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José Manuel Mansilla-Fernández

José Manuel Mansilla Fernández is Lecturer (Profesor Contratado Doctor interino) at the Department of Business Management and Linked Researcher at the Institute for Advanced Research in Business and Economics (INARBE) of the Public University of Navarre. He obtained his PhD in Economics from the University of Granada (Spain).

Previously, he held two post-doctoral positions at the University of Milan and the University of Bologna (Italy). Additionally, he served as a predoctoral research fellow and teaching assistant at the Department of Economics of the University of Granada.

His main area of research is the Economics of Banking and Finance such as banking regulation, bank risk-taking, industrial organization, international trade and SME, trade credit and liquidity management. He published in peer-reviewed journals including Applied Economics Letters, Empirica, Estudios de Economía Aplicada, Hacienda Pública Española, Spanish Journal of Finance and Accounting, Revista de Economía Aplicada.

Lastly, he collaborates as Editorial coordinator of European Economy – Banks, Regulation, and the Real Sector.

Numbers

November 14, 2024 by José Manuel Mansilla-Fernández

Authors

José Manuel Mansilla-Fernández[1]Public University of Navarre (UPNA) and Institute for Advanced Research in Business and Economics (INARBE).

 

Figure 1. The status of Central bank digital currencies projects in the world

Notes: Map retrieved from CBDC Tracker. Available at: https://cbdctracker.org/. Accessed on September 10, 2024.

 

Figure 2. Central bank digital currencies project status and central bank independence

Notes: Own elaborations. Project score, measured in the horizontal axis, is an index that takes the value 0 for jurisdictions without any CBDC work publicly announced by the central bank, 1 for projects in early stages, 2 for pilot projects, and 3 for jurisdictions that have already introduced a CDBC; data are the updated version of those in Auer et al. (International Journal of Central Banking, 2023), available at https://www.bis.org/publ/work880.htm. Central banks’ independence, measured on the vertical axis ranges from 0 (the lowest level of independence) to 1 (the highest level of independence); data are the updated version of those in Romelli (2022, Economic Policy), available at https://dromelli.github.io/cbidata/index.html. The size of the bubbles represents the aggregate GDP of the countries in each category. The sample includes 124 countries.

 

Figure 3. Central bank digital currencies project status and central bank responsibility for banking supervision

Notes: Own elaborations. Project score, measured in the horizontal axis, is an index that takes the value 0 for jurisdictions without any CBDC work publicly announced by the central bank, 1 for projects in early stages, 2 for pilot projects, and 3 for jurisdictions that have already introduced a CDBC; data are the updated version of those in Auer et al. (International Journal of Central Banking, 2023), available at https://www.bis.org/publ/work880.htm. Central banks’ responsibility for banking supervision, measured on the vertical axis ranges from 0 (banking supervision not entrusted to the central bank) to 0 (banking supervision entrusted to the central bank alone); data are the updated version of those in Romelli (2022, Economic Policy), available at https://dromelli.github.io/cbidata/index.html. The size of the bubbles represents the aggregate GDP of the countries in each category. The sample includes 124 countries.

 

Figure 4. Central bank digital currencies project status and bank concentration.

Notes: Own elaborations. Project score, measured in the horizontal axis, is an index that takes the value 0 for jurisdictions without any CBDC work publicly announced by the central bank, 1 for projects in early stages, 2 for pilot projects, and 3 for jurisdictions that have already introduced a CDBC, distinguishing between retail and wholesale projects; data are the updated version of those in Auer et al. (International Journal of Central Banking, 2023), available at https://www.bis.org/publ/work880.htm. Bank concentration, measured in the vertical axis, is the share of total assets of the three largest banks in each country; data are from the World Bank Global Financial Development Database, available at https://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database. The sample includes 140 countries.

 

Figure 5. Central bank digital currencies project status and payment habits.

Notes: Notes: Own elaborations. Project score, measured in the horizontal axis, is an index that takes the value 0 for jurisdictions without any CBDC work publicly announced by the central bank, 1 for projects in early stages, 2 for pilot projects, and 3 for jurisdictions that have already introduced a CDBC, distinguishing between retail and wholesale projects; data are the updated version of those in Auer et al. (International Journal of Central Banking, 2023), available at https://www.bis.org/publ/work880.htm. Payment habits, measured in the vertical axis, are measured by the share of the population 15 years of age or older that made a digital payment in each country; data are from the World Bank Global Financial Development Database, available at https://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database. The sample includes 113 countries.

Footnotes[+]

Footnotes
↑1 Public University of Navarre (UPNA) and Institute for Advanced Research in Business and Economics (INARBE).

Filed Under: 2024, From the Editorial Desk

Institutions

November 14, 2024 by José Manuel Mansilla-Fernández

Authors

José Manuel Mansilla-Fernández[1]Public University of Navarre (UPNA) and Institute for Advanced Research in Business and Economics (INARBE).

The following presents a snapshot of Central bank digital currency initiatives in the G20 countries according to CBDC Tracker (https://cbdctracker.org/; accessed on September 10, 2024).

 

Argentina (Research stage)

In 2023, the Argentine central bank committed to introducing a digital peso bill as soon as possible, accelerating its work on legislation to implement a Central bank digital currency in the country. However, no specific project has been presented by the authorities yet.

 

Australia (Research/Proof-of-concept stage)

The Reserve Bank of Australia (RBA) is actively investigating both retail and wholesale CBDC solutions, using research and proof-of-concept trials to assess the benefits and limitations of CBDCs in different contexts. While the projects are still in the early phases, Australia’s dedication to studying digital currencies underscores its commitment to remaining at the forefront of this field.

In 2020, the “eAUD” (Retail) project was launched as part of a broader research initiative by the RBA to explore the potential use cases for a retail CBDC in Australia. This project focuses on how digital currencies could be used for daily transactions among consumers, addressing the practical applications of a CBDC for retail purposes. Although still in the research phase, the RBA aims to determine whether a retail CBDC would bring benefits such as improved transaction efficiency, financial inclusion, and enhanced payment security. At this stage, no concrete implementation plan has been set, as the project remains focused on understanding the desirability and feasibility of a retail CBDC within the Australian market.

Simultaneously, the RBA also launched a wholesale version of the “eAUD”, focusing on large-scale transactions between financial institutions. The “eAUD” (Wholesale) project was announced in 2020 and quickly moved into the proof-of-concept stage.

Alongside these retail and wholesale explorations, in 2020 the RBA also initiated “Project Atom”, focusing on the use of a wholesale CBDC for atomic Delivery versus Payment (DVP) settlements, where both the delivery of assets and the corresponding payment are made simultaneously.

 

Brazil (Proof-of-concept stage)

Brazil has been proactive in exploring the potential of a Central Bank Digital Currency (CBDC) since 2017, through its project known as “DREX”, now at the proof-of-concept stage. The overarching goal of the “DREX” project is to assess how a digital currency could benefit Brazil’s financial system, with a focus on key areas such as financial inclusion, economic stability, and the effectiveness of monetary policy.

The Central Bank of Brazil (BCB) recognizes that a CBDC could play a critical role in addressing some of the country’s financial challenges. By providing a more inclusive financial platform, a digital real could help bring underserved populations into the formal financial system, increasing access to banking and payment services. Additionally, the implementation of a CBDC could help promote stability within the financial system by providing a more secure and efficient means of payment that is less prone to the risks associated with cash handling and private digital currencies.

Another major motivation for exploring a CBDC is the potential to enhance the conduct of monetary policy. A digital currency could provide the Central Bank with more precise tools for controlling the money supply and implementing monetary policy, enabling quicker adjustments to interest rates and more effective management of inflation.

In the coming year, the Central Bank of Brazil plans to launch a pilot program to test the practical applications of a CBDC. This pilot will help the BCB better understand the technical requirements, regulatory challenges, and economic impacts of issuing a digital real. The outcomes of this pilot phase will be instrumental in determining the feasibility of a full-scale launch of a Brazilian CBDC in the future.

 

Canada (Research/Proof-of-concept stage)

Canada has adopted a comprehensive and forward-thinking approach to CBDC development. Through proof-of-concept trials and extensive research, the Bank of Canada has positioned itself to respond to various scenarios, whether that involves the decline of cash or the rise of private digital currencies. While no formal decision to launch a CBDC has been made, Canada’s work in this space demonstrates its preparedness to implement a CBDC should the need arise.

In 2016, the Bank of Canada launched “Project Jasper”, a proof-of-concept initiative aimed at exploring how distributed ledger technology (DLT) could deliver greater benefits to interbank payments. This project marked the beginning of Canada’s exploration into wholesale CBDCs. “Jasper” also tested the potential for cross-border transactions, particularly through its collaboration with the Bank of England and the Monetary Authority of Singapore.

