Technology Management and Innovation in Banking IADS PDF

Technology Management and Innovation in Banking Certified Banker Stage II TMIB Ch. 3 Last updated: 31 May 2023 Copyright © The Hong Kong Institute of Bankers. All rights reserved. 1 Interbank Account Data Sharing (IADS) Copyright © The Hong Kong Institute of Bankers. Al...

Technology Management and Innovation in Banking Certified Banker Stage II TMIB Ch. 3 Last updated: 31 May 2023 Copyright © The Hong Kong Institute of Bankers. All rights reserved. 1 Interbank Account Data Sharing (IADS) Copyright © The Hong Kong Institute of Bankers. All rights reserved. 2 Learning Objectives Copyright © The Hong Kong Institute of Bankers. All rights reserved. 3 Pre test Copyright © The Hong Kong Institute of Bankers. All rights reserved. 4 5.1 General Principles of IADS Interbank Account Data Sharing (IADS) is a HKMA initiative aimed to allow customers to securely and efficiently share a wide range of their bank account data with other participating banks subject to customer consent. ▪ Example: This means that a customer (Retail/ SME/ Corporate) with banks accounts in Bank A and Bank B can ask Bank A to share their customer’s data held there with Bank B. The initiative was announced in 2023, with a pilot program that commenced on January 1, 2024. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 5 5.1 General Principles of IADS IADS is part of the "Open Application Programming Interface (API) for the Banking Sector," one of the seven initiatives launched by the HKMA in September 2017 to transition Hong Kong into a new era of Smart Banking. This initiative is also part of the global Open Banking and Open Finance movement. The goal of IADS is to digitize banking operations, improve risk management, and enhance the customer experience by leveraging open data access among participating banks. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 6 5.1 General Principles of IADS Key ecosystem players include: ▪ Regulatory Authority - HKMA Serves as the primary regulatory body responsible for establishing comprehensive guidelines, standards and best practices for IADS and plays a crucial role in coordinating with various stakeholders within the ecosystem to promote, implement, and oversee the progress of the initiative. ▪ Data Holders and Data User - Participating Banks Banks that have been mandated by the HKMA to participate in the IADS initiative. These banks are required to be “Data Providers” whilst being a “Data Consumer” is encouraged. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 7 5.1 General Principles of IADS Key ecosystem players include: ▪ Customers - Retail, SME, Corporate Customers of Participating Banks These customers possess the authority to consent to the sharing of their financial data from a participating Data Provider bank to a participating Data Consumer bank. At present, customers are required to maintain deposit accounts at both banks to facilitate this data sharing process. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 8 5.1 General Principles of IADS Key ecosystem players include: ▪ Hong Kong Science & Technology Parks (HKSTP) One of Hong Kong’s innovation hubs which offers value- added services for Hong Kong's technology and research and development sector. In partnership with HKMA, it manages the “IADS Developer Platform”. ▪ Fintechs & Technology Providers Unlike some other jurisdictions, Hong Kong’s IADS currently only allows participating banks to be data providers and data consumers. That being said, banks can and are currently collaborating with multiple fintechs and technology providers to build IADS infrastructures and use cases. These providers include Jetco and Planto. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 9 5.1 General Principles of IADS The core principles of IADS can be summarized as: ▪ Data Ownership: Acknowledging that customers own their financial data and have the right to share it as they see fit. ▪ Transparency: Providing clear information about how data is shared, used, and safeguarded. ▪ Security: Implementing robust security measures to protect customer data, via Information Security Standards. ▪ Interoperability: Ensuring different systems and platforms across banks communicate and work together seamlessly. ▪ Innovation: Encouraging a competitive environment that drives development of innovative products and services. ▪ Customer-Centricity: Prioritizing customers’ needs. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 10 5.1 General Principles of IADS Participating banks must obtain customers’ consent before sharing their data. The consent process is as follows: ▪ Customer initiates the process through the Data Consuming Bank’s platform (e.g. internet or mobile banking). ▪ Platform above will redirect the customer to the internet or mobile banking platform of the selected Data Providing Bank. ▪ Customer logs in to internet banking of the Data Providing Bank and then reviews and confirms the consent details. ▪ If customer wishes to grant the consent to multiple Data Providing Banks, they will need to repeat the above steps for each selected Data Providing Bank. