Open banking- a revolution in the financial sector XVII MEĐUNARODNI SIMPOZIJUM OSIGURANJE NA PRAGU IV INDUSTRIJSKE REVOLUCIJE Open banking- a revolution in the financial sector Svetlana Popović Velimir Lukić Aleksandar Živković

Introduced OPEN BANKING CONCEPT PSD2 in European Union, November 2015 In CMA: “Open banking remedy” in UK, In January 2018 Introduced OPEN BANKING CONCEPT development of digital single market EBA makes guidelines and recommendations on PSD2 Final draft technical standards on the electronic central register (in effect since mid-2019) Draft guidelines for technical standards on strong customer authentication and common and secure communication under PSD2 (since September 2019) PSD2 is effective after adoption by the national legislation 24 EU members transposed it into national law In 3 it is partially adopted

Open banking concept The use of APIs to open up customers financial data to third parties enabling them to create and distribute their own products After clients approval, EU bank must open up APIs and clients data to third-party companies (fintechs and other financial companies) Third party providers will gain access to payment data

Open banking regimes in the world UK: Open banking is compulsory Goal: to promote competition in UK retail banking market and that UK banks become leaders in new technologies CMA research: insufficient competition between larger banks in retail sector, for smaller and newer banks it is hard to compete Higher costs for customers Australia: third parties (other banks, telecommunication providers, energy companies etc.) will get access to data held by other businesses in different areas (financial services, then energy and telecommunication)- from July 2019 Hong Kong: Open API framework-competitiveness and relevance of banking sector, to foster collaboration with TPP, innovative banking services, keep up with international developments US: industry-led approach Rise of fintechs in India (mobile wallet segment), Singapore, Japan, New Zealand, Canada, South Korea and Iran Governments support fintech innovations in financial sector and open banking initiatives

Significance of artificial intelligence and API Use of AI- simple and smarter interfaces, machine learning that would change back office processes AI is increasingly used in interaction with clients Integration of bank core functions with digital platforms to improve customer relationship management. Financial transactions will be done through platforms like Uber or WeChat.

API software/management companies have an integral role in open banking ecosystems Banks can’t choose whether and to whom they provide access to their infrastructure TPP must be licensed by supervisory authority and authorized by customer Fintechs and software suppliers can offer new or improves services and attach them to existing banking infrastructure

Implications for the competition CHALLENGES Open banking changes client-bank relationship, clients can simply switch accounts In focus is how to serve the client the most convenient way, not his loyalty Open banking is liberalizing financial sector, innovators can lunch services very fast, shaking the market New technologies are Lowering entry barriers (cloud) Opening up distribution (mobile) Speeding up network effects (big data) Facilitating collaboration with third parties New companies are becoming a part of a bank value chain Beside “traditional competitors” from financial industry, there is increased competition by large IT companies (Google, Apple, PayPal etc.)

OPPORTUNITIES Banks can be the beneficiaries of technology development Automation, integration and data availability increase the transparency of their activities, and enable more effective decision making They can became marketplace for different banking and non-banking services Work in partnership with TPPs to build new business models and offer improved services

Benefits for customers Reduced costs- customers can have control over their financial arrangements- single digital APP enables them to manage their accounts with different services providers Tailored services, greater convenience, larger choice in financial services More people will have access to financial services through digital distribution channels Fintechs are capturing the needs of underserviced clients (lower credit scores, small business, without adequate banking infrastructure)

Implications for insurance companies McKinsey: insurance will shift from current state of “detect and repair” to “predict and prevent” model Insurers can be a part of financial ecosystem Use of data from sources like Google, Amazon and Apple Use of data from any manufacturer of connected devices (cars, smartphones, wearables, medical devices etc.) allow better profiling of customers, enable customized pricing and prompt services delivery enables better calculation of relevant risk score for a client Every aspect of business will change, from underwriting and distribution to pricing and claims Focus on real-time transacting AI enables prompt response of insurer on subtle shifts in underlying risks Insurance policy could be priced and purchased in the real time

Changes in insurers business Open banking enables new income and better client management Indemnity insurance-for TPPs Access to payment data gives info about consumer behavior and enables sales of core insurance products with better risk based pricing Insurance companies can expand their services in payment and account servicing Usage-based insurance products Traditional model of “purchase and annual renewal” –”continuous circle” Insurer is permanently at service to client Adapts timely to their behavioral pattern and circumstances with offerings Bancassurance development Sophisticated analytics of bank data enables timely offers Offer could be initiated by information on particular event Relevant debit/credit card or money transfer by customer can trigger offer sent by mobile message or app notification Insurer can react on data obtained by geo-location services

Insurtech- instant need coverage-real time service Client can insure single item through a mobile app with possible coverage activation and termination at any time Disaggregation of existing products into separate micro elements Cost reduction Enhanced detecting of frauds Cross checking their customer data records by comparing with bank ones Automation of processes Reduced handling costs of claims Reduced time for processing a sale of a policy Open banking can trigger reform in insurance regulation