In 2017, Canada expanded its CBDC research with the “Digital Loonie” project, which focused on the conditions under which a retail CBDC might be introduced. The Bank of Canada considered launching a CBDC if the use of banknotes continued to decline or if private digital currencies became widely adopted as alternatives to the Canadian dollar. The Digital Loonie project emphasized the importance of being prepared in advance, as creating a general-purpose, cash-like CBDC would take several years.

Building on these efforts, in 2019, the “Jasper-Ubin” project was launched as another proof-of-concept initiative, aiming to explore how a wholesale CBDC could improve cross-border transactions and interbank payments, leveraging DLT to enhance the speed, security, and transparency of these transactions.

 

China (Pilot stage)

China has been a global leader in the development and deployment of CBDC projects. The People’s Bank of China (PBOC) began exploring CBDCs as early as 2014, making it one of the earliest central banks in the world to do so. The country’s primary project, “e-CNY” (also known as the Digital Yuan), was launched as a pilot with the goal of creating a more efficient, secure, and inclusive retail payment system. The People’s Bank of China’s early adoption, rapid expansion, and ongoing innovation in the CBDC space have positioned the country as a global leader in the digital transformation of financial systems.

The “e-CNY” project is designed to provide a digital alternative to traditional payment methods while preserving monetary sovereignty. It is intended to serve as a backup infrastructure for private-sector payment platforms like WeChat Pay and Alipay, ensuring competition and promoting interoperability in China’s vast digital payments market. Additionally, e-CNY aims to increase financial inclusion by providing an accessible payment method for people in remote areas or those underserved by traditional financial services.

Since its launch, e-CNY has expanded rapidly. Piloted in several major cities and promoted through large Chinese banks, the digital currency has been integrated with popular apps like WeChat and Alipay, allowing users to make NFC payments and even offline transactions. As of the latest updates, the total value of transactions conducted with e-CNY has surpassed 1.8 trillion yuan, underscoring its broad and growing usage.

One of the distinctive features of e-CNY is its potential to enhance cross-border payments. To this end, the digital yuan has already been integrated into cross-border platforms such as “mBridge”, launched in 2022, which is specifically aimed at improving international trade settlement.

The People’s Bank of China has also been forward-thinking in terms of user adoption strategies. Initiatives such as wallet-opening machines for tourists and the potential introduction of features like expiration dates to encourage spending reflect China’s commitment to increasing the everyday use of e-CNY. The system has also been designed with privacy in mind, incorporating controlled anonymity to ensure user privacy while maintaining transparency for government oversight.

 

Euro area (Pilot/Research stage)

The European Central Bank (ECB) has been working on several initiatives regarding the implementation of a CBDC within the Euro Area, focusing on both retail and wholesale CBDCs. These projects aim to modernize the financial infrastructure and improve the resilience and efficiency of the European payment system.

Announced in 2021, the “Retail Digital Euro” project is currently in the research phase. The goal of this initiative is to provide European citizens with access to a safe form of digital money, reflecting the fast-changing dynamics of the digital economy. A digital euro would not replace cash but rather complement it by offering an alternative in the digital realm. The primary motivation is to ensure that, as digital payments continue to expand, the public retains access to central bank-backed money, the safest form of currency.

In 2022, the ECB announced a pilot for the “Wholesale Digital Euro”. This project focuses on enhancing the efficiency of large-scale financial transactions, particularly between financial institutions. The main motivations behind this pilot are to consolidate and further develop ongoing work by Eurosystem central banks and to gain insight into how different solutions could facilitate interactions between TARGET real-time gross settlement (RTGS) services and DLT platforms. This would enable faster, more efficient cross-border payments and improve interoperability within Europe’s financial system.

Related to the ECB’s CBDC efforts is “Project Stella”, launched in 2016 as a joint research initiative between the European Central Bank and the Bank of Japan. This project explores the potential of using DLT to improve financial market infrastructure, particularly for payments and securities settlements.

 

India (Pilot stage)

India has made significant progress in its exploration of a CBDC through its “Digital Rupee” initiative, led by the Reserve Bank of India (RBI). Announced in 2020, the project has already moved into the pilot phase, with a focus on both retail and wholesale applications of the Digital Rupee.

The main objective of India’s CBDC project is to increase efficiency and reduce risks within the country’s financial system by leveraging features such as instant settlement and programmability, which allow for the automatic execution of transactions, including the return of funds at specific times without delays.

Currently, the RBI is gradually rolling out the Digital Rupee in a controlled manner, testing its application across various sectors and use cases. By conducting a phased implementation, the central bank aims to identify potential challenges and ensure the stability of the Digital Rupee before a full-scale launch.

 

Indonesia (Proof-of-concept stage)

Indonesia has been actively exploring the implementation of a CBDC through the “Digital Rupiah” project. Initiated by Bank Indonesia in 2018, the project entered the proof-of-concept phase with the aim of complementing the country’s existing banknotes and coins. However, at the time, Bank Indonesia clarified that there were no immediate plans to move forward with a pilot project or trial, and the issuance of the “Digital Rupiah” was still a distant possibility. At present, the project remains at the proof-of-concept stage.

The project aligns with Indonesia’s broader digital transformation agenda, which is reflected in initiatives such as the Blueprint for Indonesian Payment System (IPSB) 2025 and the Blueprint for Money Market Development 2025. These frameworks are designed to modernize the country’s payment systems and financial markets, ensuring that Indonesia remains competitive in the rapidly evolving global economy.

 

Japan (Research/Proof-of-concept stage)

Japan has made significant strides in developing its own CBDC through multiple initiatives, most notably the “Digital Yen” project. The Bank of Japan (BoJ) began conducting research on the Digital Yen in 2021, marking an important step as Japan seeks to keep pace with global advancements in digital currencies.

The “Digital Yen” project has now moved into the proof-of-concept phase, with the Bank of Japan working closely with private-sector banks to test the system’s capabilities. The upcoming program represents an end-stage trial, with a strong focus on real-world application and feasibility. The central bank will conduct trials to test deposits and withdrawals from accounts, ensuring the currency can function as a viable alternative to physical cash.

As the Bank of Japan pushes forward with its CBDC efforts, a local digital currency forum is simultaneously working on creating a digital currency for Japan’s private sector. This initiative is intended to complement the central bank’s work, highlighting the cooperative effort between public and private sectors to modernize Japan’s payment infrastructure and keep up with the evolving global financial landscape.

Beyond the Digital Yen, Japan has also engaged in research projects exploring the broader applications of DLT. One such project is “Project Stella”, a joint research initiative launched in 2016 with the ECB.

 

Mexico (Research stage)

Mexico has been making progress in the exploration of a CBDC through the “Moneda Digital del Banco Central (MDBC)” initiative, led by Banco de México (Banxico). The project entered the research phase in 2021.

The main objective of Mexico’s MDBC project is to provide a digital alternative to the national currency, enhancing the accessibility of financial services for the population. Financial inclusion is a key focus of this initiative, as the digital currency is expected to allow citizens to open accounts more easily, facilitating their entry into the formal financial system. This could help address the significant portion of the population that is currently underserved by traditional banking infrastructure.

Mexico aims to launch the digital currency by the end of the year, following extensive research and analysis on how it could be incorporated into the country’s existing monetary system. Banxico has indicated that the asset will be designed to complement the use of physical currency, providing a secure and efficient alternative that will contribute to the overall digitization of financial services in Mexico.

 

Russia (Pilot stage)

The “Digital Ruble” project, initiated by the Bank of Russia in 2019, is a key initiative aimed at modernizing Russia’s financial system using a CBDC. The project has now successfully completed the pilot phase.

One of the primary objectives of the “Digital Ruble” is to reduce costs associated with financial transactions. By providing a digital alternative to physical cash and traditional bank transfers, the Digital Ruble has the potential to lower transaction fees, making financial services more accessible and affordable for the general public. The digital currency is also expected to increase the speed of payments, ensuring faster and more efficient transactions, particularly for businesses engaged in domestic and international trade.

Additionally, the introduction of the Digital Ruble is designed to foster the development of innovative products and services within the financial industry. By providing a secure, digital platform for payments and financial transactions, it could encourage the growth of new financial technologies and services.

 

Saudi Arabia (Pilot/Research stage)

Saudi Arabia has been involved in several significant CBDC projects, demonstrating its commitment to advancing digital currency technologies for both domestic and international financial systems. The initiatives led by the Saudi Arabian Monetary Authority (SAMA) reflect the country’s forward-thinking approach to enhancing the efficiency of payments and financial settlements using digital currencies.

A major area of exploration for Saudi Arabia is the development of a wholesale CBDC. This research forms part of Saudi Arabia’s broader efforts to modernize its financial infrastructure and remain competitive in the global financial landscape.

In addition to its work on wholesale CBDCs, Saudi Arabia has also been researching the potential of a retail CBDC since 2019. The goal of this research is to evaluate the feasibility and advantages of a retail CBDC in Saudi Arabia, particularly in terms of improving financial inclusion and the efficiency of payments for individuals and businesses.