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 11 5.1 General Principles of IADS Customer Consent (cont’d) ▪ Customers can view the current status of their consents and revoke their consents through the internet or mobile banking platform of their Data Providing Banks at any time. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 12 5.1 General Principles of IADS Simple Illustration 1 User: Selects accounts to 2 consolidate Provides consent on their Bank A requests data from Bank A application banks consented by the user *User repeats the process from 1 (B,C,D in this case) Bank B to 3 for banks C&D Bank A Bank C 4 3 Banks B,C,D provides data Bank A consolidates, enriches and to Bank A Bank D generates insights from the data for different use cases The user interface design and detailed procedures may vary with banks Copyright © The Hong Kong Institute of Bankers. All rights reserved. 13 5.1 General Principles of IADS Why is IADS important to banking professionals like yourselves? Copyright © The Hong Kong Institute of Bankers. All rights reserved. 14 5.1 General Principles of IADS With the democratization of data, IADS has the potential to revolutionize the financial services industry by transforming banks' operating models, enhancing customer service, improving fraud detection, and creating new revenue streams. According to HSBC’s survey conducted in 2024, 56% of respondents have expressed they are likely to give consent to banks to access their account data to use related services, and of that, 86% are willing to do so for balance consolidation and faster credit card and loan applications. As of 2024Q4, >70% of participating banks have launched or are going to launch an IADS use case in the market. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 15 5.1 General Principles of IADS Examples of impact on banking professionals include changing the way: ▪ Senior Management sets digital strategies and roadmap - becoming more data and digital driven. ▪ Business Units (eg. Relationship Managers/ Sales) understand their customers by providing a comprehensive view of financial profiles across multiple banks, allowing for more personalized services and products. ▪ Operations Teams conduct KYCs, credit assessment and monitoring - streamlining overall processes. ▪ Technology Departments develop and train AI models, resulting in improved performance and outcomes. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 16 5.1 General Principles of IADS IADS can also potentially disrupt the status quo of the banking industry as it levels the playing field for all banks through the democratization of customer data - driving innovation, AI application, competition and customer centricity amongst all participating banks. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 17 5.2 History of IADS In Hong Kong, IADS falls under HKMA’s "Open Application Programming Interface (API) for the Banking Sector," where: ▪ Application programming interface (API) is a computer programming approach for facilitating exchange of information and executing instructions between different computer systems. ▪ Open APIs refer to APIs that allow third party access to systems of an organisation. As part of this, the HKMA published the “Open API Framework for the Hong Kong Banking Sector”, where the framework takes a risk-based principle and a four-phase approach of Open API implementation. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 18  5.2 History of IADS The Four Phases of Open API Phase Open API functions Examples Delivery time I Product and service Deposit rates, credit By the end of January 2019 information: card offerings, service “Read-only” charges and other information offered by banks public information on details of their products and services II Subscription and new New applications for By the end of October 2019 applications for credit cards, loans and product/service other products – Customer acquisition process such as allowing online submissions/application of financial products III Account information Account balance, The initial set of API functions, which (Related to IADS) credit card outstanding includes deposit account information only balance, transaction and online merchant payments, is being records, credit limit implemented gradually, with over 90% of change and others banks having achieved full implementation. IV Transactions Payment and transfers Phase 3 is currently being launched through IADS Copyright © The Hong Kong Institute of Bankers. All rights reserved. 19 5.2 History of IADS The framework chose a "collaborative" rather than a "mandatory" implementation strategy at the time of publication. The scope of the Open API framework includes: ▪ Open API functions and deployment timeframe ▪ Open API technical standards on architecture, security and data ▪ TSP governance model ▪ Open API facilitation measures ▪ Open API ongoing development Copyright © The Hong Kong Institute of Bankers. All rights reserved. 