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A look at the rewards and risks of open banking - report

RiskBusiness has released a report on open banking and finds that while it holds much potential, financial services firms need to ensure that their approach to managing third-party risk is up to the level of robustness required to engage with this new technology.

Open banking, in essence, is where consumers allow third-party providers to use the financial information held by their bank to inform new products and services.

The report says open banking promises much, such as reduced transaction costs and faster transactions and engagement.

RiskBusiness says there are about 4.5 million regular users of open banking in the UK alone, of which 3.9 million are consumers and 600,000 small businesses.

The report says the rapid decline of cash use, the growth of eCommerce due to COVID-19 and continuing regulatory reforms are encouraging the growth of open banking.

RiskBusiness says while the substantial profits gained from card fees will decline, ultimately implementing open banking should enable financial firms to switch off ageing technology infrastructure and develop new products and services.

However, it says the risks associated with open banking are also becoming more evident too.

Opening up to third parties means there is added risk of misuse of information, even if it's unintentional. The report says there are all the traditional data risks associated with third parties, but they are magnified because of the speed at which transactions occur between the customer, the third party and the financial firm.

RiskBusiness says there are significant concerns that AML, counter-terrorist funding, and KYC processes that firms may currently have are insufficient to meet regulatory obligations within an open banking context.

The report says there's also fraud and operational resilience risk.

RiskBusiness says truly managing these risks will require the efforts of individual firms. But it says it's obvious that the network ecosystem nature of open banking demands a network ecosystem approach to managing these risks.

The report says there have already been scandals and failures in open banking in the likes of the UK.

The Open Banking Implementation Entity (OBIE) has been the focus of a substantial scandal recently, which has seen its CEO resign and its culture branded as toxic.

RiskBusiness says the banks engaged with open banking may need to take action. In addition, three major banks, including most recently HSBC in April 2022 have been subjected to regulatory warnings for failing to fully comply with the open banking requirements.

The report says financial firms should seek to actively manage the risks associated with open banking while not being blind to the opportunities this new technology creates.

RiskBusiness is an international governance, risk, audit and compliance (GRAC) solution provider, delivering risk content, risk intelligence, risk tools and risk advisory services to its clients. It has offices in Birmingham, London, Buenos Aries, Amsterdam, Hong Kong, New York, Singapore, Toronto, and Zurich.

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