Open Banking: How The Digital Innovation Fulcrum Has Evolved In India

Open banking has enabled the 'Buy Now, Pay Later' (BNPL) trend, helping high conversion rates in sales, among many other developments.

Open banking has gained quick traction in India and around the world in the last couple of years. It has fast-tracked technological innovation with financial institutions facing more urgency to accelerate the adoption of digital services, pressured in part by events of the last 18-24 months. Consumer behavior has fundamentally changed, transforming the way they transact. Fintechs have taken the leap and challenged the status quo, transforming the way money moves. Financial institutions are no longer keeping digital at bay. Regulators are picking up to keep pace with the fast-changing dynamics of the evolving ecosystem.

India is at the forefront of the open banking revolution, attributing it to the numerous needs and pain points of an emerging economy. It will have a significant impact not only at a national level but worldwide as well, with numerous learnings to be exchanged. In this article, we will take a look at how the ecosystem has evolved over the years around open banking, with a greater focus on the Indian market — across different flavors, ranging from its evolution to various driving forces, what is in it for the present and future, different participants and stakeholders, as well as various risks associated with the new landscape.

An industry study shows that the GDP of global economies which will facilitate sharing of data for financial services will gain 1-5 percent by 2030. In terms of size, the global open banking market is to grow from $27 billion in 2019 to $395 billion by 2026, per a report by a leading business consultancy.

India, which has already embraced various use cases of open banking (triggered by flagship UPI), has kickstarted its formal approach towards it. Regulators like RBI have acknowledged the potential of new-age financial plumbing in driving future economic growth.

Fintech firms have seen unprecedented growth over the past couple of years on the foundations of open banking, bringing various innovative solutions into the market. Even the Indian prime minister has recently acknowledged the massive growth of fintech and its core importance in shaping up the digital economy. Most of it can be attributed to the open banking infrastructure and market approach that has shaped the country over the last five years. However, before moving ahead, it is important to develop a practical understanding of what is open banking and why it shaped up in the first place.

What is open banking?

With the emergence of innovative technologies and new regulations, the world of banking is witnessing major changes which are transforming the way people use financial services. As the number of third-party providers (TPPs) increases, the user experience related to financial services is rapidly getting better. Open banking is the key facilitator for this. It has gained greater momentum amid the global COVID-19 pandemic, which drove up demand for digital financial services, and is here to stay. 

Open banking refers to a new-age banking practice that provides TPPs open access to consumer data, financial transactions, and other financial data from banks and non-banking financial institutions using application programming interfaces (APIs). It is an ecosystem where the banking world converges with the rest of the universe through various touchpoints.

How does open banking impact us?

With open banking, personal finance apps can analyse spending habits, deliver dashboards and offer customer-specific product recommendations. 

In consumer lending, open banking allows companies to build a process that increases conversion rates and approval rates for creditworthy customers. It reduces administrative and operating costs.

Open banking has enabled the ‘Buy Now, Pay Later’ (BNPL) trend, helping high conversion rates in sales, helping small businesses, and enhancing credit reach to the masses.

In real estate, open banking allows tenants to prove creditworthiness to landlords by allowing direct and secure access to income information. It also automates matches between lenders and loan applicants.

Building blocks of open banking in India over time

A quick look at how open banking evolved over the years: 

2010 — Aadhaar Stack: First foundational step for creating public digital infrastructure, with the launch of digital identity.

2016 — UPI: First launched for public use in the market, enabling access to any bank account from third-party apps using API protocols. Eventually, many other payment systems were launched by NPCI over the year (AEPS, BBPS) enabled by open API architecture.

2016 — Account Aggregator: Framework launched by RBI to create consent managers and democratise financial data by empowering customers. The system went live in 2021.

2020 — OCEN: It aimed to change the way credit is enabled to the end-customers by introducing new touchpoints for distribution.

2020 — DEPA: This is a consent-based data-sharing framework launched by NITI Aayog, aimed at data democratization and financial inclusion. It complements the AA framework.

2022 (expected) — PCR: A holistic information repository where all information about existing as well as new borrowers is stored, for both individuals and corporate. It is intended to solve information asymmetry for lenders.

