Absolutely. Let’s start at the start, again.
Open Banking was the starting point that conceptualized empowering consumers to be able to share their financial data with other financial institutions and financial service providers. This was largely done to ensure greater competitions between financial institutions and better customer experience.
To mention one use case, customers could move their financial data from one bank to another if they were not being treated well.
The Open Banking capabilities in the U.S., however, may be approaching the level of Open Finance.
Open Finance expanded this to include fintechs and other third party providers including financial service providers and non financial service providers. Open Finance seeks to provide consumers with easy and fast access to personalized and innovative products and services with great customer experiences.
Making Open Finance interoperable across borders paves the way for a more open digital economy leading to faster and easier global transactions, solving identity problems internationally for consumers and improving customer experiences.
We shall dive into the issues of interoperability across borders and how interoperability could lead to a more open connected world while navigating through regulatory differences between countries and regions.
Benefits of Interoperability to Consumers and Businesses
Accessibility to financial products for consumers and expansion of global revenue streams for financial institutions could be the first benefits of having interoperable frameworks.
Expats living in the U.S. could share their financial information from their bank accounts in the U.S. and their countries of nationality to get access to better customer service and easier access to services and products in both countries. For example, an expat could choose to invest using their bank accounts in either country based on fees, currency rates etc.
With access to global financial information of consumers, financial institutions across borders could spin up more products that are personalized and useful to global consumers.
Similarly, businesses could gain easier access to funding, vendor credit, and financial products and services internationally. This would make entering new markets much simpler.
As Henk Van Hulle, CEO, Open Banking Limited (OBL), U.K., put it, “By enhancing cross-border connectivity and interoperability, we are shaping a world centered around open finance that delivers outstanding and consistent customer experiences, offers faster and more cost-effective flow of money and data, tackles international identity verification issues, and reduces fraud.”
The primary objective is to enhance customer experiences by offering more personalized, innovative, and above all, useful financial services and products.
Access to a broader and more modern range of financial products globally with enhanced customer experience, will propel growth in the digital economy.
Democratizing the Digital Economy Globally through Open Finance
Startups in Africa, South East Asia and India are sprouting up to bridge the flow of money and data globally as can be seen in this year’s cohort of Y-Combinator.
With money and data flowing across borders through the internet, the opportunities for more innovation open up.
Hemant Gangolia, Founder and CEO, iNRI, a Y-Combinator fintech startup that serves Non-Resident Indians (NRIs) globally, says “The NRI customer segment has historically been underserved by the big Indian banks. Many financial products that are available for resident Indians like UPI haven’t been accessible to the Indian diaspora yet even after having an Indian bank account.
I believe that Open Banking and Open Finance can help innovate on the financial products and they can be made available to NRI customers who have a strong need to manage their India finances.”
B.G. Mahesh, CEO of Sahamati, India’s Open Finance Consortium, believes that enhancing interoperability and connectivity across global Open Finance frameworks could simplify the process of transferring financial data into and out of India.
He said “A Globally Networked Open Finance system would streamline KYC and identity verification processes, facilitating investments in India by Non-Resident Indians (NRIs) and allowing Indian residents to participate in international markets.”
He added “Such a network would greatly benefit Indians who travel abroad, enabling them to use their bank accounts through the Unified Payment Interface (UPI) for overseas payments and to obtain visas more quickly with readily verifiable identities. Additionally, it would ease the way for foreigners visiting India to make local payments from their bank accounts and for foreign investors to invest more seamlessly in India.”
Open Finance democratizes the availability of both money and data to all entities that respect user consent.
With a globally acceptable interoperable model, the digital economy could become more open than morphing into a matrix of walled gardens run by tech giants.
How to build Cross-Border Interoperability
Potentially, Open Banking/ Open Finance consortiums such as The Financial Data Exchange (FDX) in the U.S., Open Banking Limited (OBL) in the U.K. and Sahamati in India could harmonize their framework standards to ensure that consent granted for money and data transfers in one country can be effectively and securely recognized in another.
