Page 47 - Banking Finance September 2021

ARTICLE

enhanced sharing of data, increases the surface area In many jurisdictions, including India, outsourcing
for cyber frauds. As the open API provides uncluttered arrangements for banks and other regulated entities are
access to customer banking data such as transactions covered under explicit regulations. Supervisors also have
and balance stored within the infrastructure, it may also certain amount of oversight over the third-party entities. If
pose a severe cyber security risk. Losses caused to the relationships in the open banking extend beyond the
customers on account of cyber events would require existing supervisory and regulatory parameters, the
financial institutions to compensate customers for such enforcement of standards and prudential policies may
losses. Institutions may also face a variety of potential
become difficult.
operational and cyber security issues related to the use
of APIs, including data breaches, misuse, falsification,
denial of service attacks and infrastructure malfunction. Conclusion
Open banking is a potential disruptor in financial system and
Y Compliance and Reputational Risk: While open banking
expands vistas of traditional banking and offers unique may change the way of doing banking for both customers
business opportunities, it also reposes extreme and banks. New pure tech-play entities have the potential
responsibilities with respect to compliance with to snatch market share from established but traditional
applicable prudential regulations and privacy laws. Risk financial institutions because they are technologically more
arise due to exposure to fines, penalties, or punitive advanced, digitally agile to cater to customer needs with
damages resulting from supervisory actions, as well as higher efficiency, have better use interface and are more
private settlements due to omissions and commissions competitive in pricing.
of the third-party service provider.
Y Grievance Redressal : With more parties and In contrast to Open Banking initiatives witnessed in some
intermediaries involved in the provision of financial countries, India has embraced an approach where both the
services in an open banking model, it is more difficult Regulator and the market have collaborated for the
to assign liability. If the regulations governing customer development of the Open Banking space. In India Reserve
grievance redressals are not updated to take open Bank and National Payments Corporation of India (NPCI)
banking business models into consideration, the came out with a payment system like Unified Payment
national authorities may find it difficult to provide the Interface (UPI) and released its API for the banks and third-
customers adequate levels of protections. In India, party app providers to build upon. The market participants
Reserve Bank has implemented a separate Ombudsman are also driving innovation and many banks are releasing
Scheme for Digital Transactions in January 2019. The their own APIs and joining forces with the fintech companies
number of complaints received under the Ombudsman to provide better experience to their customers. Moreover
Scheme for Digital Transactions (OSDT) have been with the launch of Regulatory Sandbox and Reserve Bank
consistently increasing reflecting increased adoption of innovation Hub, Reserve Bank's approach has been that of
digital modes of banking. encouragement and guidance.

In addition to the above, open banking frameworks also At the same time, all stakeholders need to appreciate the
present regulators with many challenges. In open banking, fact that while technological innovation is of paramount
there can be wide-ranging third-party arrangements such importance, the customer privacy and data protection are
as fintech firms, intermediary firms engaged in data
aggregation and other service providers which may not have not negotiable. We must generate trust amongst the
a contractual agreement with the bank over which customers that their data is safe and secure in all their
regulators can exercise jurisdiction. Further, it may be financial relationships with regulated entities and for that -
possible that several of these firms may not fall under innovation and regulation should hand-in-hand. Regulators
regulatory purview of any financial sector regulator. In such and Supervisors should also gear-up for the future
situations, it may become difficult for regulators to set challenges. Afterall, as the saying goes for
requirements, specifications, and exercise regulatory (Regulators)……"while they can overlook the weather of the
jurisprudence. day, they cannot ignore climate of the era". T

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