In 2019, the “Aber” initiative was launched as a joint project between the Saudi Arabian Monetary Authority (SAMA) and the United Arab Emirates Central Bank (UAECB). The primary goal of Aber is to create a digital currency that can be used for cross-border financial settlements between Saudi Arabia and the UAE. The digital currency is limited to central banks and select financial institutions, with the purpose of improving the efficiency of international remittances. In November 2020, the two central banks published the results of the pilot project, demonstrating the feasibility of using a digital currency for financial settlements between the two nations. It also highlighted the potential for a digital system to serve as a backup for domestic payments in the event of a disruption. While the Aber project has shown promise, the timeline for full-scale implementation of the CBDC has not yet been announced, and specifics about the underlying technology and blockchain structure remain undisclosed.

In 2022, Saudi Arabia joined the “mBridge” project, a pilot initiative aimed at improving international trade settlement using CBDCs.

 

South Africa (Research stage)

Since 2019, the South African Reserve Bank (SARB) has been engaged in research surrounding the development of a CBDC. The central bank is investigating the role that a CBDC could play in enhancing South Africa’s financial infrastructure. A key objective of this research is to evaluate whether a digital currency can serve as electronic legal tender, complementing physical cash in the economy.

South Africa’s approach to a CBDC is deeply rooted in ensuring security, which stems from the high prevalence of internet banking fraud in the country.

Also launched in 2019, “Project Khokha” is a major research initiative that examines the potential of DLT to support South Africa’s CBDC infrastructure.

 

South Korea (Proof-of-concept/Research/Pilot stage)

South Korea has been steadily advancing its exploration of CBDCs through several initiatives led by the Bank of Korea (BOK). These efforts include research, proof-of-concept projects, and pilot phases aimed at developing both retail and wholesale CBDCs, as well as exploring regulatory requirements for cross-border payments.

In 2020, South Korea moved forward with a pilot for the “Digital Won”, the country’s retail CBDC. The pilot completed its second phase in June 2023, during which the Bank of Korea tested various features of the Digital Won, such as its use in offline payments and cross-border remittances. While the pilot yielded positive results regarding these functionalities, the Bank of Korea encountered performance issues with the blockchain technology underpinning the Digital Won. These challenges suggest that further refinement and development will be necessary before a full-scale launch of the Digital Won can be considered.

In 2023, the Bank of Korea initiated research into a wholesale CBDC, focusing on understanding how such a CBDC could enhance the efficiency and security of interbank settlements and broader financial market transactions. Although the project is still in the research phase, it marks an important step in South Korea’s efforts to modernize its financial infrastructure.

Also launched in 2023, “Project Mandala” is a research initiative focused on compliance policies and regulatory requirements for cross-border payments, aiming to explore how a CBDC could streamline these processes.

 

Turkey (Pilot stage)

Turkey has been actively exploring the implementation of a CBDC through its “Digital Lira” initiative, launched by the Central Bank of the Republic of Turkey (CBRT) in 2018. The project is currently in the pilot phase, with the goal of establishing a robust financial sector that can support the financing needs of the real economy while promoting financial innovation and strengthening Istanbul’s position as a global financial hub.

The main objective of the Digital Lira project is to create a strong institutional structure that can respond to the financing needs of the Turkish economy at a low cost. In addition, the project seeks to offer a variety of financial instruments to a broad investor base through reliable institutions. The overarching vision is to support Turkey’s ambition of making Istanbul an attractive global financial center.

For the first phase of the pilot study, the CBRT is developing a prototype “Digital Turkish Lira Network” and conducting closed-circuit pilot tests in collaboration with technology stakeholders. These initial tests are designed to evaluate the feasibility and functionality of the digital currency in a controlled environment.

Additionally, the CBRT intends to diversify the scope of the project to include other important aspects of financial technology. This includes further testing the integration of blockchain technology, exploring the use of distributed ledger systems in payments, and examining how the Digital Lira can interact with instant payment systems.

 

United Kingdom (Research stage)

The United Kingdom has been actively engaged in research on CBDC projects, spearheaded by the Bank of England (BoE). These projects aim to explore various CBDC models and understand the practicalities of implementation for both the public and private sectors.

The “RSCoin” project, which began in 2015, was one of the first CBDC research initiatives undertaken by a central bank. The Bank of England introduced “RSCoin” as part of its “One Bank Research Agenda”. Since then, the BoE has continued to explore the architecture of CBDCs, examining different models to identify the most effective design.

In 2018, the BoE initiated the “Digital Pound” project, researching how a CBDC could work across the entire end-to-end user journey. The goal is to refine the functional requirements for both the Bank of England and private sector entities, ensuring that the eventual design of the CBDC is user-friendly and secure. The project emphasizes making the concept of a CBDC more tangible for internal stakeholders within the BoE and external players in the financial sector. By studying the user journey, the BoE is working toward a more practical and applicable digital currency, one that integrates smoothly with the existing financial infrastructure.

Also in 2018, the BoE launched a broader CBDC research initiative aimed at investigating the various implications of introducing a digital currency. The BoE is considering several design options, including how CBDCs would coexist with physical cash and how they could potentially reshape the UK’s financial landscape.

The architecture of the future CBDC remains undecided, as the BoE is still weighing the trade-offs between a direct model – in which the central bank directly manages transactions – and a hybrid model, where private institutions play a key role in processing payments.

 

United States (Proof-of-concept/Research stage)

The United States has been exploring the potential for a CBDC, with several key initiatives led by the US Federal Reserve. These projects range from research into the underlying technologies of CBDCs to proof-of-concept trials aimed at understanding the real-world applications of a “Digital Dollar”.

Initiated in 2020, the “Digital Dollar” project is currently in the research phase. In August 2020, the Federal Reserve published findings from its “FooWire” trial, which highlighted the potential of DLT for payment systems.

Additionally, the Federal Reserve Bank of Boston partnered with researchers from MIT’s Digital Currency Initiative (DCI) to embark on a multi-year collaboration aimed at building and testing a hypothetical open-source CBDC platform.

Launched in 2022, “Project Cedar Phase II” is part of a collaboration with “Project Ubin+”, a proof-of-concept project focusing on cross-border cross-currency transactions using wholesale CBDCs as settlement assets. The goal is to design a system that can achieve atomic settlement, a mechanism where both sides of a transaction are settled simultaneously, reducing the risks associated with cross-border payments.

The project aims to establish connectivity across multiple heterogeneous simulated currency ledgers to significantly reduce settlement risks, a major issue in international transactions.

In 2023, the Federal Reserve began further research into a “Wholesale Digital Dollar”, focusing on large-scale financial transactions between financial institutions.

Overall, the United States has adopted a cautious and thorough approach to exploring the potential of a “Digital Dollar”. Through a combination of research and proof-of-concept trials, the Federal Reserve is gradually building a body of knowledge that will inform its future decisions regarding the possible implementation of a CBDC. However, the Federal Reserve has not yet made a formal decision regarding the launch of a digital currency. The research continues to focus on understanding how a CBDC could integrate into the existing financial system and what challenges would need to be addressed for a full-scale implementation.

Footnotes[+]

Footnotes
↑1 Public University of Navarre (UPNA) and Institute for Advanced Research in Business and Economics (INARBE).

Filed Under: 2024, From the Editorial Desk

Numbers

April 18, 2023 by José Manuel Mansilla-Fernández

Authors

José Manuel Mansilla-Fernández[1]Public University of Navarre (UPNA) and Institute for Advanced Research in Business and Economics (INARBE).

 

Characteristics of Open Banking[2]We wish to thank Platformable for making their data available for our research.

Figure 1. APIs development by banks.

Notes: Own elaboration on Platformable and world Bank data. The figure reports the first 30 countries ordered by the ratio of the number of APIs developed by banks in the Platformable sample and the total number of banks in the country.

 

Figure 2a. APIs development by banks in different world regions.

 

Figure 2b. APIs development by banks in Europe.

Notes: Own elaboration on Platformable database. The vertical axis represents the average number of APIs developed by each bank of the sample. The whiskers represent the maximum and the minimum of the distribution. The box is divided into two parts by the median, i.e., the 50 percent of the distribution. The upper (lower) box represents the 25 percent of the sample greater (lower) than the median, i.e., the upper (lower) quartile. The mean of the distribution is represented by ×.

 

Figure 3: APIs development and bank size.

Notes: Own elaboration on Platformable database. Correlation between banks’ size measured as the natural logarithm of bank’s i total assets (Ln(Total assets)) in 2022Q3, which is represented in the horizontal axis, and the number of APIs in 2022Q3, which is represented in the vertical axis. The sample includes banks from Austria, Denmark, France, Greece, Ireland, Italy, The Netherlands, Spain, and the United Kingdom.

 

On FinTech companies

Figure 4: Use of FinTech-provided services.

