OPEN BANKING, THE NEW PARADIGM?
Indian banking system is among the most convenient and trusted in the world, but banking as we know is changing dramatically with the rise of connected digital ecosystems and new incumbents such as Digital Banks and fintechs both large and small. Fintechs have the advantage of offering personalized services that traditional banks do not have the flexibility to offer. These new entrants have superior capabilities as at the end of the day, their core focus is technology and they invest significantly in hiring talented engineers for developing unique digital experiences.
In order to serve their customers, fintechs rely on digital technologies to make data-driven decisions. For example: Micro-lending startups rely on leveraging digital footprint of their customers, bank statement analysis in-order to determine the credit worthiness of their customers. Some other trends are elaborated below:
1.1 Shifting consumer habits
The current generation of customers and the millions of internet users in India are so used to personalized experiences offered by digital applications from the comfort of their homes that they dread a visit to the bank or taking physical copies of their documents and bank statements in order to avail financial services. Fintechs appeal to the new generation by designing apps and web experiences with the customer in mind. This creates a seamless and personalized experience which leads to greater engagement as well as increased customer loyalty.
1.2 Decoupling of Banking
In the past, banks used to be the only gateway for availing a multitude of financial services, new incumbents are unbundling banking services and specializing in a particular domain.
1.3 Lending to thin-float customers
P2P lenders are connecting lenders who previously put their money into savings accounts to high returning investments by lending to peers to vetted lenders.
They solve the problem of lending to customers who couldn’t avail loans through banks due to cumbersome processes as well as lack of Credit Ratings.
1.4 Investing, algorithmic wealth management
By leveraging technology and algorithms to calculate returns, wealth management startups are helping create wealth for millions of Indians who previously didn’t participate in the money market. Looking at China, apps like WeChat and Alipay has been able to serve 900 million Chinese consumers in a matter of a decade compared to banks that have existed for 50+ years. These startups don’t try to physically sell products to their users like banks do when customers visit their branches but rather provide their users with education and an overview of the advantages through interfaces that consumers are already used to. Passive investing is increasing at a rapid scale and companies like Groww and SmallCase are making it easier for people to invest through a click of a button through their app.
1.5 Personal Finance management by educating consumers
Personal Finance management apps like Mint and Acorns in the US and CleoAI in the UK, help promote better financial management by providing their users with spending analysis as well as advice them on optimizing loan repayments and investing on high-returns financial products.
Co-creating the digital ecosystems by adopting a Platform Business Model
By letting third-party developer’s build on top of the infrastructure provided by banks, banks can position themselves at the centre of the ecosystem and provide their customer increased value thereby retaining their core competencies. This is increasingly becoming the case in the US and EU markets where banks are opening up their APIs – Application programming interfaces to startups to let them build services that delight their own customers.
Taking a cue from giants like Google and Facebook who were able to position themselves in the centre of the ecosystem by letting developers build on top of their APIs, banks can place themselves at the forefront of a fintech revolution and extract value similar to Google and Facebook. As is the case with all major technology companies, opening up their APIs to foster collaboration results in increased customer engagement and new revenue models. As can be seen by Google monetizing their Maps by letting companies like Uber and Zomato use their maps APIs or Facebook letting millions of app integrate its APIs to third party apps fetch the data from their user’s Facebook account in order to provide a more personalized experience.
2.1 Banking as a platform
“A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value” By leveraging the power of increased distribution and physical branches around the country, banks are uniquely positioned to act as custodians and become platforms.
Banks -> Customers -> Ecosystem
Banks already have APIs that integrates with their mobile apps and allows their customer to avail various services on their apps. By adopting an open API based business model, banks can let third-party developers access the banking records of their customers securely with the permission of their customers. Banks can charge a volume-based pricing or offer access to APIs for free to foster growth. Fintech startups like AuthLayer, leverages APIs provided by multiple banks and offers a single SDK to other developers that rely on APIs form multiple banks much akin to payment gateways but for information, rather than payments that are sourced from banks.
2.2 Banks as custodian of data
With the rise in number of total bank accounts opened under Pradhan Mantri Jan Dhan Yojana (PMJDY) reaching 333.8 million as on November 28, 2018 and with over 500 million Internet users in India, both banks, as well as fintech, have a huge opportunity in serving the customers. By helping fintechs provide easier access to records such as KYC details which banks already has on record, banks can increased customer delight by becoming an interface for their customers when they interact with third parties. When a customer takes a print of their respective bank statements, banks don’t get any revenue from that. Customers risk their own privacy by letting fintechs scan their GMail inbox for parsing their PDFs of bank statements.
By letting their customers share their transactions data to third party developers securely, banks can get a twofold benefit. Direct Monetization by charging volume-based API pricing. Indirect Monetization by knowing which of their customers are leveraging third parties and thereby segmenting such users in order to better target them with offers and services. By monetizing their APIs bank can leverage additional revenue through APIs for some of the following use cases.