20 5.2 History of IADS To facilitate the implementation of Phase III Banking Open API, the Hong Kong Association of Banks (HKAB) released the "Phase III Banking Open API Standards" on December 14, 2021. These standards were created in collaboration with the banking industry, covering: ▪ Technical Standards for the design and development of APIs including the functional and technical process flows, RESTful framework, URI structure, HTTP header, response code, payload structure, pagination, versioning and API fair usage policy. ▪ User Experience Standards that covers customer experience principles, customer journey, and wireframes for customer consent management and customer data access procedures. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 21 5.2 History of IADS Standards (cont’d) ▪ Customer Authentication Standards for the customer consent management process including integration, endpoints, permission and API specifications. ▪ Data Standards for customer data access procedures covering API functions, endpoints and API specifications. ▪ Information Security Standards to enable secure exchanges of data covering certificates, transport-layer security, OAuth 2.0, OpenID Connect, two-factor authentication (2FA), cyber and anti-fraud security. ▪ Operations Standards to support the implementation of APIs which includes the availability, performance testing, problem and change-management support procedures. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 22 5.2 History of IADS Whilst the standards are for informational purposes only, banks have referenced the guidelines for the design and development of Open API Phase III and IADS. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 23 5.3. Current Status of IADS To date, the accounts and data covered as part of the IADS pilot program include Corporate/SME/Retail deposit account information. Data can only be shared between banks. Rules and standards have been established to facilitate interbank customer-consented data sharing from one participating bank (Data Providing Bank) to other participating banks (Data Consuming Bank) that have been communicated to the participating banks. There are a total of 28 participating banks that are mandated to join. Banks are required to enter into agreement on a bilateral basis for data sharing. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 24 5.3. Current status of IADS Current 28 IADS Participating Banks Under the Pilot Airstar Bank Limited CMB Wing Lung Bank Limited Mox Bank Limited Ant Bank (Hong Kong) Limited Dah Sing Bank, Limited Nanyang Commercial Bank, Limited Bank of China (Hong Kong) Limited DBS Bank (Hong Kong) Limited OCBC Bank (Hong Kong) Limited Bank of Communications (Hong Fubon Bank (Hong Kong) PAO Bank Limited Kong) Limited Limited The Bank of East Asia, Limited Fusion Bank Limited Public Bank (Hong Kong) Limited China CITIC Bank International Hang Seng Bank, Limited Shanghai Commercial Bank Limited Limited China Construction Bank (Asia) The Hongkong and Shanghai Standard Chartered Bank (Hong Corporation Limited Banking Corporation Limited Kong) Limited Chiyu Banking Corporation Limited Industrial and Commercial Bank WeLab Bank Limited of China (Asia) Limited Chong Hing Bank Limited Livi Bank Limited ZA Bank Limited Citibank (Hong Kong) Limited Copyright © The Hong Kong Institute of Bankers. All rights reserved. 25 5.3. Current status of IADS Data covered as part of the pilot includes deposit (current and savings): ▪ Account Availability: Which checks customer information against the specific account. ▪ Account Status: Whether it is active or inactive. ▪ Balance and transaction records: Includes amount and currency, credit/debit, balance type, date and time. ▪ Account Details: Such as Currency and nickname. The data exchanged should, in principle, reflect the information presented on the customer's internet and mobile banking platforms. This exchange occurs without incurring any additional costs for each API call made. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 26 5.3. Current status of IADS On the digital banking platforms, customers can: ▪ Choose what accounts to be shared. ▪ Select how long the accounts should be shared for (eg. 3 months, 6 months, 12 months). ▪ Manage their consents any time. As part of the terms and conditions, participating banks must share with the customer information such as: ▪ Why the bank is accessing customer data. ▪ What data will be retrieved. ▪ How the data will be used by the bank. ▪ How data is kept and customer’s right to compensation. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 27 5.3. Current status of IADS On October 23, 2024, the HKMA hosted the "IADS Showroom Day" giving participating banks the opportunity to present the initial outcomes of the pilot program. IADS use cases that have been piloted include: ▪ Consolidated financial analysis: Allowing customers to get a consolidated view of their deposit accounts. ▪ Streamlining Loan Application Processes: Helping banks to streamline the credit assessment process. ▪ Online Identity verification: Simplifying the identity verification process during KYC. