A few years ago, banks guarded their data with utmost security and privacy. In fact, they were more reluctant to share customer and financial data than they were about parting with their money. But with the growth of fintech start-ups, banks are now realising that to stick to rigorous banking methods is to become irrelevant. They are now much more flexible and ready to share data through APIs for fintech start-ups and are thus siding with the competition. As a result, both the banking as well as the fintech sector are growing together and have become mutually beneficial to each other.
What is open banking?
Open Banking is an initiative which is fostering innovation in the fintech sector. It transforms the banking sector into a more inclusive and convenient medium for users. Besides financial inclusion, it is pivotal in driving innovation in the banking industry. Open banking cuts the dependency on legacy infrastructure among banks. It’s the bridge that’s culminating in more partnerships and collaborations between traditional banks and the fintech sector, thus encouraging innovation in fintech and leading to higher fintech adoptions among consumers.
How open banking is driving SME success in Fintech
The fintech sector is riddled with disruptive players especially among start-ups and SMEs. These fintech players are collaborating with banks and leveraging APIs to create digital solutions that are democratising financial services. This has been possible only because of the prevalence of the open banking system.
How MSMEs in Fintech are benefitting
India has high demand for credit and in this regard the Open Credit and Open Credit Enablement Network (OCEN) have emerged to democratise credit for the vulnerable segments like MSMEs and small businesses. By providing credit access to the severely underpenetrated MSME sector, OCEN is a valuable technology framework that’s giving rise to the open data economy. On the other hand, it nurtures multiple service providers including technology companies in fintech to extend credit services through innovative solutions.
Funded by data
Through open banking, banks are making valuable data available via APIs. This is funding small and mid-size enterprises (SMEs) with a more valuable asset than hard capital ‘data’, which is driving fintech success. The data they harvest is endowing SMEs with real value. Data sharing implementations like the AA (Account Aggregators) architecture and the DEPA (Data Empowerment and Protection Architecture) are helping lenders in fintech to lend money to individuals and small businesses both in the fintech and non-fintech space within minutes. With data flowing freely, subsectors in fintech are thriving with new players venturing into sub-sectors like lending, wealth management, personal finance management, accounting, etc.
India’s Open Banking Ecosystem and UPI
India’s Open Banking system is based on a hybrid model comprising IndiaStack, a Government API initiative and software platform for businesses, start-ups and developers. UPI (Unified Payments Interface) is a subset of IndiaStack that’s a classic example of the introduction of open banking in the country.
Open banking cuts the dependency on legacy infrastructure among banks. It's the bridge that’s culminating in more partnerships and collaborations between traditional banks and the fintech sector, thus encouraging innovation in fintech and leading to higher fintech adoptions among consumers.
What’s in it for me?
Fintech start-ups can either develop data driven solutions for the payment’s ecosystem or partner/cross-collaborate with other fintech players to avail these solutions. Open Banking and the Open Data Economy have made available large repositories of data to the fintech sector. By leveraging these data repositories, fintech start-ups have huge potential currently in the market.
The trend is here to stay in the fintech space, and more banks are coming out of their hard shells to embrace and aid fintechs in the process. Ever since the open banking ecosystem began including NBFCs (non-banking financial companies) in 2020, the trend has only grown and picked up pace with the rising demand in digital financial services by consumers.
Start-ups in this space are attracting huge levels of funding since open banking is strengthening the bond between technology and the economy. If the open data economy becomes a reality and open banking is fully unleashed, the fintech start-up sector will be at the forefront and will lead the banking revolution that’s already happening.