Developing Open banking in Vietnam: Opportunities and challenges

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In recent years, the fourth industrial revolution has been progressing strongly, resulting in numerous accomplishments that have profound implications for various industries and sectors of the economy, including the banking sector. In the context of the digital transformation boom, traditional banking models have undergone modifications and advancements with the aim of boosting competitiveness and efficiency, leading to the emergence of the Open banking . The open banking concept represents a relatively optimal business model in line with the trends and demands of the digital era, allowing banks to expand their operations by offering digital products and services conveniently, comprehensively, cost-effectively, and reaching a more diverse customer base, both domestically and internationally.

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Nội dung Text: Developing Open banking in Vietnam: Opportunities and challenges

TAØI CHÍNH DOANH NGHIEÄP Taäp 02/2024 Developing Open banking in Vietnam: Opportunities and challenges Nguyễn Ngọc Mai; Trịnh Như Hồng Nhật - CQ59/11.12CLC I n recent years, the fourth industrial revolution has been progressing strongly, resulting in numerous accomplishments that have profound implications for various industries and sectors of the economy, including the banking sector. In the context of the digital transformation boom, traditional banking models have undergone modifications and advancements with the aim of boosting competitiveness and efficiency, leading to the emergence of the Open banking . The open banking concept represents a relatively optimal business model in line with the trends and demands of the digital era, allowing banks to expand their operations by offering digital products and services conveniently, comprehensively, cost-effectively, and reaching a more diverse customer base, both domestically and internationally. What is open banking? In the traditional business model, banks typically manage and safeguard information by storing all transaction data and customer account details. In contrast, open banking allows banks to utilize and share their customers’ financial data, including transactional histories and account details, with third parties such as other financial institutions, Fintech companies or electronic payment services through Application Programming Interface (API). This sharing is carried out with the customer’s agreement. The main objective of open banking is to promote competition, encourage the development of financial services, and improve the customer experience. It enables third parties to use the shared data to create solutions that assist individuals in more conveniently managing their finances, conducting transactions and accessing financial information. Open banking operates under government regulations to ensure privacy and data security. This model must strictly adhere to data protection laws and security standards to safeguard customer information. How does open banking operate? Open banking utilizes API (Application Programming Interface) technology for its development. In the context of APIs, the term application refers to any software that features distinct functionalities. An interface serves as a service contract between two software applications. Consequently, it can be understood that an API functions as a mechanism for linking two software components to facilitate the exchange of information and data. Open API not only eliminates the limitations on interactions between involved parties but also promotes the evolution of business models. This technology enables third parties to Sinh viªn 23
Taäp 02/2024 TAØI CHÍNH DOANH NGHIEÄP access open data or securely access an organization’s closed data with the owner’s consent and compliance with relevant legal regulations. In this particular context, third entities often refer to technology startups and online financial service providers. It is due to this convenience of APIs that they are incorporated into the functioning of open banking. In this model, banks will provide their services via open APIs and collaborate with partners to construct an ecosystem that satisfies the needs and demands of users. The utilization of open APIs facilitates collaborations between banks and third parties, thereby improving the financial experience of customers. Specifically, by connecting with partner applications, banks can gain access to a diverse customer base at a reasonable cost through open banking. This reduces the time required to seek out and attract customers. In Vietnam, open banking has been widely and actively implemented. Banking applications, including mobile banking and internet banking, have improved user payments via open banking by incorporating functionalities such as contactless payment and QR codes. In addition to serving as an electronic banking application, open banking also offers various non-banking utility services, including online shopping, bill payments, and network service registration. Benefits of open banking Benefits for businesses First, open banking allows immediate payments and minimizes transaction expenses for businesses. Instant transfers between accounts become feasible due to the rapid movement of money. This also assists companies in increasing the rate of payment acceptance, enabling them to expand their business operations. Moreover, by eliminating card payments, enterprises can reduce transaction costs, as card providers may charge various fees to accept card payments. Second, open banking enhances user customization. Open banking allows businesses to access a wealth of consumer data, enabling them to provide more personalized services to their clients. Benefits for users Customers’ financial experiences are improved through the use of open banking. It simplifies financial management for users as financial services have shifted online. Moreover, by allowing the sharing of information with user consent, open banking enables users to access a wider range of services through a single application. Security is another advantage of open banking. All third-party providers must meet the highest security standards to operate in the market, ensuring consumers can confidently utilize open banking services. Benefits for banks and financial organizations Open banking has facilitated partnerships between financial technology (fintech) firms and banks. In the rapidly evolving financial world, this cooperation can help banks and financial organizations enhance their technological expertise and stay updated with Sinh viªn 24
TAØI CHÍNH DOANH NGHIEÄP Taäp 02/2024 innovative solutions and new financial technologies. Furthermore, open banking improves the interaction between banks, financial organizations, and their customers. In a highly competitive market, banks and financial organizations must develop and improve their services. Developing banking applications makes the provision of services and customer consultations more convenient and accessible. Challenges of open banking Firstly, concerning legal framework Although open banking has been implemented in Vietnam, due to its complex and relatively new nature, the country has issued several guiding documents, such as Circular No.:16/2020/TT-NHNN regulating the opening of individual payment accounts by electronic Know Your Customer (eKYC), Circular No.:09/2020/TT-NHNN on information system security in banking operations of the State Bank of Vietnam, among others. However, in general, the legal framework for this model is still incomplete as it is only sparsely defined in various separate documents. Specifically, the government has yet to issue regulations or detailed guidelines regarding open API technology. This includes general standards for information system storage, data security and the types of digital productions and services that third - party partners can provide and operate. The absence of legal framework creates potential risks for banks’ operations, leading to hesitation and uncertainty among banks when adopting new technology. Secondly, concerning data security and privacy In open banking, the use of customer data sharing with third parties implies that banks must confront a range of riskes related to data security and privacy. These risks encompass potential service disruptions, fraudulent activities, financial losses for both the bank and its customers, as well as the theft and unauthorized use of data from both the customers and the bank. Furthermore, cyberattacks targeting banking systems, especially within the open banking framework, have grown more sophisticated and intricate, as cybercriminals can carry out illicit activities anytime, anywhere and through various methods. Thirdly, concerning technical infrastructure and investment Open banking operates on an open API platform to establish connections with third- party partners. To maintain these connections and ensure the seamless flow of data within the banking ecosystem, a robust telecommunications infrastructure of the highest quality is essential. Additionally, the management of API quality is crucial for ensuring smooth and efficient integration. Therefore, the initial investment in the technology system is substantial, presenting a significant financial challenge. Nonetheless, it is a crucial step in ensuring the success of the open banking model. References: https://thitruongtaichinhtiente.vn/phat-trien-ngan-hang-mo-tai-viet-nam-thuc-trang-va-kien-nghi-48232.html https://tapchinganhang.gov.vn/ngan-ha-ng-mo-xu-huo-ng-mo-i-trong-ngan-ha-ng.htm https://thoibaonganhang.vn/ngan-hang-mo-xu-huong-tat-yeu-125318.html Sinh viªn 25