Why are so many in APAC eager to embrace open banking?

In July 2018, the Hong Kong Monetary Authority (HKMA) published a plan for moving the territory's financial-services system to an Open Banking model. The four-phase strategy starts with the introduction of read-only services and finishes with full transactional processing [1]. Nor is Hong Kong the only Asian market embracing Open Banking. The Monetary Authority of Singapore has decided against mandating the move to Open Banking but despite this, comes top in the Finastra Open Banking Readiness Index, which measures open-banking readiness on a range of criteria [2]. In India, the government launched UPI 2.0, the second iteration of its near-real-time online instant payments system [3].

Throughout the Asia Pacific region, governments are either mandating change or encouraging it. At the same time, there is an increasing demand from below for more digital-financial services. Digital transactions are now up to 5 times as common a branch transaction [4]. And almost three quarters of consumers would be willing to switch around half of their transactions to a digital bank [4].

The economy can't grow if people can't spend

Why is there this impetus to Open Banking? There are two reasons and they reflect the divided state of this regional market.

The first, is financial exclusion. People are financially excluded if they don't have access to a bank account and other financial services. In Southeast Asia alone, 438 million people count as financially excluded [5]. In India, that figure is 190 million [6], in China 225 million [7].

Getting these people into the financial system is crucial to meeting the region's development goals. If people can't pay and be paid as part of the national and global financial system, they are stuck only being able to participate in their hyper-local cash or barter economy.

One of the problems of increasing financial inclusion, is the relative scarcity of bank branches in many Asian countries. In India, for instance, there are only 14 bank branches for every 100,000 adults [8]. In the United States, that figure is 33. If people, particularly in remote areas, can’t get to a bank easily, they won't open a bank account.

But according to the International Telecoms Union (ITU), 87% of Indians have a mobile phone subscription [9]. And 24% of Indians have a smartphone [10], a figure that's rising all the time. Using mobile-enabled open banking, Asian countries can pull millions of people into the financial system at a fraction of the cost it would take if they had to build an expensive network of bank branches.

The complications of prosperity

The other reason for the explosion of interest in Open Banking seems diametrically opposed to the first reason. Asians are getting richer. By 2018, average wages in some areas of China were on par with those in parts of the European Union [11]. By 2025, only Afghanistan and Nepal are expected to remain officially poor  the rest of Asia will be classed as middle-income [12].

According to a report by analysts Bain, household consumption in China will grow by 6% a year to reach $8.2 trillion by 2028 [13]. In India, nearly 80% of households will be middle income by 2030 [14]. The trend is the same across the continent: many millions of people are getting richer and they want to spend.

But as with the poor, many of these new middle-class consumers do not live in areas well served with amenities such as banks and shops. So, if they're going to buy the consumer goods for which they hunger, they need to shop and pay online. And that can best be achieved through the expansion of Open Banking throughout the region's financial-services and retail sectors.

Asia is in the process of undergoing more than one transformation: from a poor to a middle-income continent; from being only partially connected to a widely connected society; from being largely unbanked to being mainly banked and financially included. Digital transformation, and Open Banking ties all of these changes together and will accelerate the pace of all of them.

The wider APAC area also includes many already developed markets, such as South Korea, Japan, Australia and New Zealand. In May 2018, the Australian government instructed the country's largest banks to adopt open banking by the middle of 2019 [15]. In March 2018, New Zealand launched an open-banking trial, including six banks and a number of fintechs [16]. The Japanese Bankers Association has been promoting the move to Open Banking since the middle of 2017 [17] and in South Korea, while there is no formal Open Banking initiative, the government has been working through its 'fintech open platform' since 2016 to encourage the development of API-enabled financial services [18].

With its mix of developed and highly prosperous markets alongside rapidly developing ones, the APAC region presents fintechs and banks alike with a complex but highly lucrative cross-border Open Banking opportunity: one they should not want to miss.

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