Third parties are invited to collaborate on developing apps by utilizing application programming interfaces (API) provided by the banks. This technology enables banks and fintech applications to interlink in order to securely share consumer data given proper consent.

Issues related to customer data remain highly sensitive in banking. Leaks or misuse of this data may harm customers, damage the bank's reputation and results in the loss of public trust in banking. Thus, this collaborative initiative should be brought to the attention of all stakeholders. The opportunities and challenges that open banking technology brings must be thoroughly assessed from various perspectives.

First, from the consumers perspective. Collaboration between fintech and banks is nothing new nowadays. For example, the bank credit channeling activities through fintech lending platform. Peer-to-peer lending regulations allow banks to become lender-customers or creditors in the platform. In this scheme, banks have the right to determine who can borrow from them and the amount to lend.

Meanwhile, the borrower-customers or debtors have less control to exercise. Debtors cannot limit the access to the information of their funding needs. Nor can they decide on who will become their creditors. Data and information regarding the debtors and their transactions will be kept by both the bank and the fintech firm.

Open banking operates differently. Customers must provide prior consent for fintech firms to gain access to their data stored in the bank. Once access is granted, fintech will process the data for the benefit of the customers, so that the customers are able to enjoy products or services that better suit their needs.

For example, if data analysis shows that the customer has a low credit risk level, then the customer can choose loan products with lower interest rates. The customer is given full discretion and transparency over their choices.

Furthermore, open banking may increase the level of convenience for customers in managing their financial transactions. API technology enables fintech to provide integrated access to a customer’s accounts that reside with various financial service providers. All can be done in one single digital application. As data owners, customers can determine which accounts and what data they would like to consolidate in it.

Customers should act prudently when granting data access to third parties, particularly when phishing and social engineering fraud continue to be widespread. This is because fraudsters often bank on customers’ lack of awareness.

Where the level of financial literacy is low, the threat of fraud lurks at every corner. The amount of fraudulent activity increases in communities of subpar financial literacy. In Indonesia, where financial literacy averages lower than 40 percent, an inordinate effort should be made to protect costumers. Increasing digital financial literacy and strong law enforcement on the misuse of customer data should be nonnegotiable.

Second, from the fintech perspective. The opportunity to access banking customers’ data makes it no longer necessary for fintech to spend their resources to collect the data by themselves. Fintech will then be able to focus on the development of their products and technology. This allows fintech to provide a larger variety of financial products and services. It will thus help to boost the market penetration and financial inclusion of the general population.

However, news regarding data security breaches involving online services are still prevalent. A few years back, illegal fintech lending was rife with issues of high interest and collection practices that do not comply with regulations. If any of that occurs again, the reputation of banks who collaborate with fintech will be adversely impacted. Additionally, the interlink of bank data networks with fintech gives rise to another issue. It may potentially create weak links that cybercriminals can take advantage of and cause data leaks that are harmful to all parties involved.

Therefore, the ability to manage various risks must be the basic requirement for fintech to participate in the open banking ecosystem. Stringent rules and standards – including comprehensive risk mitigation measures – should be maintained.

Third, from the bank perspective. Fintech poses a direct challenge to banks, as their income streams are consequently depleted by customer migration to fintech. The more customers leave, the farther bank services fall behind those of fintech. Collaboration in the form of open banking gives banks an opportunity to remain relevant while retaining customers. Digital technology and applications they will jointly develop with fintech will enable banks to offer better products and increase their customers’ digital engagement. Additionally, banks may also leverage the fintech digital network to expand their market reach.

But those upsides will only come to fruition once banks can establish the right ecosystem for such collaboration to thrive. The appropriate technology and sufficient human capital must be deployed to deal with a wide range of issues – from data security and cybercrime to improving customers’ digital financial literacy.

Particularly, traditional banks with a legacy system will encounter immense obstacles when participating in open banking. For them, digital transformation is imperative in succeeding.

All things considered, open banking is an industry breakthrough that provides a win-win solution for both the fintech and banking industry. More importantly, it gives consumers the opportunity to enjoy the benefits of the data stored in the bank. It can advance fintech growth, push banks to improve their services and boost financial inclusion. However, this can only be achieved if the abovementioned challenges are overcome.

 ***

The writer is head of legal and corporate secretariat at Bank DBS Indonesia. The views expressed are his own.

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