According to NPCI, as of June 2022, UPI is processing more than 5.8 billion transactions in a month, amounting to more than $130 billion. The Centre reported 430 million Jan Dhan accounts in 2021, with over $19 billion in deposits. Aadhaar has facilitated more than 370 million transactions per month in 2022. The sheer scale and volume demonstrate the significance of these open infrastructures and hint at the further potential role they will play over time.

Clubbed alongside regulations, innovations in financial services have been greatly augmented by the foundational blocks of open APIs built over time. There is a great potential for building newer use cases on these existing infrastructures across payments, lending, and supply chain amongst others.

The forces behind the evolution of open banking

Globally, the EU PSD2 directives are attributed to be the onset of open banking in the global banking space, when competition and markets authority found that new-age financial institutions faced significant disadvantages compared to incumbent banks to access the market and grow. Since then, many fintech firms have moved into aggregating data of customers from various financial institutions, thus giving customers more freedom in leveraging financial information. 

Most of these fintech companies provided digital payment services to customers, trying to create stickiness to their products and harness more data.

The global driving force can be traced back to the cumulative effect of various factors: the emergence of new generation and changing needs, the need for greater financial inclusion for economic growth, and new technologies enabling market forces d) regulatory forces spurring innovations.

Even in India, the story is somewhat similar. Due to legacy and inertia, banks and financial institutions have historically faced challenges, especially in areas of inclusion and consumer experience. They continue to do so. However, at the same time, opportunities had emerged to shape current and future revenue pools. Incumbents realized that they can no longer run banking in their traditional ways. Disruptors realized the plethora of gaps and opportunities.

The India OCEN framework is a noteworthy example of how open banking is addressing areas of credit gap in the country. Collectively with Sahamati’s Account aggregator ecosystem, the framework is a perfect use case of how open banking will democratize credit access to the Indian masses. If executed properly, it can have the potential to become the UPI of lending.

Bringing more customers into the formal banking sector has been one of the key motives behind the Indian revolution. The inclusionary approach was undoubtedly a consolidated effort to enhance the reach to potential consumers and facilitate access to affordable credit. The Centre’s open API policy enabled millions of citizens to have bank accounts via Aadhaar-facilitated e-KYC and e-signing. Failing to such large masses is not a chance financial institutions should be comfortable taking.

India’s approach to open banking

Pioneered by fintechs and banking incumbents, India’s open banking ecosystem has grown to become part of its financial landscape and is now among one of the most advanced in the world. It has helped create a level playing field for the new to compete with the largest banks here through collaborations and partnerships.

In fact, with rising demand for digital services over time, open banking has intensified competition within the Indian financial services industry, as some of the large banks have become torchbearers of new-age initiatives.

But, as IMF had rightly pointed out, what distinguishes India from most other open banking and broader data policy frameworks implemented around the world is its foundational approach based on the provision of extensive public digital infrastructures and protocols. It has enabled an ecosystem for servicing data portability and interoperability across the economy based on user consent.

Over the past 10 years, India has seen an ambitious overhaul of its digital infrastructure through the development of the so-called “India Stack.” The main objectives of this initiative have been to promote financial inclusion, as per the IMF.

The road ahead 

This is an evolving orchestra, and it calls for perfect harmony amongst all stakeholders.

Though we have seen large perceived benefits of the new age of financial disruption, caution must not be kept at bay. The regulators see open banking as “a potential disruptor in the financial system” and flag various risk factors associated with the next generation of financial data exchange which needs to be taken care of.

Each player in the system has an important role to play. The competing stand of banks and fintechs will not work. Even though new business models are and will continue to disrupt the financial services industry, banks are here to stay for a long time.

Therefore, the emphasis should be more on how these new businesses can leverage their strength to complement bank offerings and focus on building sustainable moats to garner better bargaining power.

They need to have clear strategies crafted around the product, technology, ecosystem partnership, and customer success.

Open banking is not just some APIs and integrations with partners. The future is “Open” and ready for democratising innovation-led financial services. Globally, banks and fintechs are traversing this path.

(The author is the Managing Director, Financial Services at Protiviti Member Firm for India. Protiviti firms are a group of independent consulting firms helping companies solve problems in finance, technology, operations, governance, risk, and internal audit.)

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