Notes: Own elaboration on Platformable database. The vertical axis represents the different FinTech categories by functions. The horizontal axis represents the share of the number of FinTech companies included in Platformable by category. The sample includes FinTech companies from Europe, The United Kingdom, and the United States.

 

Figure 5: Users of FinTech-provided services.

Notes: Own elaboration on Platformable database. The horizontal axis represents different users of banking services provided by FinTech companies. The vertical axis the share of each users. The sample includes FinTech companies from Europe, The United Kingdom, and the United States.

Footnotes[+]

Footnotes
↑1 Public University of Navarre (UPNA) and Institute for Advanced Research in Business and Economics (INARBE).
↑2 We wish to thank Platformable for making their data available for our research.

Filed Under: 2022, From the Editorial Desk

Institutions

April 18, 2023 by José Manuel Mansilla-Fernández

Authors

José Manuel Mansilla-Fernández

 

Open banking frameworks

Open banking is defined as the “sharing of customers’ permissioned information held by banks with so-called ‘third-party’ developers, who can use them to build applications and services comprising payments, synthetic information for account holders, and other marketing and cross-selling opportunities” (BIS, 2019).[1]The term ‘third party’ can be defined as ‘legal entities’, rather than supervised banks. More precisely, ‘third parties’ can be supervised banks and / or regulated companies, sellers, and … Continue reading

Many authorities are planning to take actions to regulate Open Banking in their jurisdictions. A large part is following a prescriptive approach, which mandates banks to share customers’ information with the aforementioned ‘third parties’ willing to access, as long as they are included in a register established by regulatory authorities. Other jurisdictions are instead adopting a facilitating approach, avoiding explicit requirements to make data available to ‘third parties’ but providing guidelines or recommendations, as well as suggesting common standards for the application programming interfaces (API) used to access the data, that the whole industry is invited to adopt. Lastly, other authorities are following a market-driven approach, setting no specific rules the sharing of customers’ information between banks and ‘third parties’ (BIS, 2019). [2]The European Union countries follow the prescriptive approach. Japan, Hong Kong, Singapore, and Republic of Korea adopted the facilitative approach. Argentina, the US and China follow the … Continue reading Overall, the regulatory framework is still embryonic in many jurisdictions, and activities by regulators, banks and market developers are still in at the initial stage (OECD, 2023).

A thorough Open Banking framework can include rules, standards and practices aimed at solving the many issues that are likely to emerge from such a pervasive data-sharing environment. Most jurisdictions take the perspective of customer protection from possible problems caused by allowing access to bank customer-permissioned data to unregulated third (and possibly fourth, if data are further transmitted to other corporations) parties (Bains et al., 2022). From this perspective, a range of different authorities are involved in regulating open banking, including: i) bank supervisors, in their traditional role of with respect to the activities of regulated banks (that are the producers of customer data); ii) technical standards setting bodies, that establish standards for automated access to customer permissioned data through API, with a special focus on security and standardization, requiring all involved entities to comply with them; iii) competition authorities, that monitor, encourage and take actions to ensure the well-functioning of markets; iv) data privacy authorities, responsible of ensuring the protection customer data; v) alternative dispute resolution mechanisms, responsible of mediating disputes between consumers and financial service providers (BIS, 2019).

 

The regulatory framework in the European Union

The revised PSD2 (Directive (EU) 2015/2366), adopted from January 13th 2018, standardizes payment services across the European Union (EU hereafter), and is the reference framework for the regulation of the payment sector.

Among other seminal provisions – e.g., detailed security transactions for electronic payments – the PSD2 also establishes the key concepts for the definition of Open Banking, by including in the regulation the Payment Initiation Services (PIS) and the Account Information Services (AIS). In this regard, the Directive clarify that the ‘competition-enhancing objective’ by regulating services operating as competitors to main banks.[3]Art. 108 of The Directive foresees reporting on the application of PSD2 to the European regulatory institutions, i.e., the European Parliament and the Council, the European Central Bank and the … Continue reading An important step in this direction was the reply by EBA to a question raised by the Bank of Ireland on the interpretation of the Directive, stating that an AISP is not limited to providing the consolidated information on the different account positions to the payment service user, but with the user’s consent it can also make this information available to third parties (EBA, 2021).

Despite the innovative content of PSD2, a recent document by EBA (2022) assessing the impact of PSD2 came to the conclusion that significant areas are still to be addressed so as to achieve the objectives to enhance competition, facilitate innovation, increase security of payment transactions, ensure the neutrality of the business model, and build a ‘single EU retail payment market’. In particular, the EBA proposes detailed interventions in four areas: 1) the prudential framework on licencing payment companies under the PSD2 regulation; 2) the responsibility of funds transferred by ‘third-parties’;[4]In particular, EBA proposes for the Directive: (i) not to take into consideration maximum limits for the amount to block payers’ accounts if the transaction is known, but introducing some … Continue reading 3) the application of Secured Customer Authentication (SCA), especially regarding the regulation of the merchant-inititaled transactions; 4) the need to address social engineering fraud risk by introducing requirements on educational and awareness campaigns, incentivising Payment Service Providers (PSP hereafter) to invest in monitoring mechanisms and sharing information among PSPs related to possible cases of fraud or fraudsters. Interestingly, regarding the need for ensuring the maximum degree of ‘financial inclusion’, the EBA suggests that the Directive introduces a general provision taking into account vulnerability of customers. The EBA also suggests enhancing attention and training on authentication procedures.

 

The British regulatory framework

The United Kingdom’s (UK) Open Banking Initiative constitutes a reference worldwide. The Open Banking Working Group (OBWG hereafter) was created in September 2015 by HM Treasury to assess whether bank data sharing may benefit the whole sector. The group consists of representatives of financial institutions, open data groups such as the Open Data Institute (ODI hereafter), as well as consumers’ associations and representatives of ‘third-party’ corporations. The following year, the Group suggested that standardized APIs would be a useful step to facilitate the sharing of information. In addition, it argued that a decentralised system of Open Banking would be safer than a single, centralised system.

The crucial year for Open Banking in UK is 2017. The PSD2 was transposed into legislation with The Payment Services Regulation and the Competition and Markets Authority (CMA) conducted a ‘Retail Banking Market Investigation’, that reached the conclusion that “older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services” (CMA, 2016). As a result, the CMA introduced a major open banking initiative aimed at enhancing innovation and competition within the banking sector, requiring the nine largest banks to “give their personal and business customers the ability to access and share their account data on an ongoing basis with an authorised [by the government] third parties” (see Taylor-Kerr, 2020). Here, the term ‘third party’ refers to banks and FinTechs. Furthermore, the aforementioned banks were required to enable third parties to make payment services authorised by customers’ banks, the so-called payment initiation. Importantly, the access to the data must be free to the petitioner (under customers’ permission), and banks are mandated to allow it (Babina et al., 2022).

In allowing banks to access customers’ information, regulators intend to create an environment where financial might propose new or improved financial services for customers and enhancing competing environment.

Lastly, the Open Banking Implementation Entity’s (OBIE hereafter), which was created in May 2020 after a thorough consultation process, adjusted the ‘Roadmap’. The process was conducted in two steps of consultation: i) open workshops, and ii) the assessment over 75 pieces of feedback from representative stakeholders, including the banks, third party suppliers, and user representatives.

 

Regulatory framework in other jurisdictions

As argued above, the regulatory framework of open banking is still embryonic in many jurisdictions. This section describes briefly the situation and perspectives of Open banking around the World.

The Australian government introduced the Consumer Data Right (CDR hereafter) legislation in 2017. The CDR applies to a broad range of customers’ data, including banking, energy, telecommunication data information, which are aimed at generating interoperability across sectors. Furthermore, the Australian Open Banking application is exclusively dealing with data, but not on payments. Additionally, the Australian Competition Consumer Commission (ACCC hereafter) assumes the supervisory role, which is equivalent to that of the CMA in the UK, while operating along the Australian Payments Network. In this regards, Andi White, CEO of the Australian Payments Network, stated that “the regulatory stance is about a balance of stability and innovation but there is a desire for good competition with the rise of challenger banks” (ACCC, 2023).

In Canada, a consultation was announced in 2017 to analyse the capabilities of Open Banking for their banking sector. In particular, an ‘Advisory Committee on Open Banking’ was appointed to conduct the analysis, along with a secretariat within the Department of Finance. In June 2019, the ‘Standing Senate Committee on Banking, Trade and Commerce’ launched a report entitled “Open Banking: What It Means For You”, which deals with a number of recommendations aimed at consolidating the Open Banking in Canada (World Bank, 2022).

The Hong Kong Monetary Authority (HKMA) released the “Open API Framework for the Hong Kong Banking Sector” in July 2018. The HKMA is intended to allow their banking industry to set their own criteria without making it a regulatory requirement (HKMA, 2018).

