This article first appeared in Personal Wealth, The Edge Malaysia Weekly on November 12, 2018 - November 18, 2018

Open banking — the sharing of bank data with third-party service providers via a platform — is a relatively new concept, especially in this part of the world. Hence, there has been much debate on the issues related to the exchange of big data with third-party platforms.

While there are no open- banking platforms in the country, Malaysian banks have started to approach market intelligence firms such as International Data Corp (IDC) and analytics company SAS to study how they can monetise data responsibly, says IDC Financial Insights regional head of research Michael Araneta.

Although open-banking platforms could give Malaysians access to more innovative financial products, it may take a while for local financial institutions to come up with a monetisation model to offer consumers as it involves a long process, he adds. “Banks will need to truly understand what data they can monetise, which partners they are going to monetise it with and how they will monetise the data.

“While many may think this means banks are trying to sell the data of their consumer base, this is not necessarily the case. There are about seven models for data monetisation and two of them are better internal usage of data and the acquisition of data.

“This seems to be the approach taken by the Malaysian banks we have spoken to. They are looking for ways to use data to provide better products and recommendations and even establish better fraud management.

“Some of the more progressive banks are looking at more advanced models, which include acquiring data from external third parties via an application programming interface (API). So, I think Malaysia can look forward to good use cases of data monetisation models in the next three years.”

Araneta was speaking on the sidelines of the Analytics Insights Exchange Kuala Lumpur 2018 conference held recently.

Open banking is more of a European construct, he says. So, it will be deployed differently across markets in Asia.

There are three fundamental foundations. The first is giving control to the consumers on what happens to their data. The second is breaking down the products to ensure that they add value to the consumers. The third is creating a data pipeline that would allow institutions to acquire and share data externally.

“These three foundations of open banking are common definitions among the open-banking initiatives of some banks in the region. Some of them are already succeeding in two or three of those foundations. Hopefully, if more banks make progress, Malaysia can be the leader in the region’s open-banking space,” says Araneta.

One of the ways to create a data pipeline is through open APIs, which can be tough to execute in Malaysia due to the limitations of the Personal Data Protection Act (PDPA) 2010. “The challenge will be identifying what data can be hashed [computed into an array of slots from which the desired value can be found] and be able to build a network or ecosystem that can acquire that data as well,” says Araneta.

On Sept 5, Bank Negara Malaysia released its proposed guidelines for open APIs and is currently seeking feedback from the public. According to its “Publishing Open Data using Open API Exposure Draft”, the central bank recognises the benefits of open API standardisation initiatives to the industry at large.

It adds that encouraging greater usage and offerings of innovative solutions by third parties will result in efficiency gains for both customers and businesses. By leveraging standardised open APIs, time-to-market can be reduced as third parties are able to rapidly build on existing systems.

Open banking has seen a lot of traction in Europe, thanks to the Revised Directive on Payment Services, which was passed by the Council of the EU in November last year. Essentially, the directive requires banks to share their data with various parties. The move is aimed at creating more competition for better customer experience as well as to give consumers more choices when it comes to selecting a bank or financial institution.

Today, nine of the biggest banks in the UK — Barclays, Lloyds Banking Group, Santander, Danske, HSBC, RBS, BoI, Nationwide and AIBG — are legally required to allow certain information to be shared securely online with other regulated companies through open banking, provided that customer permission has been given.

Concerns and opportunities

Despite the issues related to the irresponsible use of data that have made the headlines, banks can create positive change with the responsible use of data. According to SAS senior industry consultant (global banking practice) Alex Kwiatkowski, banks can use data for the benefit of consumers, regulators and the investor community.

“Banks are good at many things, but they could really do with some help for some things, for example, connecting with the consumer and thinking about how they can add value to their consumers’ journey. This can be done with proper analytics,” he says.

“If the bank knows what I did yesterday and today, it can determine what it can do for me tomorrow. It is that simple. What is important is that banks see the customer as a person, not a number. Instead of revenue generation, they should strive to provide their customers with the best course of action, that is, technology being used responsibly.”

Banks that choose not to explore open banking and refuse to reengineer their legacy systems may be losing a golden opportunity, says Kwiatkowski. Banks are trusted more than technology companies or financial technology businesses to provide open-banking applications. So, if banks do not leverage this advantage, they may stand to lose their customers to these third-party companies, he adds.

“That is what big tech companies have done very well. They have been data-driven from day one because they grew in an era when data is the natural currency — the oil that makes the gears turn nicely,” says Kwiatkowski.

“They have been able to monetise as much data as they can. Banks’ monetisation of data is pathetic by comparison because they get money from traditional businesses. They have not used data to find new business models and revenue opportunities.

“What is good about being in this region is that no one has really cracked this yet. Sure, some banks are more advanced, such as DBS Bank [in Singapore], but not one bank has really powered so far ahead to be uncatchable. Everyone has the same opportunity to be ahead of the game.”

However, there are some fundamental obstacles that have yet to be addressed that are hampering the deployment of data monetisation in the industry, he says. These obstacles involve master data management, data quality and data governance.

“Banks have an enormous customer depository of information. They have structured data, unstructured data, social data, data that informs their risk models, data that they use for fraud and financial crime … all of that perhaps sitting in a warehouse. How can they make sure they are using analytical models powered by the right data?” says Kwiatkowski.

To overcome this challenge, banks will need to ensure that they are doing things properly, he adds. “They need to build a solid foundation, understand all of their data, clean it, make sure they are looking at every possible input, then run the data through their models that they use to make decisions. That is the proper way to do it.”

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