The promise & pitfalls of Open Banking in India

Mr. Oddiraju writes on how open banking can transform India’s financial sector by enhancing inclusivity and customer experience.

From electricity bills to mutual funds, banks have a repository of what we spend, where we spend and how we invest. This critical financial data is now being increasingly shared with third parties in what is known as the “open banking” phenomenon and this development is the key that will unlock a slew of digital financial innovation. Such advantages are driving the growth of the global open banking market as it is expected to reach US$ 43 billion in valuation by 2026.

But what is open banking? It is a system through which consumers or businesses authorize third parties to access their financial data. This type of banking allows such third parties to provide various products and services as a bundle to customers based on their investment and spending habits. With implementation in more than 50 countries, open banking could play a critical role in financial inclusion and equity.

 This is of particular interest in the Indian context where close to 190 million people are still unbanked and policymakers struggle to provide affordable and accessible financial services to this unbanked population.

Open Banking in India

One can say that the Indian government has already created the infrastructure to make open banking easier. Aadhaar, the state-built national identity database, reduces the costs and risks of sharing customer information. The affiliate, United Payments Interface (UPI) also enables common standards for digital payments. Aadhaar and UPI are thus the foundation which will allow banks to experiment with collaborative models.

Partnering with a consumer-facing platform can bring a bank a readymade huge user base, thus necessitating the widespread adoption of open banking. The inherent embedded finance offerings of open banking can solve the distribution problems of traditional banks, reduce operational costs, and bring about a greater degree of financial inclusivity.

However, Indian banks have been reluctant to explore such relationships. It must be noted that India has no regulatory mandate that forces banks to share their customer data with third parties. For example, Amazon has entered the payment market in the country by leveraging APIs from multiple banks to provide a range of financial services to its users. A homegrown company like Airtel Payments Bank was founded because brick-and-mortar branches were too expensive to reach new and underserved clients.

A more important category in India are businesses that operate on the principle of low-margin, high-volume. Such businesses, like the regular kirana stores, make their money by turning their inventory with minimal overhead at low margins. This is when open banking can act as a game-changer. By embedding a bank’s service into a third party’s platform, the costs of such merchants will be reduced.

The various advantages offered by open banking are as under:

Advantages of Open Banking

Personalization: One of the greatest benefits of open banking is that it allows banks to explore different industry partnerships and integrations faster and with much lower risk. This allows a financial institution to spread out its offerings beyond the traditional online banking platform in a manner that is faster and simpler. Consumers can now avail a diverse number of services from a central source and have greater transparency regarding the offers and their financial situation.

Customer experience: An improved customer experience has been brought on by two primary opportunities that open banking creates: a competitive environment and increased digital services. Open banking has opened the door for more players to enter the market. This has created a competitive environment which benefits consumers because, to stand out, companies need to ensure their customer service is of the highest standards. Legacy banks, such as the State Bank of India, have started to improve their online services, resulting in quicker and easier financial management for consumers at a lowered service cost.

Security: As third-party payment service providers must meet the highest security standards to operate in the market, open banking has also a greater degree of transparency and has standardised data sharing and security features.

Centralised information: Open banking enables the sharing of information previously only kept by banks. This data can now be transferred to licensed service providers with a consumer’s consent, making banking operations quicker and more convenient and available in one place. Financial services offer a larger number of customer needs by providing information when needed and managing transactions with greater visibility.

Added revenue source: Open Banking has the potential to create new revenue streams, especially in areas that were seen as internal banking services that depleted revenue. For instance, there is a huge opportunity for banks in the identity verification space. While customers own their data and share it with third-party apps of their own volition, there may be gaps while verifying this information. This is where open banking can act as an alternate revenue stream. Using open banking varied databases, financial institutions can now offer to verify the accuracy of any data at a nominal fee. Banks can also partner with fintech firms to create marketplaces and offer fintech services to their current customers, giving them a wider choice of new products that improve the customer experience and drive customer engagement.

The pitfalls

Lack of a framework: While the advantages of open banking from an Indian context are myriad, there are a few disadvantages as well. India needs a robust regulatory framework to deal with multiple challenges that can emanate from an increasing number of players in different geographies getting involved in open banking operations.

Privacy concerns: While technological innovation in banking is paramount, it cannot be pursued at the cost of customer privacy. There is also the issue of low digital literacy and lack of access to smartphones, especially among the economically weaker sections of society. This can deepen the already existing digital divide. As per a recent survey, 40% of rural consumers stated that they were unaware of digital payments and feared losing their money through such payment platforms. While “quick click” consent is a quick and easy way to accomplish an open banking mandate, it might leave customers vulnerable to data misuse, as they may not understand how or where their personal information is being used.

Way forward

Financial inclusivity and accessibility are the cornerstones of India’s economic development. Open Banking holds immense potential to transform the country’s financial sector by redefining the standards of customer experience. It gives banks a rich opportunity to expand their ecosystems and extend their reach to build a thriving digital future. The groundwork has already been laid, now all banks need to do is harness open banking with a digital-first approach.

Meet the author:

Mr. Vijay Oddiraju is the Co-founder and Chief Executive Officer of Volante Technologies.

Edited by Shivani Srivastava, Senior Editor, CFO India