The banking ecosystem of India has gone through rapid changes since the last decade, moving from a conventional product-centric approach to deal with a consumption-based system. Until now banking ecosystem was pioneered by Banking Financial Services and Insurance (BFSI) players like Yes Bank, Kotak, RBL. However, now banking industry is leaving the brick-and-mortar system and heading towards a comprehensive digital ecosystem.
The Open Banking ecosystem in India has incorporated Non-Banking Financial Companies (NBFC’s) and other FinTech players under its domain to provide speedy, efficient, and secured services to its consumer.
What is Open Banking?
Open Banking is referred to as a system in which traditional banks and financial institutions share data of their consumers with Third Part Providers (TPPs) with the help of Application Programming Interfaces (APIs), to develop new apps and services, share financial information efficiently, provide real-time payments, increase financial transparency, etc.
Open banking offers incumbent banks the opportunity to partner with FinTech Companies rather than compete with them. It has now become a piece of their organizational culture.
The ecosystem has also witnessed the rise of significant players in API validation and data-driven solutions, empowering it to develop into maybe what can be known as the most holistic and comprehensive open banking ecosystem worldwide.
Open Banking Ecosystem in India
The Open Banking ecosystem in India is layered into 5 categories:
- banking layer;
- technology layer;
- third-party API layer;
- customer layer; and
- enabling layer
The Banking layer contains the bank APIs shaping the bottom layer to provide services including payments, lending, and collections. This layer is supported by technology stack partners such as API integrators and API gateway players, as well as data validation and analytics specialists.
The Banking layer is followed by Technology layer, which is empowered by key participants who perform tasks like data validation, analytics, and infrastructure. The viability of this organization has prompted the rise of a few cases like neo banks, digital banks, and big tech players who use bank APIs for their underlying operations. Investors likewise support the ecosystem. Many banks and NBFCs have stepped up, partnering with the ecosystem through a significant investment in technology and change in their internal culture.
The base of the Open Banking-based business model is Banks and NBFCs. They offer their business products and services in API packages. These APIs range from Payments APIs like IMPS, Penny Drop, UPI, NEFT, AEPS, etc., or Collection APIs like UPI Collect, NACH, Direct Mandates, or Lending APIs like Full-stack for specific loans like personal loan, education loan, etc., and other banking services. However, only by the democratization of the customers’ financial data can a good open banking ecosystem be achieved.
The framework for Open Banking has become possible due to enablers like data providers that ensure proper risk management by verifying the customer’s credit status and identity. With the ecosystem acquiring more players and evolving into a more collaborative approach, the focus has shifted away from owning the best products and providing an enhanced customer journey and seamless customer experience. This is where Analytics and AI also play a key role.
In contrast to the Open Banking initiatives witnessed in some countries, India has embraced a hybrid approach where both the regulator and the market have collaborated to develop the Open Banking space in India. Few of the initiatives taken in that direction are depicted below:
The India Stack initiative, which was introduced more than ten years ago, aims to create a consolidated software platform for government, businesses, startups and developers. This initiative intends to promote financial inclusion through increased access to financial services, improve the delivery of public services and benefits, and increase competition in the Indian financial sector.
Reserve Bank of India (RBI) and National Payment Corporation of India (NPCI) came out with a payment mechanism like Unified Payments Interface (UPI) and released its API for the banks and third-party app providers to build upon. With the RBI Innovation Hub and Regulatory Sandbox launch, RBI’s approach has been that of encouragement and guidance.
The Aadhaar Identification System in India is another initiative by the government that has helped the development of Digital Finance and Open Banking in India. The Aadhaar system has introduced electronic know-your-customer (e-KYC), which allows banks to digitally onboard customers and drastically reduce operational costs of verifying the identity of customers.
Further, the government released a draft policy, named the Data Empowerment and Protection Architecture (DEPA). This framework intends to create a consent-based data sharing infrastructure to further push the financial inclusion in India.
The market participants are also driving innovation, and many banks are releasing their APIs and joining forces with the FinTech Companies to provide a better experience to their customers.
The commencement of Open Banking has completely revolutionised the traditional banking system in India. Now, with the inauguration of Open Banking in India there is no more need of “screen scrapping” as earlier the first generation of personal finance management apps, also known as Account Aggregator Platform (AAP) required its customers to provide the same user name and password, which was used to log in to your bank account, which is then used by the platform to “screen scrape” – to pick and choose the information it needed from among all the information it had at its disposal.
This method was very cumbersome, unsecured, and unreliable and required reworking after bank updated its website. However, APIs used by Open Banking resolved the issue, as it gives direct access to the exact pieces of data needed without needing password i.e. account balance or specific transaction details.
Therefore, considering the growth of Open Banking in India, although the traditional banking mindset has been the foundation of banking in India, it has provided new perspectives to make banking easier, efficient, and customer friendly.
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