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 28 5.3. Current status of IADS Of the use cases that have launched/planned for launch in 2025 around: Are for retail customers, Account consolidated 82% which includes account and related analyses 67% consolidation, lending and wealth Streamlining of Loan 53% Applications Are for SME customers, which encompass account 46% consolidation, lending and identify verification 4% Identity verification Copyright © The Hong Kong Institute of Bankers. All rights reserved. 29 5.3. Current status of IADS HKMA has partnered with HKSTP to launch the "IADS Developer Platform" which offers testing account data and simulated APIs from participating banks, encouraging greater collaboration between banks and technology firms to create innovative IADS use cases. The data provided gives access production-like data. Fintech companies like Jetco and Planto have also partnered with banks to accelerate the development of IADS infrastructure and use cases. Jetco has worked with banks on Open APIs and Planto has collaborated with Citibank and Shanghai Commercial Bank on wealth and SME lending use cases. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 30 5.4 IADS for Lending Traditionally for retail banking, applicants apply for loans through filling an application form (online or offline) and uploading or submitting relevant supporting documents such as salary proof, ID copy, employment contract etc. For SMEs, the process is even more time-consuming, as it requires additional information about the company and more documentation, including company registration documents and annual reports. For lending, banks typically depend on an applicant’s information, credit history from TransUnion (for consumers) or the Commercial Credit Reference Agency (CCRA) (for businesses), and their own credit scores, utilizing the data they have on the customers. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 31 5.4 IADS for Lending These result in many issues such as ▪ Limited and potentially outdated data. SMEs are particularly vulnerable to this as the annual reports they submit may not always reflect their real credit-worthiness. ▪ Risk of fraud and document manipulation. ▪ Long processing times, with banks averaging 3-5 weeks to process an SME loan application. ▪ Lengthy risk monitoring procedures. For SMEs this may include additional document requests, interviews, site visits and more. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 32 5.4 IADS for Lending Traditional practices also often overlook generational differences. For instance, Gen Z and Millennials, who tend to have freelance and tech-savvy lifestyles, may lack a conventional credit history, making traditional assessment methods inadequate for evaluating their creditworthiness. As a result, banks may lend to those who default or deny credit to worthy applicants. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 33 5.4 IADS for Lending IADS enhances the lending process by: ▪ Streamlining the Application Processes: Customers can share their bank related data securely via APIs with lenders, making the overall process faster and seamless. ▪ Greater Financial Inclusion: IADS helps banks assess the creditworthiness of previously overlooked individuals and businesses by referencing their latest cash flow. ▪ Dynamic Risk Assessment: Banks can continuously monitor customers’ financial health through real-time data. ▪ Enhanced Data Verification: IADS allows access to real- time financial data directly from customers' bank accounts, making it easier to verify identities and financial status, which can help reduce fraudulent applications. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 34 5.4 IADS for Lending Participating banks that have launched or plan to launch retail lending IADS use cases in 2025 include BOCHK, BEA, CCBA, Livi Bank, OCBC and ZA. For ZA, the implementation of IADS has streamlined the process by eliminating the need for users to upload proof of income and removing the manual approval steps for their banking staff. As a result, under their testing environment, loan approvals can be completed in as little as three minutes. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 35 5.4 IADS for Lending Participating banks that have launched or plan to launch SME lending IADS use cases in 2025 include BOCHK, China CITIC Bank International, CCBA, DBS, Fubon, HASE, HSBC, OCBC and Shanghai Commercial Bank. Shanghai Commercial Bank has shared that they have processed loan applications totaling over HK$50 million for SMEs, where applications can be approved in as fast as one day. Hang Seng Bank has also approved around HK$60 million in SME loans as of Sept 2024. