Disruption and Banking 4.0

Banking 4.0 is here. It’s disruptive, it’s ubiquitous and it’s marked by innovation.

Go back to the time when there was a long wait at what we now refer to as ‘brick and mortar banks’ and cumbersome paper-based processes. It took decades to evolve to the next phase when electronic banking was introduced, ATMs were installed, and basic online services were offered. Gradually, banking facilities became accessible from the comfort of our mobile phones and offering digital services was no longer a ‘choice’ or a ‘value-added’ service for some banks, but a necessity. If you could have a Facebook account, you could use mobile banking too.

Banking 4.0 is set to challenge existing banking models, compelling stakeholders, regulators, financial service providers and technologists, to ‘reframe’, in other words, change the way banking has been viewed as a service.

The shift is in the approach – from simply digitising age-old practices to re-engineering the way we bank. From a focus on value to offering data-driven customer experiences via optimum channels, Banking 4.0 embodies a transformative shift towards a digital-first, customer-centric, and collaborative banking model that leverages technology to deliver enhanced value and experiences to customers and stakeholders alike.

To be more specific, banking will now be driven by the use of virtual facilities and emerging technologies, including cloud-based storage, blockchain and AI, to offer tailored financial services. Banking 4.0 is largely based on the following key components:

Open Banking: It entails the secure sharing of financial data among authorised third-party providers. This approach fosters innovation, competition and interoperability within the financial ecosystem, giving consumers greater control over their financial information as well as enabling the development of innovative products and services.

Technological Advancements: Banking 4.0 leverages a spectrum of transformative technologies, including AI, machine learning, blockchain, and the Internet of Things (IoT). These technologies enable banks to streamline operations, enhance risk management, personalise services and deliver real-time insights to their customers, thereby driving efficiency, agility and innovation across the industry.

Customer Centricity: With Banking 4.0, customer experience takes centre stage, with banks prioritising personalised interactions, intuitive interfaces and seamless omnichannel experiences. By harnessing data analytics and predictive modelling, banks can anticipate customer needs, tailor offerings and deliver value-added services that foster long-term loyalty and engagement.

Open Banking and the API Economy: Currently a $65 billion industry, open banking is about sharing a bank’s customer data, by consent, with authorised third parties via application programming interfaces (APIs) to develop customer-centric, innovative services and products. For example, Citi’s Developer Hub, which enables developers to connect to Citi via API, is used by Intuit to authorise data sharing with QuickBooks and Mint.

To make this happen, the main elements of open banking are ownership of data (shifting ownership of data from institutions to individuals); API connectivity (creating API connectivity for financial service providers); consent management (for users’ KYC and financial data); and payment initiation (from third-party applications).

Globally, nearly 100 countries have adopted, or are considering adopting, open banking in some form. For instance, in the EU and the Gulf Cooperation Council, open banking regulations have come into force and today there are a large number of fintech startups emerging in both regions, particularly in Saudi Arabia. In countries including Pakistan, Egypt and the US, open banking regulations are currently under development.

The concept of open banking varies across different jurisdictions. In the EU, Payment Services Directive Two (PSD2), a payment legislation, provides guidance on both account information and transaction data sharing with third parties, as well as payment initiation by third parties. It is similar in framework to some other countries, including Bahrain, Brazil, Saudi Arabia, Singapore and the UK. However, the regulatory scope varies. For instance, open banking frameworks in India, Malaysia and Mexico focus on data sharing only and exclude third-party payment initiation. In contrast, Indonesia’s open banking standards cover payment initiation but not data sharing.

Despite the difference in the regulatory models, the underpinning global API economy trend is marked by:

API Standardisation: As the network of stakeholders in the open banking market expands to include non-bank financial institutions, fintech startups and other third-party providers, API standardisation becomes more critical than ever. In simple words, by offering a common language for banks and third-party providers to communicate, API standardisation reduces development costs and simplifies compliance requirements. NextGenPSD2, an initiative of the EU under the Berlin Group, is an example of this.

AI: With the growth in open banking and an increase in the volume of transactions, AI-powered systems are playing a pivotal role in analysing large volumes of data in real-time to detect and prevent fraudulent transactions, and providing personalised product recommendations and financial planning tools.

As these elements come together, data-driven, customer-centric and personalised financial solutions become possible by leveraging customer-permission data. The most common use cases of open banking include personal finance management, multi-banking, intelligent savings, identity verification, income verification, affordability checks, creditworthiness assessments, payment reconciliation, tailored insurance and customer buying trends. To give an example, for payment service providers, it means meeting unified banking APIs, consent management and compliance requirements, whereas, for end users, it means smart invoicing, expense tracking and insights for more informed decision-making.

Open Banking in Pakistan: The existing digital landscape (80% of the population are mobile users, a 37% internet penetration rate, and a six percent year-on-year growth in digital banking) underscores that Pakistan is ready to embrace open banking.

RAAST, a fully interoperable instant payment system gateway, was launched by the State Bank of Pakistan (SBP) in 2021, followed by the introduction of a merchant payment system module. Recently, by establishing a regulatory sandbox and opening it for public consultation, the SBP has taken a revolutionary step.

With regulation coming into force, the finance and technology sectors will benefit in two ways. Firstly, it will alter Pakistan’s financial landscape by allowing fintechs to test their products in a controlled, simulated environment before going live. This will give them an edge in the form of offering refined services to customers as soon as they launch. Secondly, global financial technology companies will enter Pakistan for the future it promises. However, it’s the early adopters who will reap the first-movers’ advantage.

To give an example, BenchMatrix, one of the fastest-growing financial technology solutions and services companies in the MENAP region, has already tested and implemented its open banking solution in the Middle East and is now venturing into the Pakistani market. With 17 fintech enterprise solutions provided to 100+ financial institutions across 16 countries in five regions, the company is ready to not only disrupt Pakistan’s existing financial landscape but to create an open banking ecosystem.

As Banking 4.0 transforms the global finance sector with open banking, 2024 is the year of disruption. Pakistan has the potential to become a regional Banking 4.0 hub, but the question is, are Pakistani financial institutions ready to adopt open banking?

Nabeel Qadeer is Deputy Group CEO, BenchMatrix.nabeel.akmal@gmail.com