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Open Banking is an innovative financial service used in modern banking to cater to various customer needs. It provides third-party developers and service providers open access to customers’ banking, transaction, and other financial data. This is done from banks and other non-banking institutions using Application Programming Interfaces (APIs). Open Banking is often referred to as ‘open bank data’. In simple words, open banking is about providing financial information to service providers or third parties in a secure way.
History of Open Banking
A Revised Payment Service directive was introduced by European Lawmakers in 2015, which allowed the use of innovative online and mobile payments in banking. In 2016, the UK Competition and Markets Authority directed nine big banks to allow licensed third-party access to their data. This helped all payment service providers to operate at the same level and also maintain security and customer protection.
Evolution of Open Banking in India
The Banking System in India has had constant revolutions. The traditional product-centric, inside-out approach is converted into a consumption-based,outside-in approach. The former believes that the capabilities and inner strengths of the organization will lead to better results while the later beliefs in creating customer value for a sustainable future. India entered into open banking through Unified Payment Interface (UPI) by the Indian Government in 2016. Unlike the initiatives in the UK and US where open banking operations are market-driven and Regulation driven respectively, India combined both and created a hybrid model, where both government and markets play an active role in these services. UPI allows individuals to access their bank accounts from registered applications such as Google pay and make transactions. These initiatives were brought into Indian Markets by the National Payments Council of India (NPCI). In recent times, with the emergence of players like, API Aggregators and Digital Banks, the life of customers is simplified. Large banks such as ICICI have also joined the business by releasing their developer portal consisting of over 250 APIs.
List of top private Indian banks who have opened their APIs to Fintechs for better customer Services:
Kotak Mahindra Bank
YES Bank
HDFC Bank
ICICI Bank
Kotak Mahindra Bank had announced its open bank platform launch in November 2018. They had a collaborative ecosystem that is powered by a developer portal making Kotak’s API available to fintech and developers. The platform offers lending and payment options to serve customer needs. Fintechs developers have to register their details on a portal before getting access to the bank's APIs. The bank had an ABCD growth charter catering A- AI enriched app B-Biometric Enabled Branch C-Context enhanced customer experience D-Data empowered design and this initiative has been a part of A, which is an AI enriched app.
YES Bank The fintech developer portal of YES bank was launched in November 2019. It consists of over 50 virtual APIs and is in line with the bank's strategy of creating customers and retaining them by providing them with valuable services. YES bank grants access to four usage categories which are
Management
Payments
Cards
CRM
HDFC Bank HDFC Bank has 142 APIs in its present catalogue. The bank aims at security in exposing APIs to developers along with providing all necessary tools to build applications. The domains include payments, customer sourcing, and servicing.
ICICI Bank The API portal launch of ICICI Bank was in January 2020.‘ICICI Bank API Banking portal’ has 250 APIs enabling businesses, fintech, corporates, and e-commerce start-ups to partner with the bank. The portal incorporates a detailed workflow for conveniently moving the API solution to the final production stage.
How Open Banking Ecosystem in India works
The open Banking network in India can be broadly divided into five layers:
1. Banking Layer-Banks and Non-Banking Financial Corporations(NBFCs)
2. Technology Layer-Application Programming Interfaces(APIs), API Integrators, Networks
3. Third-Party API layer-API Stack Players, NBFC Account Aggregators
4. Customer Layer-Retail NeoBanks, SME NeoBanks, Digital BAnks, Big techs
5. Enabling Layer-KYC / AML / Risk Management Players / Credit Bureau, India StackInvestors
Banking Layer
The Banks and NBFCs consist of the bottom layer of the open banking ecosystem. They offer APIs to perform banking services which include Payments, Collections, lending, etc. The introduction of open banking allows third parties to develop better personal finance management. This creates pressure on existing banks and financial service providers to improve their services. Due to this increased competition, banks either enhance their financial services or partner with third parties. The banks utilize the APIs to stay at par with the competition. APIs refer to the set of codes and protocols which decide the path of interaction among various software components. These enable day-to-day transactions like collections, disbursements, etc.
Technology Layer
This layer is fueled by technology, the integrators who have coding expertise. API gateway enables access to the bank's API in a secured way. It also handles user and partner authentication, routing controls, API monetization, monitoring, and analytics.API Integrators are the technology-based startups that guide the development of API Gateways along with handling the bank’s internal APIs. Payment Networks in India provide payment routes to everyone through instruments like Debit Cards, Credit Cards, UPI, etc.
