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Ramdas is a middle aged man and a third generation potter living in the country side of Bihar (an Indian State) with his wife and two children. Advent of Prime Minister Jan Dhan Yojna (PMJDY, Financial Inclusion initiative by Govt. of India) has opened up a bank account for him. Ramdas’ business transactions are mostly in cash, as are all his purchases for daily needs. He has to travel to a nearby village to deposit money in his account. The great distance he has to travel to reach the bank branch is responsible for his rare visits; and thereby increases his distance from other basic financial services like loans, fixed deposits, insurance products, etc.

Is there a way these financial services can be taken to Ramdas? Ramdas is an Aadhaar card holder, uses a mobile phone, and frequently recharges his prepaid talk-time balance at a nearby grocery store. Visiting business correspondent (Bank Mitra) of a different bank is a good friend of Ramdas and usually talks to him about banking products. Ramdas is thinking of expanding his business by purchasing a mechanized potter’s wheel to increase production, but the purchase requires a micro-business loan.

There are millions of people in India like Ramdas, who have been inducted into the formal financial ecosystem but remain dormant due to lack of financial access and usage points. Can open banking be the way forward in this situation? Open banking strategy enables a bank to focus on its core competency, and hand over customer relationship, marketing, product delivery and other support functions to third parties like local retailers, telecom operators or even logistics companies.

Open Banking to Rescue

Open banking strategy works on an API (Application Program Interface) driven technology framework, which can be seamlessly integrated with existing digital products in various businesses. This omni-channel banking experience- built by 3rd party non-traditional financial players on open APIs of banks, is destined to set a new normal in consumption of financial services. Open banking is both a challenge to the monopoly of banks in offering financial services; as well as an opportunity for them to integrate their services with different ecosystems and value chains and thereby achieve unparalleled service delivery to customers for additional revenue streams.

In the open banking ecosystem, non-traditional players like retailers, technology providers, telecom operators can deliver financial services and can continue to enhance their relationship with last mile customers without worrying about regulatory licenses. The arrangement favors greater competition among players owing to enhanced customer choice and diminishing relations of customers with traditional banking entities. Open banking represents a paradigm shift which promises faster payments, security enhancements with 3rd party apps and high accessibility with value added services to customers.

API driven open banking strategy is being introduced in many economies across the globe, but introduction of PSD2 by the European Union is worth mentioning. The banking ecosystem in the European region has taken revolutionary strides owing to Payment Service Directive 2 or PSD2, as the directive opened up the banking infrastructure and enabled data sharing with non-traditional players, paving the way for new business models and superior customer service.

Fidor Bank, a Munich based bank is spearheading the concept of open banking in the European region. Fidor bank has provided access to its banking APIs to various customer facing institutions like retail outlets and fuel stations. While retaining banking, which is its core competency, Fidor Bank has completely outsourced customer engagement and marketing to customer-facing institutions. As a result, the bank can now acquire customers indirectly and provide next generation banking services.

India Story

RBI’s vision document for 2018 and the Ratan Wattal Committee Report, 2017 treated financial inclusion through digital channels as an imperative. The reports indicate relevance of digital payments and their importance in promoting financial inclusion, as payments are one of the most used banking services when it comes to individuals. As per Google BCG Report, 2017 on digital payments, inadequate penetration of accepting infrastructure like PoS terminals and ATMs is one of the major obstacles to adoption of banking services. The report identified introduction of Unified Payments Interface (UPI), entry of non-traditional players, smartphone adoption as developments that are poised to create seismic changes in the banking ecosystem in India.

A glimpse of the potential of open banking strategy and its success can be seen in UPI powered PhonePe and Tez payments apps. PhonePe is owned by Flipkart and has tied up with Yes Bank for UPI services. Similarly, Tez is owned by Google and its UPI service component is powered by banks like SBI, Axis Bank, ICICI Bank and HDFC Bank. These apps utilize Flipkart and Google’s core competencies and strength of customer engagement to extend digital payment services. Currently, both apps lead the charts in UPI based transactions and are continuing to grow their customer base.

Such innovations are set to get a further boost with India Stack technologies. India Stack is an initiative by Product Nation powered by Isprit that has created various API stacks to enable one touch identity and background verification, digital storage, payments etc. to empower start-ups and developers to create next generation banking products.

The Big Question

In the Indian context, however, a big question remains unanswered with respect to open banking strategy. Will Ramdas trust a non-banking entity to handle his money? Will he be comfortable enough to know that his details are being shared with other players in the ecosystem? Will Ramdas ever go to a bank again? Perceptions and needs of the financial inclusion segment are heterogeneous and different from their counterparts who are active users of formal banking services. Understanding the needs of this segment will help us to forge a strategy for open banking based product development.

This research was developed as part of the Bharat Inclusion Research Fellowship.