India released the Unified Payment Interface (UPI) in 2016, which is developed by the National Payments Corporation of India (NPCI). The UPI allows data transfer among financial institutions using a strong API environment that includes a digital identity solution which is still missing in most European and US jurisdictions/markets. Importantly, a new category of entities called Account Aggregators act as data fiduciary managing data requests from institutions that have a legitimate interest and the providers of information, and the consent of the data subject. The model is a clear representation of the regulatory approach. Importantly, it does not pre-judge the type of services the data receivers will offer, and allows all institutions regulated by any of the financial sector regulators in India and the Department of Revenue, Government of India to be able to participate as data receivers (see Natarajan, in this issue).

In Japan, the Amended Banking Act introduces a system for TPPs and establishes the environment for the banks-TPPs collaborations, in addition to other voluntary partnerships among banks to release ‘digital payments initiatives’. However, the activities of adopting ‘third parties’ are still in a preliminary phase, partly because of the difficulty in negotiating contracts between banks and FinTechs.

Mexico has implemented a model similar to the British one, but considering ‘premium’ versions for APIs. In March 2018, Mexico passed the ‘Financial Technology Institutions Law’ (The FinTech Law) aimed at regulating the FinTech and the Open Banking companies. The Mexican government is now finalising its implementation. The National Banking and Securities Commission will be the Open Banking regulatory framework, which is also intended to enhance innovation and financial inclusion (Greenberg and Traurig, 2020).

New Zealand implemented a model of Open Banking similar to the British one. The similarity results from the tight collaboration between both jurisdictions, conducted under the administration of the local payments associations, namely PaymentsNZ. Furthermore, New Zealand’s programme includes information about customers’ accounts and their payments (World Bank, 2022).

In Nigeria, the ‘Open Technology Foundation’ launched the Open Banking Nigeria (OBN hereafter) in 2018, which was aimed at fostering innovation in the Nigerian banking sector. OBN was intended to standardize open APIs as well as foster financial institutions and FinTechs to open their APIs protocols. Unlike other Open Banking jurisdictions, OBN regards excessive the British standards for the Nigerian purposes. Hopefully, Nigeria is designing suitable standards for the needs of their banking sector, and for other West African countries. The OBN’s API framework is expected to reduce the cost of innovation and to provide a good customer experience (Kassab and Laplante, 2022; ODI, 2020).

In Singapore, banks are encouraged to adopt APIs to accelerate the implementation of Open Banking. The Monetary Authority of Singapore (MAS hereafter) is not directly intervening, but together with the Association of Banks in Singapore has released an API typescript to encourage financial institutions to take part in the programme. As a result, several banks are launching their own API portals (e.g., Citibank, DBS, Standard Chartered, among others).

In the US, the so-called “NACHA’s API standardisation programme”, which was announced in 2017, focusses on three areas: i) fraud; ii) customers’ information sharing; iii) access to payment services. Additionally, the Consumer Financial Protection Bureau’s principles advice banks to include APIs for customers’ information sharing.

 

References

Australian Competition and Consumer Commission (ACCC) (2023). The consumer data rights. Available at: https://www.accc.gov.au/focus-areas/the-consumer-data-right (Accessed on 23 March 2023).

Babina, T., Buchak, G. and Gornall, W. (2022). Customer Data Access and Fintech Entry: Early Evidence from Open Banking. Mimeo.

Bains, P., Sugimoto, N., and Wilson, C. (2022). BigTech in Financial Services: Regulatory Approaches and Architecture, FinTech Notes. Available at: https://www.elibrary.imf.org/view/journals/063/2022/002/article-A001-en.xml (Accessed on 22 March 2023).
Badour, A., and Presta, D. (2018). Open Banking: Canadian and international developments. Banking & finance law review, 34(1): 41-47.

BIS (2019). Report on open banking and application programming interfaces. Basel Committee on Banking Supervision. Available at: https://www.bis.org/bcbs/publ/d486.pdf (Accessed on 15 February 2023).

Competition and Markets Authority (CMA) (2022). Retail banking market investigation. Avaulable at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1048212/Final_revised_Agreed_Arrangements_190122.pdf (Accessed on 22 March 2023).

Competition and Markets Authority (CMA) (2016). CMA paves the way for Open Banking revolution. Available at: https://www.gov.uk/government/news/cma-paves-the-way-for-open-banking-revolution (Accessed on 22 March 2023).

EBA (2022). Opinion of the European Banking Authority onitstechnicaladvice on thereview of Directive(EU) 2015/2366onpayment services in the internal market (PSD2). Available at: https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Opinions/2022/Opinion%20od%20PSD2%20review%20%28EBA-Op-2022-06%29/1036016/EBA%27s%20response%20to%20the%20Call%20for%20advice%20on%20the%20review%20of%20PSD2.pdf (Accessed on 15 February 2023).

EBA (2021). Guidelines on customer due diligence and the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions (‘The ML/TF Risk Factors Guidelines’) under Articles 17 and 18(4) of Directive (EU) 2015/849. (Accessed on 22 March 2023). Available at: https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Guidelines/2021/963637/Final%20Report%20on%20Guidelines%20on%20revised%20ML%20TF%20Risk%20Factors.pdf

GreenbergTraurig (2020). New Open Banking Regulation in Mexico. Alert – Financial Regulatory & Compliance. Available at: https://www.gtlaw.com/en/insights/2020/6/open-banking-en-mexico-nueva-regulacion (Accessed on 23 March 2023).

Hong Kong Monetary Authority (2018). Open API Framework for the Hong Kong Banking Sector. Available at: https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2018/20180718e5a2.pdf (Accessed on 22 March 2023).

Kassab, M., and Laplante, P.A. (2022). Open Banking: What It Is, Where It’s at, and Where It’s Going. Computer, 55: 53-63 DOI: 10.1109/MC.2021.3108402.

Leong, E., and Gardner, J. (2022). Open Banking in the UK and Singapore: Open Possibilities for Enhancing Financial Inclusion. Journal of Business Law, 5: 424-453. DOI: http://dx.doi.org/10.2139/ssrn.4194256.

Natarajan, H. (2022). Regulatory Aspects of Open Banking: The Experience thus Far. European Economy. Banks Regulation, and the real Sector, this issue.

Open Data Institute (ODI) (2020). Open Banking preparing for lift off. Purpose, Progress & Potential. Available at: https://www.openbanking.org.uk/wp-content/uploads/open-banking-report-150719.pdf (Accessed on 23 March 2023).

OECD (2023). Data portability in open banking: Privacy and other cross-cutting issues. OECD Digital Economy Papers, No. 348, OECD Publishing, Paris, DOI: https://doi.org/10.1787/6c872949-en.

Parliament of Canada (2019). Open Banking: What it means for you. Senate, Ottawa, Ontario, Canada, K1A 0A4. Available at: https://sencanada.ca/content/sen/committee/421/BANC/reports/BANC_SS-11_Report_Final_E.pdf (Accessed on 2 March 2023).

Taylor-Kerr, A. J. (2020). Adopting Open Banking in Canada: An Analysis of Current Global Frameworks (Unpublished master’s project). University of Calgary, Calgary, AB. URI: http://hdl.handle.net/1880/114213

World Bank (2022). Technical Note on Open Banking. Comparative Study on Regulatory Approaches. Available at: https://elibrary.worldbank.org/doi/abs/10.1596/37483 (Accessed on 2 March 2023).

Legislation cited

The CDR Treasury Laws Amendment (Consumer Data Right) Act 2019. Available at: https://www.oaic.gov.au/consumer-data-right/cdr-legislation (Accessed on 15 February 2023).

Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (Text with EEA relevance).

Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC.

Hong Kong Monetary Authority (2018). Open API Framework for the Hong Kong Banking Sector. Available at: https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2018/20180718e5a2.pdf (Accessed on 15 February 2023).

Japan. Act No. 59 of 1981, as amended (Banking Act). Available at: https://uk.practicallaw.thomsonreuters.com/w-007-5339?transitionType=Default&contextData=(sc.Default)&firstPage=true (Accessed on 15 February 2023).

Mexico. DECRETO por el que se expide la Ley para Regular las Instituciones de Tecnología Financiera y se reforman y adicionan diversas disposiciones de la Ley de Instituciones de Crédito, de la Ley del Mercado de Valores, de la Ley General de Organizaciones y Actividades Auxiliares del Crédito, de la Ley para la Transparencia y Ordenamiento de los Servicios Financieros, de la Ley para Regular las Sociedades de Información Crediticia, de la Ley de Protección y Defensa al Usuario de Servicios Financieros, de la Ley para Regular las Agrupaciones Financieras, de la Ley de la Comisión Nacional Bancaria y de Valores y, de la Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita. Available at: https://www.dof.gob.mx/nota_detalle.php?codigo=5515623&fecha=09/03/2018#gsc.tab=0 (Accessed on 15 February 2023).