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 36 5.5 IADS for Financial Management Currently, the overall digital banking experience for consumers and businesses remain highly transactional. Customers typically log in to check their accounts and make payments, leading to low levels of engagement. On the retail front, banks like HSBC, HASE and ZA have integrated personal financial management into their digital platforms, offering tools like financial insights and budgeting. However, prior to IADS, limitations existed as they lacked a 360 view of customers’ finances. Consumers,on the other hand, have unmet needs. 80% struggle to manage their finances across multiple bank accounts and 64% would consider switching their primary bank due to bad digital experience. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 37 5.5 IADS for Financial Management SMEs are largely underserved in digital banking, with HSBC being one of the few banks to offer business financial management tools like cash flow analysis. However, similar to retail banking, these tools have limitations because business data is often scattered across different accounts. SMEs have increasingly sought alternatives to traditional banking services. According to an EY report, 36% of SMEs in Hong Kong have considered switching their financial service providers and 65% would like to have business management functions, with some searching for options that can better support their digital transformation, cash flow, accounting and administrative needs. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 38 5.5 IADS for Financial Management With the implementation of IADS, banks have the opportunity to tackle the challenges through: ▪ Personal Finance Management which can help consumers truly understand and manage their finances. These include tools for budgeting, spending insights, analytics, financial planning, and personalized financial advice and product recommendations, creating a user experience akin to “Netflix” for financial management. ▪ Business Finance Management which can help businesses manage their cash flow and provide support on accounting or administration work. These tools include cash flow management, expense tracking, invoicing, budgeting, alerts and recommendations - all of which work towards a “Digital CFO” Copyright © The Hong Kong Institute of Bankers. All rights reserved. 39 5.5 IADS for Financial Management Most participating banks in Hong Kong have launched or plan to launch retail account consolidation/financial analysis in 2025. Whilst most banks focus on basic account consolidation, Citibank stands out with their Citi Wealth 360. The features allow Citi’s customers to manage all personal finances in one place, offering insights into spending, expense management as well as carbon footprint tracking. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 40 5.5 IADS for Financial Management Participating banks who have launched or plan to launch SME account consolidation/financial analysis in 2025 include BOCHK, BOCOM (HK), Chong Hing Bank, CMB Wing Lung, DBS, Fubon, OCBC and and Shanghai Commercial Bank. As of Oct 2024, most banks who have launched or plan to launch are providing basic account consolidation, while Shanghai Commercial Bank stands out by offering business analysis report. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 41 5.6 IADS for KYC Current Know Your Customer (KYC) practices require banks to implement a Customer Due Diligence (CDD) process, in which they must: ▪ Identify and verify customers using documents, personal data, or information provided by a reliable and independent source ▪ Identifying and taking reasonable measures to verify the beneficial owner’s identity These processes can take days or even weeks— especially for businesses—since they often require banks to gather data and reference to multiple disparate systems and sources. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 42 5.6 IADS for KYC With IADS, the KYC process can be expedited by accessing real-time customer and account details directly from a trusted third-party bank that has already conducted thorough KYC checks on the customer. As of Oct 2024, Dah Sing Bank is the only bank that has implemented IADS in their KYC processes for SMEs. Their streamlined identity verification service for SMEs allows their "328 Business Banking" customers who opened their account remotely to complete customer due diligence online by sharing their account availability and status from other participating banks - simplifying procedures. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 43 5.7 Open Banking & Open Finance Around the World Open APIs in financial services are implemented to varying extents around the globe. Although interpretations differ, they can generally be categorized into three main areas: Open Banking is where customers consent to share their banking data with 3rd parties. This may include payments. Open Finance is defined as customers sharing financial data from banking and other institutions with 3rd parties. It goes beyond traditional banking to encompass areas such as pensions, investment brokers, insurance, and more. Open Data extends beyond the sharing of financial information to include a variety of data types, such as utilities, telecommunications, healthcare, and more. