by addressing existing gaps and fostering more significant innovation.

2.     Technical Infrastructure: Developing robust technical infrastructure is essential for secure and efficient data sharing between banks and TPPs. This includes standardised APIs and strong cybersecurity measures to protect consumer data.

3.     Consumer Awareness and Trust: Efforts must be made to educate consumers about the benefits of open banking and ensure they trust the security and privacy of their data. Consumer trust is paramount for the widespread adoption of open banking services.

The Malta Financial Services Authority (MFSA) has been working to modernise and enhance the payments sector's regulatory framework. Recognising the rapid evolution of financial technologies, the MFSA has introduced several initiatives to foster innovation while ensuring robust oversight and consumer protection. One notable development is the implementation of a comprehensive fintech regulatory sandbox. This sandbox allows startups and established financial institutions to test innovative payment solutions in a controlled environment, providing valuable insights into regulatory needs and potential market impacts.

In line with the MFSA's efforts, the Malta Financial Services Advisory Council has outlined a strategic vision for the future of payments in Malta. This strategy emphasises the importance of creating a dynamic and competitive payment ecosystem that leverages cutting-edge technologies such as blockchain and artificial intelligence. The Advisory Council's strategy enhances regulatory clarity and promotes cross-sector collaboration. By fostering partnerships between financial institutions, fintech startups, and technology providers, the Council aims to create a fertile ground for innovation and ensure Malta remains competitive in the global economic landscape.

The commitment to digital transformation and financial inclusion is central to the Advisory Council's strategy. The Council has highlighted the need for a robust digital infrastructure that supports seamless and secure payment transactions. This includes initiatives to upgrade payment systems, improve cybersecurity measures, and enhance data protection protocols. Moreover, the strategy underscores the importance of making digital financial services accessible to all segments of society, thereby promoting financial inclusion. The MFSA and the Advisory Council aim to create a resilient and inclusive payment ecosystem that benefits consumers, businesses, and the broader economy by addressing these critical areas.

The upcoming PSD3 directive presents a significant opportunity for Malta to leapfrog in the open banking space. PSD3 aims to address PSD2's shortcomings by providing more comprehensive guidelines on data sharing, enhancing security measures, and fostering a more inclusive financial ecosystem.

For Malta, leveraging PSD3 could mean implementing advanced regulatory technologies (RegTech) to streamline compliance processes and improve efficiency. By adopting RegTech solutions, Maltese financial institutions can reduce the costs and complexities associated with regulatory compliance, making it easier to innovate and offer new services. This can also enhance transparency and trust, encouraging more consumers to use open banking services.

Government needs to play a vital role

Given Malta's small market size and the risk of market failure, government intervention is critical to kick-start the open banking revolution.

The government can play a pivotal role by:

1.     Establishing a Dedicated Open Banking Entity: Similar to the UK's OBIE, Malta could benefit from a dedicated entity responsible for overseeing the implementation of open banking, developing technical standards, and ensuring compliance among financial institutions.

2.     Providing Financial Incentives: Offering grants or tax incentives to financial institutions and fintech startups can stimulate investment in open banking solutions. This can help overcome initial barriers to entry and foster a vibrant fintech ecosystem.

3.     Encouraging Public-Private Partnerships: Collaborations between the government, financial institutions, and technology providers can accelerate the development and adoption of open banking services. These partnerships can facilitate knowledge sharing and innovation, ensuring Malta stays at the forefront of financial technology advancements.

4.     Promoting Financial Inclusion: Government initiatives aimed at improving financial literacy and inclusion can ensure that the benefits of open banking are accessible to all segments of the population. This can help bridge the digital divide and create a more inclusive financial system.

Open banking represents a transformative opportunity for Malta to enhance its financial sector, drive economic growth, and improve consumer outcomes. By learning from the UK's successful implementation and developing a comprehensive national payments strategy, Malta can unlock the full potential of open banking. Leveraging the upcoming PSD3 directive and ensuring proactive government intervention will be crucial in overcoming market limitations and fostering a competitive, innovative, and inclusive financial ecosystem. The time is ripe for Malta to embrace open banking and secure its place in the future of finance.

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Open banking is a financial technology practice that enables third-party developers to build applications and services around financial institution data. It involves using open APIs (application programming interfaces) to securely access financial data from banks and other financial institutions. This sharing of financial information can lead to new financial products, better financial management tools for consumers, and increased competition in the banking sector. Various companies use open banking; Revolut (banking) and PayPal (e-commerce) are the most notable.

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