BankTech

Why India Needs to Strongly Consider Open Banking Guidelines

  • To promote the sustainable, broad-based and versatile growth of FinTech.
  • To innovate on the distribution of banking products and services in ways that can directly impact the consumer.

There are ~1K FinTech companies in India, over half of them born in the last couple of years. A handful of them will make it to the top of the scale being first movers with unique and innovative products and services (like Paytm). Some others will be the subject of M&A (like Freecharge). Some will perish.

Pervasive surge and the success of FinTech in India (not skewed by a few) rest heavily on how those in the middle of this scale survive and grow. These are the mid-caps of FinTech.

The growth of FinTech relies heavily on development and maturity of an ecosystem around it. Banks and most vitally the regulator are the biggest change agents in this ecosystem. This must happen along the following two dimensions:

  1. Through the emergence of collaborative business models between banks and FinTech and
  2. Through central bank regulations/directions/guidelines, making it easier to execute such models.

Learnings from EU

The European Union, by some distance, has been the pioneer in open banking models. The earliest partner consumable API stores were established in 2008/2009 followed by slow experimentation with innovative models. Fidor came in 2009 followed soon by the likes of N26.

The scale and pace of open banking adoption, however, changed with a tide of legislative measures (in somewhat sequential order):

1. Opening of UK market to challenger banks 2. PSD2 in EU 3. Instant Payments and 4. Open Banking Implementation (OBI) in the UK

Without getting into the innards, aspects of open data access, transparency, security and consumer experience promoted by these directives have now started to produce the following main outcomes:

  1. Spike in new market entrants – startup banks, payments entities, aggregator entities, etc.
  2. New collaborative business models between banks and FinTech
  3. Higher visibility and brand support for FinTech products and services through banks’ marketplaces
  4. Rise in FinTech as of banks’ distribution partners

Overall, the face of banking is starting to look different in Europe with even traditional banks matching the new kids on the block in terms of embracing new business model paradigms.

India and its current state

Take a moment and absorb this, in the context of 29 states and 1.25 billion people:

  1. Aadhaar: The largest central database of biometrics-based identity information in the world.
  2. IMPS: An instant payment infrastructure with sizeable transaction volumes operational since 2010 – something most countries in the world are currently working hard to implement.
  3. UPI: A peer-to-peer payments scheme that bypasses all intermediaries and encourages competition and cost savings – something the likes of the EU has just woken up to with PSD2.
  4. Functional versatility of India stack – whereas most such others worldwide are confined to identity and KYC services.
  5. Upcoming policy frameworks on account aggregation, P2P lending, blockchain and its own cryptocurrency.

This puts India in a better position than other markets to leapfrog FinTech growth and concurrently redefine the experience of digital consumption of banking products and services.

Underutilized potential?

Surprisingly, however, FinTech growth in India has been anything but broad-based and sustainable. It has been restricted to very few domains, primarily payments and most recently, online lending and robo-advisory. Of these, we have witnessed scale only in payments – an already overcrowded business. There has also been suboptimal focus and investment on solving problems on the business and merchant side of the ecosystem.

While bank-FinTech collaboration has grown in the past three to four years with API Banking, I am tempted to comment that the relationship should be much more symbiotic. A good measure is a surge in the distribution of FinTech products and services through banks, at scale. Once again, barring payments, one has to believe this has not happened.

What India needs to consider

Progress from ‘API Banking’ to ‘Open Banking’

This might sound like semantics but API Banking does not reflect consumer inclusiveness. In many ways, it has constrained the objectives to have better API stores, mostly for businesses to consume. Initiatives have been mostly technology-driven with a heavy focus on B2B integration as a driver.

With Open Banking, the discussion and culture move to executing better banking business models. By its very nature, it is business-driven and executed top-down (checkout Santander, BBVA, ING). Third-party services feature firmly in most open banking models. Bank marketplaces distributing both in-house and third-party products & services become common thereby increasing choice to the consumer (Fidor, N26 and most recently, Starling Bank have great marketplaces with third-party services). Open Banking also promotes product innovation through customer-centric bundling and personalization. It eventually leads into a natural progression of banks serving as platforms connecting consumers and providers (read FinTech). This Aite Group report on Open Banking models is a good checkpoint.

Concurrently, it also brings relevance to more third-party services thereby stimulating FinTech growth.

Implementation possibilities

The biggest critical success factor for open banking is open access to customer data and commoditized banking capabilities, of course, done securely and with customer consent. The prospect of what the India stack offers combined with access to customer data is arguably a winning proposition. The success of new RBI proposals such as Account Aggregation (under consultation and akin to AISP services in EU) hinges greatly on an equalizing policy on open access to customer data.

Experience from other geographies shows that open data access and the surrounding consent and security framework can be implemented in many ways. Here are some examples:

  1. Being implemented in EU as PSD2, a directive covering all banks, regardless of size and business, across all member states.
  2. Being implemented as Open Banking as a directive covering only the top 9 banks in the UK (popularly named the CMA9).
  3. Being implemented in Singapore as an industry guideline, not a legislation, by the Monetary Authority of Singapore working with the Association of Banks in Singapore.

The CMA’s approach in the UK is possibly one of the better ways to implement open banking in India. Say, the top seven banks combined, cover a lion’s share of banking population and that brings scale. Although, this is by no means a trivial task, given the fact that technology landscape and infrastructure in banks in India is more modern than those running in most advanced markets – technical implementation of it should be less labor.

Technical standards for open banking access

To ensure complete interoperability, it is also critical to have published standards on APIs, security, customer consent, and compliance. On one hand, standards ensure uniformity in multi-bank access and make it easier and cost-effective for FinTech. On the other, it will leave banks to focus more on innovation and differentiation, thereby increasing consumer choice and improving customer experience. In this regard, the pursuit should be to outline these standards at the stage of formulation of an open banking legislation/guideline.

One may refer to Open Banking UK and Berlin Group (among many others) for guidance on standards related to interface definitions, security and messaging.

Conclusion

In many ways, in terms of evolution and maturity of digital banking and FinTech, India is today where the EU was eight years ago. Despite being ahead of the western markets on influential aspects such as modernity of banking infrastructure, payment rails and identity, broad-based FinTech growth and digital banking in India is still lagging by a few years.

One of the ways to turbocharge both is to create a favorable and friendly but provisory environment for FinTech startups to seed and bloom. This has started happening through the joint pursuits of the Government of India and NASSCOM. However, something more consequential and impactful would be the regulator and banks to jointly consider progressing from ‘API Banking’ to ‘Open Banking’ with consensual access to customer data, backed by standards.

Note: The views expressed by the author are his own and do not necessarily reflect the views of his employer.

Salil Ravindran

Salil runs the digital banking Center of Excellence at Oracle. In his current role, he works on new digital initiatives and business models. He works closely with CDOs and digital business stakeholders at banks worldwide, in an advisory capacity. Salil has spent 20 years in banking on operations, technology and business transformation. He is eight years young in digital banking and FinTech.

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