Don Cardinal, Managing Director, FDX, said, “Globally, Open Finance data standards are all tightly-related. They are all REST APIs with JSON requests/responses. All use FAPI or some advanced variant of OAuth2 tokens.
So – assuming two parties (for example: a US based lender requesting data from a UK based bank (directly or via a UK-authorized aggregator)) have a data sharing agreement in place – then there should be no technical reason (why) consumer/business permissioned data cannot be securely shared with a little data translation.”
He added, “Of course – the legal and regulatory parts … that’s on the two parties to resolve, but the tech should indeed work. That’s the beauty of globally-interoperable standards.”
Henk Van Hulle, CEO, OBL, echoing Don, said, “Building interoperability is more feasible among countries that share similar standards, such as those based on the OpenID Foundation’s FAPI, ISO 20022, JSON, and OAuth—particularly among the 60 nations that have built frameworks using the U.K.’s Open Banking blueprint.”
Plugging in Open Finance frameworks that do not use FAPI and OAuth, like India’s Account Aggregator Framework, would need some additional work, which may not be a big deal, technologically.
Challenges to Cross-Border Open Finance Interoperability
Not only are there differences in frameworks and technological architectures to deal with, but differences in taxation, regulations and policies need to be navigated through as well.
Consider a case of cross border investing with US residents investing in Indian mutual funds.
Navigating the financial landscape means people having to deal with various national taxation regulations, such as the U.S. ‘s Passive Foreign Investment Company (PFIC) rules and India’s 20% Tax Collected at Source (TCS).
Moreover, Know Your Customer (KYC) processes in India and regulations like the proposed American Data Privacy and Protection Act, California’s California Privacy Rights Act (CPRA) along with privacy laws in 15 other states, and India’s proposed Digital Personal Data Protection (DPDP) Act 2023 add layers of complexity to the cross-border financial transfers.
The economic models for Open Finance ecosystems are still being debated and every country might develop its own model, be it charging for data access or pricing users’ data based on demand or making taxpayers pay for it. Building interoperability between different economic models would need some work.
While user consent is at the core of Open Banking and Open Finance, it is important to not irritate users with constant requests for consent.
Dealing with Regulatory challenges
Working with different regulatory regimes across borders is not easy.
Ritesh Banglani, of Stellaris Ventures, a VC fund based in Bangalore, India, spent some time due-diligencing the cross border investments space. He remarked, “with some regulatory gymnastics, cross border transfers should be possible.”
A potential first step towards seamless interoperability might begin with jumping through a few hoops.
Henk suggested that countries should implement “Targeted Regulations” to support cross-border data portability within an Interoperable Open Finance Global Network.
It would, however, be ideal if there was consensus on a global regulatory framework to support an Interoperable Global Open Finance Network.
Tokenization Across Borders
Using data tokens to substitute sensitive financial data in Interoperable Open Finance Networks across borders would significantly improve data security and privacy.
Tokenization could expedite money and data transfers by reducing the need for extensive security checks at every stage of the transfer process.
While tokenization is still in the initial stages of adoption, establishing a globally accepted standard would significantly accelerate its widespread use.
Identity and Consent Management
Credentials could be verified easily for any cross border activity ranging from traveling to investing. This could also help to prevent fraud and money laundering, providing seamless KYC etc.
Plugging in consent managers that either operate in wallets or as separate apps, as in India’s Account Aggregator Framework, would empower users to manage consent without getting bombarded by third party providers for consent for each transaction.
The Future Beckons
The Interoperability of Open Finance Networks across the globe promises to spur economic growth by connecting diverse markets more effectively than ever before thereby enhancing financial inclusivity.
Countries stand to gain more by allowing their residents and financial institutions to safely engage in open finance, rather than deterring cross-border financial activity through taxation and regulations.
As cross-border money and data transfers grow, the future of the Open Digital Economy driven by Open finance looks promising.
