In this blog, we’ll try to understand what is Open Banking. What it means for Financial Institutions (FIs), Fintech companies and Consumers like you and me. We will try to answer some pertinent questions and break down some relevant use cases.
“Get closer than ever to your customers. So close that you tell them what they need way before they realize it themselves.”
These lines by Steve Jobs continue to dictate how technology can be leveraged to best serve the customers. FIs have, for a long time, digressed from focusing on their customers' needs. Spam calls selling loans when one doesn't need them in the first place are signs that banking isn’t intuitive at all. \ With a maturing FinTech ecosystem, banking can no longer continue to operate in silos. FIs can’t be viable just by serving the wealthiest families and big corporations and the prospect of future business is increasingly on an open, vast ecosystem serving the many underserved consumers. This has led to the evolving concept of Open Banking. What is Open banking? To serve customers better you need to know them better. Open Banking is the system of allowing access to consumer banking and financial data through third-party applications which are available as APIs. Access to customer financial data is key to the operation of this system. Open Banking is in short, ‘Open Data Banking’.
Imagine an app that would automatically switch your gas and electricity provider based on your usage habits. Or your broadband. Or even find you cheaper car insurance. Imagine that app could also manage your savings, pay for your groceries, and renew your website subscriptions. In short, an app that manages your financial needs intuitively. This app can be any app when Open Banking becomes a full-fledged phenomenon. That’s precisely what it seeks to offer - Allowing seamless information exchange between banks and other financial institutions, to help customers get innovative, on-demand and value add services. Simply put, Open Banking enables easy and economical access to financial products and features that were otherwise unavailable in traditional banking.
The Indian Model
In India, the introduction of an open technology platform, UPI (Unified Payments Interface) has resulted in providing an innovative system which has led to an exponential increase in online payment adoption and redefined customer experience and sentiment. While UPI is the most widely known and used technology accessible as an API, there are several lesser known yet extremely innovative and useful applications that have been developed and made available as APIs in the financial system.
In 2016, Account Aggregators (or 'AAs') have been developed by the Reserve Bank of India to facilitate the open banking system. Think of the AAs as an intermediary for customers' financial information. Once the customer grants consent that their specific data may be shared with particular entities seeking it - FIU (Financial Information User) the AAs procure the information from the FIP (Financial Information Provider) holding the data and deliver it to the FIU. On the basis of the data so received the latter may offer appropriate financial services to the customers.
The AAs are regulated by the RBI and work under its directions to ensure security, privacy and consent management. AAs are not allowed to conduct any other business other than data-exchange services, the risks of data misuse are minimized.
How Open banking works? Intrigue: A dairy farmer in a distant rural village seeks a loan from a finance company to expand his farm. Conflict: He hasn't taken a loan earlier and is a first-time borrower. The finance company is apprehensive about him defaulting on the loan. Intervention: The finance company asks the farmer’s consent to source his financial data from his bank. Mediation - The banks, AAs and finance company come together under the framework of Open Banking and the information is shared efficiently. Solution - The finance company checks the transaction data, and spending history and offers a loan to the farmer based on his repayment capacity. It’s a win-win for everyone. Use cases for Open Banking - Customized financial products - insurance policies, loans, investment options etc are increasingly easier to curate and distribute. - Wider access to new financial services for consumers
- Low or no cost of development for FIs with minimal implementation costs. With that said, Open Banking will play an increasingly important role in the future. It‘ll make banking more intuitive, convenient, cheaper and more exciting. The only thing we as a consumer need to take care of is consent. It’s reassuring that consent management would not be through fine print but more explicit and comprehensive. And that’s what new-age banking promises. Let’s keep an eye out for how open banking shapes up in the coming days in the diverse milieu that is the Indian market.
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