- eKYC: Since banks already have KYC records of their customers on file, they can allow their customers to authenticate themselves with third-party by securely verifying their bank account. The APIs can provide Customer details such as Name, Address and Account opening date.
- Accounts: Number of accounts held by the customer in that banks.
- Cards: The number of cards held by the customers as well as their repayment schedule.
- Transactions: Allow customers to give developers access their transactions data through APIs rather than downloading bank statements. Salary information can automatically be deduced from the API response which reduces time to process documents.
- Loans: The number of loans held by the customer as well as their repayment schedules.
- eNACH: Allow customers to sign eMandate for automatic fund disbursal for investments or payments
- Advantages and new revenue opportunities:
According to a study conducted by Accenture banks that embrace Open Banking will profit from a potential revenue uplift 20 percent, whereas those failing to do so risk losing 30 percent to disruptive industry players 2020.” By partnering with fintechs, banks can still retain their core banking facilities and offer their customers a gamut of new financial products thereby increasing engagement as well as customer loyalty.
- Development around the world
The European Union passed an Open Banking regulation in 2018 known as Directive on Payment Services (PSD) and the Open Banking Standard to grant third-party providers access to customer accounts, payments, product data and other data through APIs. In the United States all major banks have APIs that enable other fintech startups to offer personalized services such as accounting and financial analysis, trade finance, insurance and access to money market funds.
One of the early examples of open banking in India is Unified Payment Interface (UPI), an instant interbank payment system developed by National Payments Corporation of India. The Government implemented a standard set of APIs (Aadhaar, eKYC and DigitalLocker, etc.) and even rolled out its own payment app–Bharat Interface for Money (BHIM)– in late 2016, to enable payments from any bank 24/7 in real-time and expedite the move towards a ‘presence-less, paperless, and cashless service delivery’ system. ‘India Stack’ the largest open API in the world, is a project of creating a unified software platform to bring India’s population into the digital age. Its website describes its mission thus: “India Stack is a set of APIs that allows governments, businesses, startups and developers to utilize an unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery”.
Another instance is SBI-led Bankchain platform, which is a community of banks for exploring, building and implementing blockchain solutions including smart contracts. Incorporated in February 2017, the platform is operated by Prime Technologies. Apart from 20+ banks in the consortium, Bankchain has also partnered with giants like Intel and Microsoft.
In India, all major banks have conducted Hackathons where they invite developers and encourage them to build solutions on top of the Bank’s APIs. Startups like Happay, GoNiyo Zeta and other has partnered with banks such as RBL Bank and Yes Bank to offer expense management and one-click generation of prepaid cards and a single dashboard for expense management. By opening up their APIs, other banks can also enable their customers to avail their services or they risk losing customer deposits to other banks.
By leveraging secure API gateways and layered permissions settings, privacy and security concerns can be alleviated since the primary authentication will remain with the banks and information is shared only with the explicit permission by the customer during the authentication process.
- Security Concerns:
It is only natural that in the existing climate regarding data and it’s uses, for there to be some reservations about the prospect of sharing data with “third-parties”. This concern seems well founded particularly when the data in question if the highly sensitive financial information of the consumer. However, the reality is that any such fintech company, app or service would be required to pass rigorous security and compliance procedure, including regulatory licensing, in order to access such information. This entire licensing process would be overseen by relevant government bodies such as the RBI in India, including others, which results in these companies having a level of security akin to banks and other financial institutions.
Consumers also need to explicitly provide permission to a third party for that company to access data. This is not a free-for-all of companies tricking people into handing over their most sensitive information. Access would be granted through an Application Programming Interface (“API”) that is made available in conjunction with the banks, and would be compliant with the government’s regulatory and technical standards.
In short, Open Banking has been designed to prevent fraudulent companies springing up and putting consumers in a position where they can request and receive access to financial information. In most instances, third parties that use Open Banking data will not be able to access the data directly – they will merely be a conduit through which it is analysed and displayed to the customer.
It is also worth noting that Open Banking is not based on blanket use of personal data. Access to data is both time-limited and limited to the minimum amount of information required to service the user. Speculation about widespread hacking and data breaches is also obscuring the fact that Open Banking presents a huge opportunity to consumers and businesses alongside the existing banking infrastructure.
- Conclusion
Open banking will open the door to a range of great new financial technology, in a choice of services and products that are bound to have profound and favourable implications for all of the stakeholder’s involved. And, as with any technological revolution, it is only natural that there is a degree of uncertainty. However, as consumers and banks begin to see the benefits, and as the security apparatus around Open Banking does its job, any fear of hacking or fraud will soon dissipate.
References
https://www.accenture.com/gb-en/blogs/blogs-open-apis-reimagining-retail-banking
https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en
Authored By:
Ashwini Kumar Singh
Chief Manager (Research)
State Bank Institute of Credit and Risk Management, Gurugram (SBICRM)