Footnotes[+]

Footnotes
↑1 The term ‘third party’ can be defined as ‘legal entities’, rather than supervised banks. More precisely, ‘third parties’ can be supervised banks and / or regulated companies, sellers, and other payment companies.
↑2 The European Union countries follow the prescriptive approach. Japan, Hong Kong, Singapore, and Republic of Korea adopted the facilitative approach. Argentina, the US and China follow the market-driven approach. Lastly, Brazil, Canada, Russia, and Turkey are in process of adopting their approach.
↑3 Art. 108 of The Directive foresees reporting on the application of PSD2 to the European regulatory institutions, i.e., the European Parliament and the Council, the European Central Bank and the Economic and Social Committee. In October 2021, the Commission’s ‘Call of Advice’, which was addressed to the EBA, was aimed at gathering information about the repercussions of the PSD2. The Art. 16a(4) of Regulation (EU) No 1093/2010 (EBA Regulation) establishes the EBA’s competence to give this opinion (see EBA 2021, 2022).
↑4 In particular, EBA proposes for the Directive: (i) not to take into consideration maximum limits for the amount to block payers’ accounts if the transaction is known, but introducing some requirements, (ii) to clarify the regulatory treatment of transactions when the final and the initial transactions are different; (iii) to clarify the distribution of responsibility between TPPs and and account service providers (ASPSPs) and between the issuing and acquiring PSPs when a secured customer authentication (SCA) exemption has been applied; and (iv) to clarify the terms ‘reasonable grounds to suspecting fraud’, ‘fraudulent act’, ‘gross negligence ‘and others, to avoid legal uncertainty and/or applying inconsistently the Directive regarding unauthorized transactions.

Filed Under: 2022, From the Editorial Desk

A Bird Eye (Re)view of Key Readings

April 18, 2023 by José Manuel Mansilla-Fernández

Authors

José Manuel Mansilla-Fernández

 

This journal section indicates a few briefly commented references that a non-expert reader might want to cover to obtain a first informed and broad view of the theme discussed in the current issue. These references are meant to provide an extensive, though not exhaustive, insight into the main topics of the debate. More detailed and specific references are available in each article published in the current issue.

 

On the functioning of Open Banking

Banking institutions allow access to their data through application programming interfaces (APIs hereafter) to third-party services providers (TSPs hereafter) to create new services, analytics, and financial products to improve customers’ services. In this regard, Open Banking is thought to support customer requirements and TSPs innovation to identify further customers’ needs and accelerate financial inclusion. The critical point is to preserve the privacy of depositors, borrowers, investors, and other types of personal information (PI). When disclosing APIs to TSPs, financial institutions might be afraid due to possible attacks to their customers by malicious software (Liao et al., 2022).

Notably, APIs can be defined as mechanisms through which computers communicate with each other using common languages. Software systems operate among themselves through standardized protocols and standard interfaces (Cowhey et al., 2009). In this regard, APIs enable such interfaces to communicate with one another, making information and contents approachable (Bodle, 2011). Furthermore, APIs technologies reduce abstraction and complexity, allowing API-consuming systems to communicate without previous conditions regarding the origin of the applications (Zachariadis and Ozcan, 2017).

Interestingly, the banking industry is experiencing a process of platformization, in which technology is used to connect people, organisations and resources in an interactive ecosystem (Parker et al, 2016; Van Dijck et al., 2014, 2018). Formally speaking, Open Banking, has been expanded worldwide, and it has become one of the most prominent strengths of the banking industry (Brackert et al., 2019; Ziegler, 2021). The cornerstone of Open Banking is to ensure sharing, provided there is consent. Interestingly, despite this simple process, data-sharing rights might be the main limitation for fostering the revolution of the banking industry from the conventional business models to ‘open platforms’, as happened in other industries such as the telecommunication sector (Babina et al., 2022; Westermeier, 2020). Indeed, platform-business models might have repercussions on competition since they rely on network externalities, as further discussed in the next section (Barba Navaretti et al., this issue).

Open Banking encourages innovation between financial institutions and TSPs. Consequently, customers’ account transactions are regarded as ‘banks’ assets’, but Open Banking allows customers to share their information with other TSPs through APIs (Almehrej, et al., 2020). Interestingly, the Open Banking Implementation Entity (OBIE) aimed to develop APIs standards for Open Banking in the UK. The OBIE requires British banks to verify TSPs (consent) access to users’ data. Liao et al. (2022: 451) identify the following three phases to implementing Open Banking:

  1. Requiring public information about time deposit interests, currency exchange, and mortgage interest rates. This information, which banks must post, must be verifiable by users.
  2. TSPs will access users’ data to supply integrated account services. This phase focuses on customers’ information, e.g., their deposits, credit, and investments for multiple banks integrated into a single set.
  3. Lastly, users can link payments and funds among different sources via ATP-providers Apps. This phase focuses on transaction information about loan repayments, authorisations, and several types of transactions.

An essential issue in Open Banking is that of security and data protection. Interestingly, blockchains which distribute digital blocks containing cryptographic linking information, can help protect customers’ privacy, ensure the safety of transactions, and provide safe scenarios, particularly for third parties (Chen et al., 2016; Chiu et al., 2021).[1]An example is Ethereum blockchain platform is an example of smart-contact (SC hereafter), which might improve control over customers’ changes of authorisations (Liao et al., 2022). Wang et al. (2020) assess methodologies employed to classify data privacy and ‘disclosure schemes’ for protecting customers’ privacy, which must concord with possible deficiencies in Open Banking blockchain, e.g., privacy-preserving granularity, over-complexities of banking subsystems, or hierarchical data management. Mukhopadhyay and Ghosh (2021), based on a systematic customer consent management analysis, set up a TPST classification to facilitate customers making consent decisions. Noting that private information has higher standards of authentication and requirements, Xu et al. (2020) built a considerable data-sharing model to ease banks and customers access to TSP information. Based on an analysis of security risks, Zhang et al. (2019) propose a data-sharing scheme and API agreement to safeguard APIs from malware. Likewise, Dong et al. (2020) describe that a blockchain-based SSI model wbhci might be able to address data privacy issues, involving registry and controlling contracts to enhance user identity changes.

 

The impact of Open Banking on competition

Economic literature usually compares traditional banks and FinTech companies when competing.

He et al. (2022a,b,) develop a model in which Open Banking may enhance credit competition between banks and FinTech companies by augmenting banks’ and FinTechs’ efficiency in screening borrowers. Accordingly, customers with higher creditworthiness will have better access to credit than those relatively worse classified. A key element of Open Banking is that customers keep control of the data they are willing to share with third-parties, which can reveal information about their creditworthiness. Lastly, Open Banking can disclose non-financial information about (FinTech) lenders. Nonetheless, little is known about how FinTechs can make relatively more targeted credit offers which can impact competition.

The irruption of FinTech (e.g., Vives, 2019) changed the sources of information production and diffusion.[2]The term Open Banking refers to data sharing of customers’ information that banks possess with the so-called ‘third-party’ (See Instititution in this issue), whereas the concept of FinTech … Continue reading Berg et al. (2020, 2021) show that digital footprints – which refers to the trail of data that a person leaves on the Internet, including visits to websites, emails, etc. – might be a valuable tool to predict consumers’ default and it might be a complementary source to traditional credit agencies. Similarly, Fuster et al. (2019) assess the mortgage credit market and show that FinTech lenders’ advantages from technology augment their origination efficiencies. Remarkably, Di Maggio and Yao (2021) show that FinTech lenders grant to borrowers of relatively better creditworthiness by financing consumer credit, who later on default ex post more frequently than similar borrowers applying to other lenders. Di Maggio et al. (2022) suggest that some borrowers wishing immediate consumption apply to FinTechs, thus exacerbating their self-control issue over overborrow.

Focusing explicitly on Open Banking, Parlour et al. (2022) investigate the case of a bank operating in both payments and credit markets. The authors assume that the bank is a monopolist in the credit market but competing with another stand-alone FinTech on payment services. A crucial assumption is that customers’ payment services provide information about their creditworthiness. Within this framework, customers might anticipate that changing their payment service to FinTech might impact their credit service. Notwithstanding, there is no implication on the equilibrium of credit quality.

On the empirical side, Buchak et al. (2018) investigates the mortgage market and explain that advances in banking regulation significantly contributed to growing FinTechs. Besides, Tang (2019) introduces a regulatory ‘shock’ that shortens bank credit to find that peer-to-peer (P2P) platforms can substitute banks in the consumer credit segment. On th supply side, Feyen et al. (2022c) conducted a survey that reveals that banks and Fintechs do not see each other as competitors. Likewise, Fintech firms expect to compete with their counterparts like BigTechs, platforms, or aggregators; whereas banks see neo-banks as their competitors. However, economies of scale and network economies are expected to consolidate large multi-product institutions, e.g., large banks, FinTechs, and BigTechs (Feyen et al., 2022a,b).

