Fleeting trend or here to stay- Understanding Open banking – Part 1


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Accelerated by our nation’s robust digital public infrastructure under the umbrella name ‘India Stack’, banking and fintech players are exploring innovative collaboration opportunities with the potential to offer significantly improved services to end customers. One such initiative is (Application Programming Interface) API-led open banking. Under open banking, banks are disclosing their APIs in return for a fee-based or revenue-sharing model, enabling third-party fintech and financial services players to access financial information required to build new apps, launch services and in turn providing account holders with enhanced options.


Open banking: Promising but with its own set of challenges

A growing number of banks in India are adopting API monetization and embracing open banking. While the benefits are plenty, certain experts recommend caution citing data privacy concerns that mandate the implementation of a stringent regulatory framework. 

In this series of articles, we shall look at the open banking ecosystem- India’s technology prowess, the current state of things, why banks are jumping onto the ‘open’ bandwagon, how the end-customers benefit, concerns that need to be addressed, potential use-cases and other similar concepts. 

 

Understanding API

API (Application Programming Interface) refers to the technology codes that define how software programs interact.  This interface enables a third-party application to connect to the bank’s systems. APIs are an essential prerequisite for the smooth functioning of Banking-as-a-Service (BaaS), which enables third parties to access a bank’s services via APIs. APIs work as a win-win situation for all – banks, fintech players and customers as financial services providers can enhance their customer offerings, which might have not been possible on a standalone basis. 

Source: Business Insider

 

India scenario

In India, the open banking ecosystem is a hybrid model with active support and participation by the Central Government and market players. Other salient aspects include:

Much of the credit goes to the development of India Stack, the key driver behind the open banking and digital payments boom. 

• India started the open banking journey by appointing an intermediary that would oversee customer consent to data sharing. This intermediary functions as a Non-Banking Financial Company.

• In September 2016, the RBI allowed the formation of newly licensed entities called Account Aggregator (AA) who were in charge of consolidating financial information of customers in possession of multiple financial entities, governed by varied regulators.

 

What is India Stack?

India Stack is made up of multiple APIs and has the goal to develop a unified software platform covering the government, business enterprises, startups, and developers.

Broadly, India Stack is made up of 4 strata: 

1. The presence less layer – A key example is AADHAR based digital identity

2. The cashless layer – A popular example is the UPI system that has revolutionized the digital payments space in India

3. The paperless layer – Examples include eSign facility and DigiLocker

4. The consent layer – This is being built on solid API foundations

In September 2020, the government released a draft Data Empowerment and Protection Architecture (DEPA), which aims to develop a universal consent-driven data-sharing infrastructure that would strengthen the financial inclusion goals of our Indian Government.

Source: Media

 

Benefits of open banking

It is often heard that ‘Data is the new oil’. This is not without reason. It is well known that Industry 4.0 would be defined by companies leveraging upon data to deliver customer-centric value. 

1. Moving beyond the internal bank value-chain: 

• Most banks have historically relied on an internal-use model of customer data that is obtained, processed and stored to develop and launch new financial products for customers based on feedback, customer preferences and prevalent trends. 

• With open banking, the platform-delivery ecosystem can be extended to a marketplace-like model comprising banks, third-party developers, agile fintech players, financial intermediaries, Govt bodies and customers

• Marketplace scenarios generally ensure fair price discovery, enhance transparency and encourage healthy competition to drive a customer-centric strategy

• All of this is achieved only after obtaining customer consent to data sharing

 

2. Collaboration over competition

• Rather than competing, it would do well for the players in the financial system namely banks, fintech players and other intermediaries to partner and play upon their own strengths.  

• With improved relations across incumbents, customers can avail best-in-class services and robust products at optimal prices.

 

3. Based on the principles of fairness and parity:

• Open banking puts customers in control of their data

• This is fair as the customers should rightly have ownership of their financial information

 

Concerns and solutions

Open banking involves the sharing of customer data, after obtaining customer permission by banks with third-party developers to develop apps that include digital payments, real-time recordkeeping, and the likes, opening up cross-selling opportunities.  

 

While the potential of open banking is immense, experts have cited concerns on the data privacy front, given the high level of interface with the external world.

 Some of the key concerns and possible solutions include:

1. Participation of multiple players in the operations, often located at different geographies, might pose security risks and affect India’s strategic interests. The urgent need of the hour is to set up a robust regulatory body that oversees the end-to-end functioning and resolves any loopholes in a timely manner. 

2. PwC India has suggested a 3-layer security model as follows:

• Country-wise: This would include minimum acceptable privacy guidelines to be complied with by all entities.

• Industry-wise: This would be built around sector-specific use cases while handling sensitive data

• Organization-wise: This would include a data protection mechanism established by each business enterprise 

 

Imperatives for success

There are several steps that banks can take, on their part, to ensure a viable, thriving open banking model. Some of these include:

1. Combining the strengths: Being regulated entities under RBI, banks have certain inherent strengths like being well-capitalized, having secure APIs and a loyal customer base. Fintech players bring to the table advantages like agility, familiarity with cutting-edge technology and risk-taking capability. By combining the strengths of both, customers can gain from customized financial products that balance risk-return parameters. Banks are extending open banking to corporate customers as well.

 

2. Customer-first approach: Open banking depends entirely on customer consent. Thus banks need to ensure customer data privacy at all times. Through encryption, multi-level authentication, AI and ML, the security levels can be constantly upgraded and monitored. 

 

3. Alliances with reputed fintech players: It is important that banks conduct a thorough background check of third parties and their security protocols. Applications that are shared with external parties may be prone to data breaches. Mandating stringent security certifications and in-depth due diligence would enable the creation of a shared repository that is built on trust. 

 

To be continued…


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