Case study for sandbox approach on open finance

Ja central bank of the philippines, Central Bank of the Philippines (BSP) published Circular No. 1122 on June 17, 2021, which defines the guidelines for the adoption of the open finance framework. Open finance is part of BSP’s digital payments transformation roadmap for 2020-2023, which aims to promote financial inclusion.

Open finance is defined in the circular as “the exploitation and sharing of data authorized by customers between banks, other financial institutions and third-party providers (TPPs) to develop innovative financial solutions such as, among others, those that provide real-time information. payments, promote greater transparency for account holders and provide marketing and cross-selling opportunities to banks, other financial institutions and TPPs”.

Monique B Ang
Associate
ACCRALAW

In other words, it is a data sharing system in which TPPs such as fintech companies will have access to financial information held by banks and financial institutions to develop applications and services. This access will be with the consent of the customer and will be facilitated by application programming interfaces (APIs).

The BSP defines APIs as “a set of rules and specifications that allow software to communicate with each other, forming an interface between different programs to facilitate interaction”. Some authors have also defined APIs as “a way for two computer applications to talk to each other over a network (mainly the Internet) using a common language that they both understand”. APIs can be used internally or externally with organizational partners or even TPPs. In this regard, an open API is a software technology interface that provides a way to access data based on a public standard. In the banking and financial services industry, APIs can facilitate the exchange of data between financial institutions and TPPs, even if they do not have formal or contractual relationships.

The participants

BSP-supervised financial institutions with a composite rating of at least “3” in the Prudential Assessment Framework, or equivalent, are automatically eligible to participate in the open finance ecosystem. Those that do not meet the criteria will need to obtain prior approval from BSP. Financial institutions not supervised by the BSP may also be eligible to participate, provided they meet the requirements set by the Open Finance Oversight Committee. The Committee will be an autonomous body that will exercise governance over the activities and participants of the open finance ecosystem. It will also adopt standards, agreements, policies and guidelines governing the framework. The committee will be established by BSP and industry stakeholders, and will be subject to oversight by BSP.

The regulatory sandbox

The BSP takes a collaborative approach to regulating fintech companies and intends to use a regulatory sandbox approach to develop standards for open finance. Accordingly, the BSP must allow open APIs to be deployed and tested in a real environment within specified parameters and timeframes. By adopting this approach, the central bank hoped to understand emerging business patterns and adequately assess and mitigate potential innovation risks.

Implementations

PASB will adopt a tiered approach to implement the open funding framework. The first level involves sharing product and service information and other details about financial products or services easily accessible online. The second level involves sharing information about subscription and account creation requests.

The third level involves the sharing of account information or personal and financial information provided by a customer. The fourth level refers to transaction data, including payments and other financial transactions. The fifth level covers other more complex financial products or use cases, including those not covered by levels one through four.

The list of tiers mentioned above is not intended to be sequential. They can therefore be implemented simultaneously.

It is perhaps important to recognize that the pros and cons of open finance in the real world are not yet fully known. The Open Finance Oversight Committee has also not been created. The challenges of implementing the framework are also unknown, although the circular itself acknowledged that developing a local sandbox can be challenging, given the cost.

Privacy and data protection issues are likely to be among the top concerns for stakeholders. The circular responds to this by requiring participants to acknowledge that customers must retain ownership of their customer and transactional data, and have the right to control the use of their data.

Monique B Ang is associated with the corporate and special projects department of ACCRALAW

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