Bahrain takes the lead on 'open banking' in the Middle East

The new regulations seek to enable third party payment initiation service providers (PISPs) and account information service providers (AISPs) to gain "unhindered and efficient" access to bank customer accounts, with a view to those companies providing innovative new services to those customers in Bahrain.

Examples of new services that open banking could provide for include "new channels for internet payments without the use of credit cards/debit cards", the aggregation of account information from different providers, and "proactive financial management and budgeting tools for users", according to the Central Bank of Bahrain (CBB), which published the regulations last month.

The new regulations are loosely based on the regulatory technical standards for strong customer authentication and common secure open standards of communication which underpin the reforms provided for in the EU's second Payment Services Directive (PSD2). Like under PSD2, retail banks will need to ensure that they only provide access to customer accounts where customers give their consent.

The timeframe for implementation is very short. Retail banks operating in Bahrain must provide the CBB with implementation plans before 31 January 2019, and arrangements to implement the requirements must be completed by 30 June 2019. Banks must notify the CBB where delays in implementation are anticipated, along with their plans to remedy such delays.

Marie Chowdhry, an expert in financial regulation in the Middle East at Pinsent Masons, the law firm behind Out-Law.com, said that the precise scope of products caught by the regulations remains unclear. She therefore encouraged banks operating in Bahrain to carry out an immediate review to understand which of their products and services are affected.

"Retail bank licensees in Bahrain should analyse the extent of their operations in Bahrain which could be caught by the requirements – this means reviewing the scope of their products available online, the functionality of these products, which customer segments these products are made available to, as well as the number of customers impacted," Chowdhry said.

There is also an opportunity for retail banks to shift their strategic position in the Bahrain market as a result of the open banking reforms, she said, urging institutions to consider whether they have the appetite to also provide new account information or payment initiation services that are envisaged under the new regulations.

Bahrain's open banking framework, similar to the requirements that have been stipulated under the EU's PSD2 framework, are stated as being "technologically neutral". Nevertheless, banks must provide a facility for new AISPs and PISPs to test their integration with the relevant interface – which in many cases will be a dedicated application programming interface (API). However, the regulations are silent on the timeframe on when this testing facility needs to be made available. In comparison, across the EU, testing capability needs to be available six months prior to launching open banking access.

Bahrain banks will also need to provide a contingency measure to enable third party access in the event that the dedicated interface fails. This mirrors requirements under the EU regime. However, no detail has been provided at this stage on when and how this will take effect. In addition, there is no obvious route to obtain an exemption from this requirement, unlike in the EU.

The Bahrain regulations, however, go further than the EU's customer authentication standards, by requiring three-factor authentication, not just two. Chowdhry cautioned that this could affect customer experience and may create friction, however she said that she is hopeful that many of the uncertainties identified will become clearer when further rulebooks are published.

Banks that fail to comply with the requirements of the new regulations risk enforcement action in accordance with the terms of the CBB’s 'enforcement and redress' rulebook.

Khalid Hamad, executive director of banking supervision at the CBB, said open banking would be "a transformative development within financial services in the Kingdom of Bahrain".

"The concept of open banking is part of a larger 'disruption' that is taking place with increasing use of mobile devices," Hamad said. "The disruptions taking place in banking have been given a boost by the innovation taking place and the adoption of new technologies. The issuance of new rules and amendments to the CBB Rulebook Volumes ... are aimed at supporting the CBB's efforts in providing the necessary regulatory framework to facilitate and support the transformations taking place."