Changing financial standards and the balancing act between state regulation and dynamic market development
Part one: The Justification of existence of standards in the world of open banking and open finance
In the modern financial world, which is characterised by rapid technological progress, global networking in the form of open banking and open finance and a constant striving for efficiency, standards create a common basis for progress and cooperation across national borders and are therefore not only a tool for simplification, but also a fundamental pillar for overcoming challenges and shaping the future.
Particularly in the emerging area of open finance, standards not only form the basis for smooth interactions, but also promote innovation and lay the foundations for a solid basis for the future of the financial sector. Standards relating to the implementation of interfaces for open finance play a key role here. The most important reasons are:
- Interoperability: Standards ensure that different financial systems are compatible with each other. This allows different applications and platforms to communicate seamlessly with each other and exchange data, regardless of the specific implementations.
- Security: By using standards, standardised security protocols can be implemented. This is crucial to protect highly sensitive financial data from unauthorised access while ensuring the integrity of the transmitted information.
- Ease of use: Standards facilitate the development of standardised and user-friendly interfaces. This enables end users to utilise financial services more efficiently as they do not have to deal with different formats and protocols.
- Promoting innovation: Uniform standards create a more stable basis for innovation. Developers can build on proven protocols without having to start from scratch with every integration. This accelerates the introduction of new technologies and services in the financial sector.
- Regulatory compliance: Standards help ensure compliance with regulatory requirements, which are particularly stringent in the financial sector. By implementing standards, financial institutions can ensure that their systems comply with applicable regulations.
Overall, standards therefore help to improve efficiency, security and innovation in the area of open finance by creating a common basis for the development and implementation of interfaces.
There are two main approaches here: regulatory open banking standards, which are defined by state institutions such as the EU Commission in the case of the PSD, and market-driven standards, which are created by the dynamics of market participants. The latter applies to Switzerland, for example, as there are no regulatory requirements such as the EU-wide PSD2. The debate about which approach is superior remains controversial.
Snapshot of Konsentus
Let’s start with a look at the current state of open banking initiatives worldwide. Konsentus, a British provider of software for open banking and open finance applications, has produced a map showing the distribution of legally mandated initiatives versus the market-driven approach: According to the map, 64 per cent of all open banking initiatives are the result of statutory regulations. Only four of the markets surveyed, namely the USA, Canada, China and Switzerland, take a purely market-driven approach to this topic and 26 percent of the initiatives have no legal requirements but still have strong regulatory support and a centralised programme approach. There is therefore currently a clear preponderance of standards in the area of open banking that have been created by legal requirements.
The view of a financial services provider
Qwist, one of the leading technology and solution providers for open finance, sees the development of open finance standards as essential for the future of the financial industry, as they promote interoperability, security and innovation. Standards create a stable foundation for the development of new technologies and enable Qwist to provide comprehensive solutions for the open finance ecosystem. It is particularly important to ensure security and trust by implementing standardised security protocols and supporting regulatory compliance, such as PSD2/PSD3 or FIDA. Qwist therefore values both the clarity of regulatory standards and the flexibility of market-driven approaches and develops solutions that support both models.
In the second part of our reflections on standards in the financial world, we will examine the pros and cons of the different concepts and draw a final conclusion.