Babina et al. (2022) recently studied open banking using a handful of data sources, including hand-collected data. Their findings show little effect of open banking on competition in the banking sector. They provide two main explanations of this result. First, the phenomenon of OB is still embryonic and data are not entirely reliable. Second, real effects can take a while to be visible substantially. Interestingly, they find that Open Banking might reduce adverse selection against new entrants and augment formers’ product quality. Consequently, Open Banking fosters innovation. These results suggest two interesting areas for policymakers. First, Open Banking diminishes banks’ incentives to generate value by capturing customers’ data. Secondly, ‘data sharing’ hurt customers who opt-out from sharing might be harmed since they might be perceived as credit-worthless borrowers, i.e., they are sending negative signals to the market. Consequently, the effects can be unpredictable because Open Banking data can be used to screen potential renters and customers who are unwilling to share information about their levels of risk, thus being removed from ‘basic housing markets’.

 

Financial inclusion and consumer protection

Financial inclusion can be defined as a measure of the degree to which individuals and companies can access financial services. The maintained assumption is that financial inclusion can substantially improve people’s well-being. Digital financial services might offer important opportunities for inclusion and resilience. In this regard, financial literacy and digital skills play an important role in correctly managing the aforementioned financial applications from a young age (Bianco et al., 2022).

The economic literature suggests that the market equilibrium depends on the context of consumer privacy preferences. Jones and Tonetti’s (2020) theoretical model shows that consumers’ data ownership frequently leads to broader data management than firm ownership, thus enhancing welfare due to the non-rivalry of such usage. Likewise, Ichihashi (2020) shows that sellers might use consumers’ information, particularly when revealing their preferences, to recommend specific products and implement price discrimination, the so-called multi-product monopoly. More precisely, they show that the seller is incentivized not to discriminate consumers in price to encourage consumers to share their information, but it harms consumers in equilibrium since firms might set constant prices anticipating the clearing of the market. Similarly, Ali et al. (2022) find that sharing information about preferences with firms might amplify price competition and benefit consumers. Interestingly, Liu et al. (2020) analyze the implications of consumers’ privacy when introducing a ‘consumption good’ and a ‘temptation good’. Data sharing might manipulate consumers’ behaviour, improving the efficiency of the ‘consumption good’, but inducing behaviorally biased consumption towards the ‘temptation good’. In particular, Ali et al. (2022) emphasize differences between the EU consumer privacy regulation, namely General Data Protection Regulation (preferred opt-out choice), and the California Consumer Privacy Act (opt-in preferred choice) (see also Kshetri and Voas, 2020).

 

References

Ali, S.N., Lewis, G., and Vasserman, S. (2022). Voluntary Disclosure and Personalized Pricing, The Review of Economic Studies, forthcoming.

Almehrej A., Freitas L., Modesti P. (2020). Security analysis of the open banking account and transaction API protocol. arXiv preprint arXiv:2003.12776

Babina, T., Buchak, G., and Gornall, W. (2022). Customer data access and Fintech entry: Early evidence from open banking. Stanford University Graduate School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=4071214 or http://dx.doi.org/10.2139/ssrn.4071214

Berg, T., Burg, V., Gombović, A., and Puri, M. (2020). On the rise of fintechs: Credit scoring using digital footprints. Review of Financial Studies, 33: 2845-2897.

Berg, T., Fuster, A., and Puri, M. (2021). Fintech lending, Discussion paper National Bureau of Economic Research.

Bianco, M., Marconi, D., Romagnoli, A., and Stacchini, M. (2022). Challenges for financial inclusion: the role for financial education and new directions. Questioni di Economia e Finanza (Occasional Papers) 723, Bank of Italy, Economic Research and International Relations Area. Available at: https://www.bancaditalia.it/pubblicazioni/qef/2022-0723/QEF_723_22.pdf

Bodle, R. (2011). REGIMES OF SHARING, Information, Communication & Society, 14: 320-337.

Brackert T, Chen C, Colado J, Desmangles L, Dupas M, Roussel P. The race for relevance and scale. Boston Consulting Group; 2019 [cited 2022 Sep 17]. Available from: https://www.bcg.com/publications/2019/global-retail-banking-race-for-relevance-scale.

Buchak, G, Matvos, G., Piskorski, T., and Seru, A. (2018). Fintech, regulatory arbitrage, and the rise of shadow banks, Journal of Financial Economics, 130: 453-483.

Chen M., Qian Y., Chen J., Hwang K., Mao S., and Hu L. (2016). Privacy protection and intrusion avoidance for cloudlet-based medical data sharing. IEEE Transition on Cloud Computing.

Chiu W.-Y., Meng W., and Jensen C.D. (2021). My data, my control: A secure data sharing and access scheme over blockchain. Journal of Information Security and Applications, 63, Article 103020

Cowhey, P. F., Aronson, J. D. and Abelson, D. (2009) Transforming Global Information and Communication Markets: The Political Economy of Innovation, Cambridge, MA: The MIT Press.

Daiy A.K., Shen K.-Y., Huang J.-Y., and Lin T.M.-Y. (2021). A hybrid MCDM model for evaluating open banking business partners. Mathematics, 9: 587.

Di Maggio, M., and Yao, V. (2021). Fintech borrowers: Lax-screening or cream-skimming? The Review of Financial Studies, 34: 4565-4618.

Di Maggio, M., Ratnadiwakara, D., and Carmichael, D. (2022). Invisible primes: Fintech lending with alternative data. NBER Working Paper 29840. DOI: 10.3386/w29840.

Dong C., Wang Z., Chen S., and Xiang Y. (2020). BBM: A blockchain-based model for open banking via self-sovereign identity. International Conference on Blockchain, Springer: 61-75.

Feyen, E.H.B., Frost, J., Gambacorta, L., Natarajan, H., and Saal, M. (2022a). Fintech and the Digital Transformation of Financial Services – Implications for Market Structure and Public Policy (English). Washington, D.C. : World Bank Group. Available at: http://documents.worldbank.org/curated/en/099735304212236910/P17300608cded602c0a6190f4b8caaa97a1

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Footnotes[+]

Footnotes
↑1 An example is Ethereum blockchain platform is an example of smart-contact (SC hereafter), which might improve control over customers’ changes of authorisations (Liao et al., 2022).
↑2 The term Open Banking refers to data sharing of customers’ information that banks possess with the so-called ‘third-party’ (See Instititution in this issue), whereas the concept of FinTech focusses on the (Internet-based) technology (see Institutions of the 2017.2 issue of European Economy) that might allow lenders and/or ‘third parties’ to process the aforementioned customers’ information.

Filed Under: 2022, From the Editorial Desk

A Bird Eye (Re)view of Key Readings

April 26, 2022 by José Manuel Mansilla-Fernández

This journal section indicates a few and briefly commented references that a non-expert reader may want to cover to obtain a first informed and broad view of the theme discussed in the current issue. These references are meant to provide an extensive, though not exhaustive, insight into the main topics of the debate. More detailed and specific references are available in each article published in the current issue.

On the relevance of climate change risks

Understanding the effects of climate change on the financial system has emerged as one of the forefront issues globally (Hong et al., 2019, 2020). Climate change is believed to increase the frequency and intensity of extreme weather events, raise average temperatures, and rising sea levels. Importantly, climate change already impacts economic and financial outcomes, which might have negative repercussions on financial systems. Correlated risks from climate change shocks could have effects beyond individual banks and borrowers to the broader financial system and economy. In this regard, in the pricing of residential mortgages does not incorporate climate change risks, a sudden correction could result in large-scale losses to banks, leading to reduced lending supply and jeopardizing financial stability. The subsequent declines in wealth could amplify the effects of climate change on the real economy, thus producing knock-on effects on financial markets (Nguyen et al., 2021).

Financial institutions must assess their vulnerabilities to relevant climate risks, as well as risks’ likely persistent and breadth, to be able to continue meeting the financial needs of households and companies when hit by disruptions caused by climate change. Remarkably, considering climate risks is relevant from the regulatory point of view. In this vein, the Federal Reserve created a dedicated supervision climate committee to observe the risks of climate change to individual banks. Likewise, the Bank of England expects its banks to understand and assess the financial risks related to climate change (Nguyen et al., 2021).

The recent studies are focused on exploring the ex-post effects of acute hazards, e.g., storms, floods, wildfires, on banks. In this regard, North and Schüwer (2018) show that natural disasters weaken financial stability. Similarly, Issler et al. (2020) find an augment in mortgage delinquency and foreclosure after wildfires. Ouazad and Kahn (2021) find that lenders are more likely to approve mortgages that can be securitized after hurricanes. Unlike acute hazards, the chronic ones -e.g., slow increases in sea levels- introduce the possibility that losses may arise from natural disasters. Despite the risk of chronic hazards causing losses, economists still know little about how such risks are priced ex-ante by banks. Consequently, more research is needed to understand how climate risk can be priced -ante by financial institutions, particularly the pricing of loans.