Third-Party API Layer:
The API slack provides access to banks to fintech. NBFc aggregators enable the customers to get a single view of their financial status and consent-based sharing of information through APIs.
Customer Layer
These constitute Neobanks- which is a digital bank with no branches. These lack physical existence and are completely online. Neobanks focuses on retail customer needs like savings and payments. Banks like Kotak, SBI, and DBS have also taken aggressive measures to new-age banking and made retail Digital Banks. Big technological-based players such as Amazon and Google have also launched their UPI-enabled platforms.
Enabling Layer: Data Providers / India Stack:
These help customers onboarding and management through KYC Check, Credit Checks, etc. Investors work at all layers.
Significance of Open Banking in India
Since open banks are digital, they open a wide benefit window which includes:
Easy Account Creation
User-Friendly Interface
Easy access to transaction Records
Easy Account Creation: Creating an account in a traditional bank is a cumbersome process. When it comes to open banking this process becomes extremely easy saving customers both effort and time.
User-Friendly Interface: Open Banking provides a good customer experience. The interface is easy to understand and fast. The applications are designed to understand the customer's needs.
Transaction Records: Immediate transaction recording takes place in the case of open banking. This enables customers to access the full transaction history anytime with a simple click. Apart from this, Open Banking also provides
Operational Efficiency
Standard Delivery Mechanism
Continuous Delivery
Commercialization of Bank’s Infrastructure
API-based banking systems can better service multiple activities associated with one customer. These can be further improved by the API integration tool. This tool connects externally facing APIs with internal Banking API and manages records. The requests of customers are directed to the endpoint through technology allowing back-office changes without impacting customers’ engagement service. Instant access to financial data is a major requirement of customers in this digital age. Open banking enables them to choose from various platforms, which would best suit them. To financial institutions, it provides customization of this application software to innovate and develop. There is a high growth potential for financial institutions through open banking.
Safety
Authorized providers have access to the data for the service customers need. In simple words, if one wants to look at account details, providers won't be able to receive your debit card information unless you give them your permission. Apart from this, all providers have to comply with data protection rules, this includes GDPR regulation which came in May 2018. According to this, the provider has to inform the customer which data it will use, the duration, and how that information will be used. In the end, it's the customer's choice if he wants to opt for these services or not. However, Open Banking Application Based Programming has a few risk elements. The threat of malicious third-party applications can wipe a customer's account. Cybersecurity is a concern for India. The Reserve Bank of India is also stressed and planning on a framework addressing cyber risk since the Indian Economy is being pushed towards being cashless. The other risks with open banking include data loss, identity theft, and terrorist financing activities. Full Digital activities are managed on the web which increases the chances of fraudulent activities. However, the Indian Government has increased its focus towards security with the encouragement of digital and cashless India. (Cybersecurity in Digital Banking: Threats, Challenges and Solution)
Sharing of Data
“Data sharing is based on consent,” The rules say that banks can share information only when a customer gives permission to new providers. The providers will ask for consent to access information. And this permission is withdrawable.
With the consent of the customer, third parties can access the following accounts:
Current Account
Prepaid Cards
Savings Account
can be shared
The rules are applicable to accounts that can be accessed online and this online banking is needed to be connected by a third party. However, it is important to know with whom data is being shared. Banks won’t be liable if the customer shares his data with an unauthorized service provider. These authorized third parties are regulated by the Financial Conduct Authority(FCA) and will appear in FCA’s Register or on the Open Banking Directory. Authorized service providers offer two types of services, and they are required to have different authorizations for each of them.
Account Information Services
Payment initiation Services
Account information Services makes all account information from different banks visible in one place and offers budget features and product recommendations. This could also include budgeting applications and price comparison websites. Payment initiation services offer direct payment from bank accounts to companies.
Is Open Banking Recommended?
Open Banking has a high potential to revolutionize money. However since it is consent-based, It's totally based on the customer's personal choice if he wants to share data with a third party or not. They offer better deals and help with finances, one should stay protected before availing of these services. In the end, it's all your choice
Conclusion
Open Banking in India is the result of increased competition in financial services. Banks are left with no choice but to revolutionize the traditional inside-out approach to a customer-centric approach for retaining customers. Open Banking will bring positive changes, with improved regulations, and technology. The banks have to follow the “Customer is the King” ideology to survive the competition and enhance the overall customer banking experience.