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In this article of our ongoing series on open banking, we shall look at the key players making up the ecosystem, the prospective applications, and key benefits for retail customers and SME players. Also, there are certain other concepts that are often used interchangeably- though similar to open banking, there are subtle differences. We shall also look at how concerns can be addressed reinforcing the importance of a robust governance framework.
Key players in the open banking landscape
According to the Digital Fifth, the key players in India’s open banking landscape are as follows:
1. Banks, NBFCs and financial intermediaries: These entities share their APIs with third parties to develop value-added services like digital payments, credit lending and financial products
2. Technology partners: These comprise partners that support the technology stack namely API integrators and API gateway players, including functions like data validation and analytics.
3. Third-party API: This group includes those entities that provide or develop the value-added solutions consisting of neobanks, digital platforms, big tech players that utilize bank APIs to provide services
4. Stakeholders: This group consists of investors and the public digital infrastructure, example, India Stack used by banks and other financial institutions
Potential use cases
The digital payments space in India has successfully championed the cause of a customer-first model. Along similar lines, open banking could be developed with a customer focus model. Open banking is an apt example where third parties can utilise the consumer data obtained from banks by using APIs. Of course, all of this is subject to prior customer consent. The shared API data can help build customised products for customers that may be outside the scope of those currently offered by the bank. For example, fintech players can conduct data analytics and due diligence of the credit risk profile of customers that would simplify the underwriting process and enable prompt loan disbursal. The following are some of the valuable applications of open banking:
• 360°-degree information: Account aggregators can provide a detailed insight into the financial details of borrowers and suggest financial services that are best suited.
• Tailor-made offerings: Aid in the development of targeted services that would be competitively priced based on specific customer needs. Also with a greater number of players and higher competition, the quality of services delivered would improve.
• Digital-first approach: Banks and fintech players would function as partners rather than competitors with the former being willing to adopt new-age technologies to keep pace with the agile technologies of nimble fintech players. Open banking might pave the way for higher penetration of digital banking.
Benefits for Retail customers:
Retail customers are expected to be key beneficiaries of the open banking movement:
• Account aggregation facility with the ability to view financial details across banks in a single place
• Time-saving financial and budgeting tools with data analysis to identify spending buckets and patterns
• Customized offerings based on past usage, for example, suggestions to opt for insurance in case of lower cover or absence of cover
• Prompt credit access from faster credit processing and risk analysis by digital modes through fintech players.
Benefits for SME customers:
SMEs can gain from bulk service offerings like bookkeeping, accounts management, vendor relations, inventory control, digital payments, and payroll. Open banking can be deployed to avail services in the following verticals:
• Book-keeping, accounting, and tax compliance
• Liquidity management and availing credit line facilities from banks
• Improved inventory management to prevent stock-out situations
Differences between open banking, neo-banking, and API
Often other terms, similar to open banking are used interchangeably. However, while similar, there are minor differences. API Banking allows fintech to use bank APIs and develop customer-centric solutions. Open banking and Neobanking in India are based on the API sharing concept. Account aggregators are an Indian concept. Neobanking is a digital banking concept, eliminating the need to visit the branch. Let’s take a closer look.
° API Banking: Under this arrangement, banks extend their APIs to fintech partners to create and develop specific solutions for a targeted audience. An API is a program that is part of the bank server and after obtaining bank customer consent may be run on external servers of third parties.
Let’s consider an example: A lending firm may access the customer accounts APIs of the bank to underwrite the loan applications. The customer would allow the fintech lender to access the bank statements via the API. This would enable the fintech to directly view the past transactions and income levels to conduct the credit assessment process. Also, the borrower would benefit from a prompt loan disbursal based on a positive credit score. The fintech player would run the program on the bank server and complete each customer transaction with credit risk evaluation for further decision-making. Other applications could include those that have a direct bearing on the customer bank account and revolve around a debit or a credit entry. Since all financial transactions are ultimately linked to a bank account, fintech players can build solutions using bank APIs as the base infrastructure.
1. Open Banking: This is what we have been discussing so far. Open banking finds its origins in Europe when the 2nd Payment Services Directive (PSD2) was issued to banks, mandating sharing of bank customer data with entities and individuals, after obtaining customer consent. The goal was to benefit the bank customers. Banks having a universe of customer data could share the same with fintech players who can access loan status, credit card dues, and salary income in a single place. Merchants would be able to directly debit the amounts from the customer’s bank account without the need to use a card as a medium. This would save costs for merchants on each transaction.
2. Account Aggregators: This is an Indian concept. 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. These entities facilitate the process of data sharing between financial players.
3. Neobanking: Globally, this is characterized by an entirely digital banking set-up, without having any physical branches. The banking entities possess a bank license but function only via the online route. Thus they are able to save on CAPEX and operating costs of eliminating the need to set up a brick and mortar establishment. This translates into higher FD rates for customers.
However, in India, banks are not allowed to function via a 100% digital-only route. Thus the neobanks in India are fintech players who offer bank services via the API route accesses through their bank partners.
The banking industry is increasingly moving towards a digital focus and a trend towards embedded finance. Open banking looks promising with its ability to integrate the players within the financial system through the API linkage. In the coming days, the core offerings of a bank- savings, lending, and investing would continue to stay relevant as before, along with the emergence of evolving relations with end customers and FinTech players.