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 44 5.7 Open Banking & Open Finance Around the World Open Data Open Finance Utilities Health Insurance Telecom…etc Open Banking Pension Investment…etc Deposit Account Credit Card Example: Loans …etc Bahrain,UAE, Brazil, Example: UK, EU, Saudi Arabia Copyright © The Hong Kong Institute of Bankers. All rights reserved. 45 5.7 Open Banking & Open Finance Around the World Globally, ~60 jurisdictions have implemented Open Banking related legislation or regulations, whilst ~16 jurisdictions have passed related laws or regulations implementing Open Finance. Jurisdictions such as Australia, Brazil, the European Union, UAE and UK are at the forefront of Open Banking and Open Finance. The objectives of Open Banking and Open Finance in most jurisdictions are to breakdown data silos, maximize the value of financial data for innovation, growth, competitiveness and powering artificial intelligence. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 46 5.7 Open Banking & Open Finance Around the World Frameworks for Open Banking and Open Finance vary significantly across regions due to differences in policies, financial market structures, and levels of digital readiness. Generally all jurisdictions will have five main actors that act as enablers - Customers, Data Holders, Data Users, Connectivity Providers, and Regulatory Authorities. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 47 5.7 Open Banking & Open Finance Around the World One of the key distinctions between jurisdictions is the approach to implementation and the governance framework, which can be broken down as follows: ▪ Regulation led: Where data holders such as banks are typically required to share customer data and/or make payments to 3rd parties upon customer’s consent. Regulators are generally the ones who set the relevant standards. ▪ Market driven: Refers to jurisdictions where authorities may provide API standards and best practices without requiring strict enforcement. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 48 5.7 Open Banking & Open Finance Around the World 54 jurisdictions adopt a regulation-led model, while 28 operate on primarily market-driven basis. Notably, 18 jurisdictions with market-driven approaches are currently planning or developing regulatory frameworks, indicating a gradual shift towards increased oversight. Regulation led jurisdictions have shown to offer a wider data coverage in six essential categories: payments, general insurance, savings and investments, mortgages, consumer lending, and pensions. This correlation indicates that regulatory oversight can have a positive impact on the extent of data sharing. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 49  5.7 Open Banking & Open Finance Around the World Regulatory Approach Jurisdiction Lead Authority Data Consumers Scope of Data Regulation Market Led Driven EU National Competent ✓ Approved Third Party All payment account data Authority (NCA) Providers (TPPs) and payment initiation UK Financial Conduct ✓ Approved Third Party Payment account data Authority Providers (TPPs) only US Consumer Financial ✓ Approved Third Party In progress - expected to (In progress) Protection Bureau Providers (TPPs) be all data types UAE Central Bank of the ✓ Approved Third Party All data types excluding UAE Providers (TPPs) pension Selected financial Balance for deposit Singapore MAS ✓ institutions and accounts, credit card, government agencies loans, unit trusts, investments Hong Kong HKMA ✓ Participating banks Deposit balance and (Working towards regulatory-led) transactions Copyright © The Hong Kong Institute of Bankers. All rights reserved. 50 5.7 Open Banking & Open Finance Around the World Regulation led approach have shown to be around 22% faster than market-driven approaches and take the lead in implementation. Hong Kong is recognized as an early adopter. Initially, it embraced a market driven approach but has since transitioned to a more regulatory focused strategy through IADS. This shift is likely influenced by insights gained from Europe and the UK. That said, financial data sharing in Hong Kong is primarily limited to between selected participating banks, unlike jurisdictions such as Europe, the UK, and the UAE, where third parties can also access data, provided they meet specific requirements. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 51 5.7 Open Banking & Open Finance Around the World Cross border Open Finance is also emerging outside of EU. In 2024, The Bank for International Settlements (BIS) launched 'Project Aperta', an initiative which aims to connect the domestic Open Finance infrastructures of different jurisdictions which currently includes Hong Kong, UAE, UK and Brazil. Initial focus will be on improving trade finance for SMEs. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 52 5.7 Open Banking & Open Finance Around the World Open Banking and Open Finance are still in their early stages. There are several challenges faced by different jurisdictions: ▪ Building Trust and Participation: Establishing robust security systems is essential to gain the confidence of customers, data providers, and data consumers. A lack of trust in security can lead to low adoption rates. Both customers and data providers need assurance about the reliability and safety of data consumers. ▪ Navigating Regulatory Complexities: Collaborating with regulators and ecosystem participants is crucial to balance innovation with consumer protection and market stability. This involves clearly defining data sharing scopes, ensuring consistent rules, and addressing data protection concerns. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 53 5.7 Open Banking & Open Finance Around the World Challenges (cont’d) ▪ Overcoming Technical Hurdles: Inconsistent standards and poor interoperability can impede progress, while the complexity of connecting data users with data holders can lead to high operational costs and slow adoption. ▪ Addressing Market and Adoption Challenges: It’s important to create products and services that provide real value to individuals and businesses. Data consumers must be able to answer the critical question: "Why should customers share their data with us?" These require continuous oversight from regulators to ensure smooth implementation while maintaining a balance between innovation and customer security. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 54 5.8 Potential Impact on AI in Banking IADS has the potential to revolutionize AI in banking, as Open Banking is viewed as the essential fuel for AI. Artificial Intelligence is built and supported on 4 key pillars ▪ Training Data: Dataset used to train and refine A.I. models. ▪ Training Methods: Algorithms and techniques used to optimize AI models, ensuring they learn efficiently from data and enhance their performance over time. ▪ Model Architecture: Design configurations and structural frameworks of AI models that determine how information is processed and how output is produced. ▪ Computational Power: The computational and storage resources needed to train and execute AI models. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 55 5.8 Potential Impact on AI in Banking A major challenge facing the financial industry today in developing AI is the availability of data. AI is only as good as the data that trains it. While banks possess extensive customer data—such as personal information, account details, and transactions— they lack a "complete" view since they only capture information related to their specific relationship with the customer. This is particularly true in Hong Kong, where consumers, on average, hold 3 bank accounts and multiple credit cards and businesses hold an average of 3-4 products. These all lead to data being scattered across various banks and financial service providers. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 56 5.8 Potential Impact on AI in Banking In a 2019 HKMA survey on AI in retail banks, 52% of respondents cited "insufficient data" as a key barrier to AI adoption, second only to a lack of employees with AI expertise. Limited data leads to several challenges for AI models, including reduced accuracy and predictive capabilities, bias in data representation and outputs, and the neglect of incomplete yet potentially valuable data for training. According to Gartner, a staggering 85% of AI projects fail and one of the reasons is due to shortage of relevant data. These issues undermine the purpose of using AI models and can lead to limited returns on AI investments. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 57 5.8 Potential Impact on AI in Banking IADS has the potential to change this by providing the data needed to build, train, and refine models. It expands algorithmic capabilities, creates dynamic feedback loops for continuous improvement, and unlocks diverse use cases. By leveraging IADS, the financial industry can deliver smarter, more responsive, and customer-centric AI-driven solutions. Given HKMA’s “guided implementation” framework, IADS is designed to not only enhance data availability but also ensure data quality, as clear standards and guidelines have been established. It fosters trust, consistency, and interoperability, laying a strong foundation for AI development. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 58 5.8 Potential Impact on AI in Banking In recent years, two subsets of AI have gained popularity: Generative AI (“GenAI”) and Agentic AI. GenAI are algorithms that can be used to create new content, including audio, code, images,text etc. Examples include ChatGPT, DeepSeek-R1, Qwen 2.5-Max. Approximately 80% of GenAI in Hong Kong's financial sector have concentrated on internal functions like task automation and knowledge sharing. Adoption for customer- facing applications remains nascent. With the implementation of IADS and a more robust GenAI regulatory framework, banks are poised to adopt customer- centric solutions that assist professionals in areas like investment advice and product recommendations. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 59 5.8 Potential Impact on AI in Banking Agentic AI refers to AI that goes beyond simply processing information and generating output. It involves systems capable of autonomous action, environmental adaptation, decision-making, and task execution to achieve specific objectives with minimal human oversight. An example is OpenAI’s first agent - “Operator”, which can perform tasks on the browser, carrying out tasks like form completion and order placement. In Hong Kong, the adoption of Agentic AI is still in its infancy. However, as IADS advances, Agentic AI is expected to significantly improve data analysis, personalization, security, and fraud detection in a more autonomous manner. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 60 5.9 The Future of IADS IADS is still in its early stages, having just completed its first year of pilot testing. It holds significant potential for growth and has the capacity to transform the banking sector. IADS could further evolve in several key areas: ▪ Increasing Participation: Expanding the number of banks. ▪ Broadening Data Scope: Adding more accounts and data types—such as credit cards, loans, investments. ▪ Deepening Use Cases: Enhancing the depth of use cases such as integrating insights from Personal Financial Management (PFM) and Business Financial Management (BFM) into Relationship Management (RM) dashboards- allowing for better-informed decision-making. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 61 5.9 The Future of IADS Key areas (cont’d) ▪ Expanding Use Cases To Apply To Different Departments: Expanding the breadth of use cases which can be applied to various departments—such as Business, Marketing, and Product. ▪ Inclusion of Other Financial Entities: Beyond banks, adding entities such as insurance companies, investment firms, and Mandatory Provident Fund (MPF) providers. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 62 5.9 The Future of IADS Examples of use cases that can be further explored: Credit Scoring ▪ Utilizing IADS data to enable banks to evaluate risk more swiftly and accurately ▪ Research from Germany’s largest FinTech lender in consumer credit shows that applicants with the lowest credit scores are around 30% more likely to share their Open Banking data. Data sharing increases the probability of loan approval by up to 11.7% and lowers the interest rate by up to 2.2%, driving financial inclusion. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 63 5.9 The Future of IADS Financial Planning ▪ Going beyond basic consolidation to provide in depth insights of customer’s finances and offer advice and product recommendations. ▪ DBS in Singapore has launched a financial planning tool that helps customers consolidate their accounts via SGFindex. The tool leverages on AI to help customers identify gaps and offer hand-picked investments and insurance to suit customers’ changing needs.Those who engage with the nudges the tool sends have saved about 80% more than non-users and have invested about four times more and are two times more insured. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 64 5.9 The Future of IADS Treasury Management ▪ Leveraging IADS data to give businesses real-time insights into their payments, along with tools to assist with invoice management and receivables reconciliation. ▪ Global banks such as JP Morgan have used Open Banking APIs to support their corporate customers, offering new services to Corporate Treasurers. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 65 5.9 The Future of IADS To encourage and advance the development of IADS, the HKMA has expanded the scope of the Fintech Supervisory Sandbox 3.1 (FSS 3.1) to incorporate IADS starting in 2025 The program offers funding support at the development stage for innovative fintech solutions, aiming to promote commercialization and broader adoption of projects that align with the HKMA’s regulatory mandate. Under the program, fintech companies can collaborate with sponsor banks to develop use cases, with funding available of up to HK$500,000, aimed at fostering greater collaboration, innovation, and adoption of IADS use cases. Copyright © The Hong Kong Institute of Bankers. All rights reserved. 66 Summary Copyright © The Hong Kong Institute of Bankers. All rights reserved. 67 Survey Copyright © The Hong Kong Institute of Bankers. All rights reserved. 68 Post test Copyright © The Hong Kong Institute of Bankers. All rights reserved. 69  END Thank you Copyright © The Hong Kong Institute of Bankers. All rights reserved. 70