Interestingly, banks may not be able to price long-term climate change risks. The Board of Governors of the Federal Reserve System (2020a, b) estates that banks’ models still lack the necessary geographic precision or horizons to price climate risks. Another challenge can be uncertainty regarding the time horizon over climate risk can be materialized (Barnett et al., 2020). Furthermore, many banks still rely on traditional backward-looking models based on historical exposures, which might not adequately reflect climate risks’ complex and continuous changing nature. Moreover, considering the set of risks that banks are currently facing -e.g., cybersecurity, geopolitical risks, and risks associated with the credit cycle-along with the relative long-term horizon around climate change and risk (Nyberg and Wright, 2015). For instance, sea levels rise is a non-conventional risk and therefore, lenders pay equal attention to this risk or incorporate it into their pricing loan decisions (Jiang et al., 2020).

On carbon pricing and its repercussions on lending

Research on carbon risk is still embryonic. Stranded assets are physical assets whose value declines substantially due to climate risk. The carbon reduction requirements in the Paris Agreement and the policies oriented to fossil fuel firms might not be able to fully utilize their existing fossil fuel reserves (McGlade and Ekins, 2015), leading to a decline in the financial values of such reserves. The carbon risk from stranded assets in the fossil fuel industry can be priced, which constitutes an approach for assessing climate-related financial risks. However, carbon risk goes beyond stranded assets. Firms issuing large volumes of carbon are relatively more likely to suffer financial penalties if environmental policies tighten. Direct penalties can result from additional costs of carbon taxes on firms’ emissions. These can apply to firms in all industries with a carbon footprint and are not limited to fossil fuels producers (Ehlers et al., 2021).

The pricing of carbon risk in the loan markets changed significantly after the Paris Agreement.[1]See the Institutions section in this issue. The difference in risk premia due to carbon emission intensity is apparently across industry sectors. Additionally, this phenomenon is broader than simply stranded assets in fossil fuel emissions or other carbon-intensive industries. Including loans fees and the premium is not prevalent in the years before the Paris Agreement, which increased banks’ awareness of carbon risk (Krueger et al., 2020). However, Delis et al. (2021) assess syndicated loan data for fossil fuel firms to investigate whether banks price the risk of stranded assets.[2]The corporate loan market, and specially the syndicated loans markets, constitutes an ideal laboratory to test hypotheses about the effects of climate change / risk on loan pricing, because banks … Continue reading They reveal that only after the 2015 Paris Agreement banks started pricing the risk of stranded assets related to fossil fuel reserves. Similarly, Kleimeier and Viehs (2018) also use syndicated loans data to investigate if forms voluntarily disclose their carbon emissions to the Carbon Disclosure Project, which allows them to reduce their cost of credit compared to non-disclosing firms. This result supportcs Antoniou et al. (2020), who theoretically find that loans spreads for firms participating in cap-and-trade programs function the cost of compliance and the specific features of the permits markets. Using the EU Emission Trading System, which is designed to pass the cost of CO2 emissions to polluters, this study suggests that the higher permits storage and lower permit prices, the lower firm financing costs.

Importantly, banks have started to internalize possible risks from the transition to a low-carbon economy across various industries. Krueger et al. (2020) suggest that carbon emissions indirectly caused by production inputs were not priced at the margin, suggesting that the overall carbon footprint is less of a concern to banks those direct missions. Likewise, Bolton and Kacperczyk (2021) find that the likelihood of disinvestment by institutional investors significantly augments with the degree and intensity of emissions directly attributable to firms. This suggests potential for ‘green-washing’ since the aforementioned emissions mentioned above can be reduced simply by outsourcing carbon-intensive activities withoutlowering the firm’s carbon footprint (Ben-David et al., 2018).

On the impact of climate change on equity markets

So far, research on the pricing of climate change risk, including carbon risk, has focused on the pricing of climate-related risks in equity markets. Recently, economists indicated that a transition risk premium in equity and option markets, which seems to be more pronounced in times of high climate change awareness. Mainly, the price of protection of option securities against the downside tail risk is higher for carbon-intense firms. In this regard, Bolton and Kacperczyk (2021) identify a carbon premium in the cross-section of the US stock market over the last decade. Particularly, the 2016 US climate policy shocks (the Trump election who appointed Scott Pruit, a climate sceptic, as administrator of the US Environmental Protection Agency) provide additional evidence that firms’ exposure impacts on their stock market valuation (Ramelli et al., 2021). Consequently, the valuation of carbon-intense firms rose. Goergen et al., (2020) assess carbon risk measures based on the firm’s overall strategy and its operational exposure to transition risk, including carbon emissions. Although they find that carbon risk is a priced risk factor, it does not find any evidence for a carbon premium in the global equity market.

On the capacity of banks to boost the climate change

As major providers of credit, banks are the key players in the effort to transition from a brown to a green economy. The momentum established by the COP21 enlarges the set of investment opportunities to finance green projects and renewable energy. Indeed, investment in the green economy has recently increased and is expected to grow enormously in market share (IEA, 2015; International Renewable Energy Agency, 2016). This increase is motivated by a growing consensus that supports movements towards a low-carbon economy and technological improvements that will lead to cost reductions in renewable energy, making alternatives to fossil fuel more appealing (Mazzucati and Perez, 2015; Krueger et al., 2015).

This might raise the question of how climate risks might directly impact financial institutions. Importantly, banks take on new risks in this regard, particularly physical and transition risks. On the one hand, physical risks arise from weather and climate-related disasters (Nordhaus, 1977; Stern, 2008; Nordhaus, 2019). These events can damage properties, reduce agricultural productivity, and impact deleteriously on human assets (Deryugina and Hsiang, 2014; O’Neil et al., 2017). Should this reduce the firms’ profitability and deteriorate their balance sheets, banks would be negatively affected in terms of asset values, collateral quality, and credit risk exposure. Furthermore, banks suffering large losses could diminish their lending availability, thus exacerbating the financial impact of physical risks by reducing credit supply. The blossoming literature provides theoretical and empirical evidence that banks should consider such physical risks in their investment decisions. Accordingly, Addoum et al. (2019) and Pankratz et al. (2019) show a negative correlation between firms exposed to extreme temperatures and profitability. Balvers et al. (2017) find that firms suffering from relatively high temperatures have higher cost of capital. This result connects with the literature advocating that extreme weather events are incorporated to stock and option markets (Dell et al., 2014; Kruttli etal., 2019; Choi et al., 2020).

On the other hand, banks should face transition risks that might arise from adjustments made toward developing a green economy. Particularly, transition risk depends on the timing and the speed of the process. Unanticipated changes in climate polices, regulations, technologies, and market sentiment could reprice the value of bank assets (CISL, 2019; Hong et al., 2019). Consequently, banks exposed to climate-sensitive sectors might be forced to fire carbon-intensive assets, leading to liquidity problems (Pereira da Silva, 2019). Therefore, this could create uncertainty and procyclicality and increase banks’ market risk (BoE, 2018). Transition risks could impact on bank credit risk if new technologies or changes in consumer behaviour towards “environmentally friendly” sectors lowered carbon-intensive firms’ profitability, further increasing their default risk (Krueger et al., 2020). Reghezza et al. (2021) analyse whether climate-oriented regulatory policies impact the flow of credit towards polluting corporations. Following the Paris Agreement, they find that European banks reallocated credit away from polluting companies. Consequently, green regulatory initiatives in banking can significantly impact on combating climate change.

Importantly, the COP21 is expected to impact the banking sector’s decisions. De Greiff et al. (2018) and Degryse et al. (2020a, b) assess the effect of climate risks on pricing in the syndicated loans. Since the COP21, banks have charged a premium for climate risk driven by increased awareness of climate policy-related risks. In particular, green firms have borrowed at comparatively lower prices since COP21 came into force.
Likewise, Delis et al. (2018) analysed the risk stemming from stranded fossil reserves, suggesting that, after 2015, banks started to price climate policy exposure by raising the cost of credit due to their awareness of transition risk. Ilhan et al. (2018), using a sample of high-emission industries in the S&P 500 before and after COP21, find that investors already incorporate information on climate-related risks when assessing risk profiles. Ginglinger and Moreau (2020) show that, after COP21, French companies subject to large climate risks reduced their leverage.

Regarding the financial system structure, De Haas and Popov (2019) find evidence of relatively lower CO2 emissions in more equity-funded economies, and they argue that stock markets contribute to reallocating investments toward less polluting industries. Similarly, Mesonnier (2019) investigates whether French banks reallocate credit from low intensive industries over the 2010-2017 period. They find that French banks reduce credit provision to more polluting industries.

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Footnotes[+]

Footnotes
↑1 See the Institutions section in this issue.
↑2 The corporate loan market, and specially the syndicated loans markets, constitutes an ideal laboratory to test hypotheses about the effects of climate change / risk on loan pricing, because banks that are the lead arrangers of syndicated loans are informed and incentivized to monitor, and data are widely available (Delis et al., 2021).

Filed Under: 2021.2, From the Editorial Desk

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