The evolution of Open Banking in India

Open Banking in India has moved quickly in the last few years, and 2021 can indeed be considered The Year of Open Banking. This movement was visible across government initiatives, the launch of scalable Open Banking initiatives by banks, decent traction by multiple neobanks, funding & scaleup of multiple Banking-as-a-Service platforms.

With Banking-as-a-Service gaining significance, most prominent institutions and upcoming ones are setting full-scale units for BaaS and digital banking with clear revenue and customer engagement targets. There is distinct movement on hiring as well as training the resources for this service. Open Banking is providing newer opportunities to develop business models like B2B2C or B2B2B or B+B2C and other combinations instead of straight business models like B2C or B2B. 

Key changes in the last 12 months

The government continues to revolutionise the fintech ecosystem through the introduction of government supported frameworks like:

Aadhaar Authentication

We believe that government would continue to support the ecosystem through these initiatives, which provide potent rails for Open Banking to grow. The Personal Data Protection Bill expected to be enacted shortly would bring immense clarity to the market.

Regulatory movements: RBI has set up the Reserve Bank Innovation Hub, which will engage with the ecosystem to remove the friction in the market. RBI has also changed KYC policies in May 2021, which will help onboard digitally MSME customers and reduce the friction in Re-KYC. RBI has also given strong messages around Open Banking, digital lending, tokenization (powering payments), public credit registry (likely to launch soon), which is helping in reducing customer risks while bringing business enabling framework to the players.

Launch of Account Aggregator Platform: After a long pause of nearly five years, Account Aggregator Platform was launched in September 2021 with all key banks like ICICI Bank, HDFC Bank, Axis Bank, Kotak Bank joining as an Financial Information Provider (FIP) as well as Financial Information User (FIU). With multiple account aggregators and technology service providers aggressively pushing the ecosystem, we believe that almost 99% of bank accounts would come under the framework in 12 to 18 months. This will help the Financial Information User in improving credit underwriting, wealth management, cross-selling etc.

Deepening of API banking platforms by banks: API Banking in India started with Yes Bank and RBL Bank taking the lead in 2017. Most significant players like ICICI Bank, Axis Bank, Kotak Bank, and Smaller Players like SBM, AU SFB, Equitas SFB have now established comprehensive API banking platforms. With broader adoption and increasing support by Bank’s Boards, we believe that in the next 12 to 18 months, ten more banks will launch their API banking platforms. Multiple banks are building their Open Banking Strategy with focus on monetization of APIs with multiple business partnerships.

Transformation of multiple payment / lending fintechs into neobanks: Due to lack of revenues in payments and lack of engagement in lending, we have seen numerous prominent players moving towards neobanking like Razorpay, Niyopay, Myshubhlife, Chqbook, etc. These players are deeply engaging with their banking partners and widening the use-cases with time.

Bigtechs: Bigtechs like Google, Flipkart, Amazon, Whatsapp started their journey in banking in India through Wallet and UPI (the world’s biggest real-time payment platform). They have now begun innovating through newer services like Google launching fixed deposit opening in partnership with Equitas Bank. There is also a deeper partnership on the Cards and BNPL side developing between banks and bigtechs. Given the traction of bigtechs in the market, we believe that many fintechs / Open Banking platforms would be acquired by them, thereby accelerating the Open Banking ecosystem. We also see regulatory oversight to bring more clarity on potential issues in the context of bigtechs.

Embedded Finance: Beyond the bigtechs, we have seen multiple startups in edtech, agritech, ecommerce, mobility focusing on embedded finance in an aggressive way. Many of these players like Ola, Udaan, Stellapps have already established the business model and are working closely with Banks and NBFCs to scale the business. This is helping the startups in improving customer journeys, gaining access to customer data, increasing customer lifetime value and creating new revenue lines. We are seeing verticalization of finance, wherein traditional financial activities (paying, borrowing, insuring, investing) are getting customized to the needs of each industry vertical.

We see a different journey for retail and SME neobanks in India. Retail neobanks will move from primarily ‘Youth and Mass focused’ to more differentiated segments. Many of these new initiatives would close down due to a lack of differentiation and monetisation opportunities. They would find it challenging to build business as they would compete with larger all-in-one apps (PayTM, PhonePe) as well as digital banks (like Kotak and DBS). Larger retail neobanks with massive funding will do well due to leadership quality, access to more considerable funds, and ability to sustain growth.

We believe that SME neobanks like Open would continue to grow with more niches coming up like exporters, importers, industry-focused – say steel, ecommerce merchants. These startups would also face intense competition from SME neobank initiatives of major banks like HDFC Bank, ICICI Bank, SBI, etc.

Entry of international neobanks: Tide and Revolut have entered the Indian market and are working on partnerships with banks to launch their neobanks. They are expected to bring international practices as well as cross-border capabilities to the market. We believe that in the next 12 to 18 months, multiple international players will enter India through acquisition of Indian Neobanks or through greenfield implementations. 

Enlarged funding rounds: Investors have invested heavily into neobanks like Jupiter, Fi.Money, Bank Open, Flobiz, and Banking-as-a-Service platforms like Setu, Zeta, NIUM, Yap. Even early-stage players are getting decent funding rounds, which is likely to positively impact this segment’s growth. We believe that as many of these Neobanking players turn into Unicorns in next three years, there are possibilities of acquisitions of banks these players. Currently, multiple Indian banks are valued below a billion dollars and there are distinct opportunities to improve them through acquisitions. 

Talent & Organization Readiness: There is clear dearth of talent with experience digital and open banking, which is impacting the growth. Banks are collaborating with Digital Specialists to train their internal resources through long term interventions. They are also relooking and rebuilding their organization structure to align with Open Banking & Digital Business instead of just Brick & Mortar Business. Nearly 100,000 new roles are getting opened up across levels and verticals to support the change. 

Conclusion 

The Indian Open Banking ecosystem continues to thrive with active support from the government as well as the market. With the launch of Account Aggregators, API readiness of banks & NBFCs, entry of multiple neobanks, intense funding, India has become a role model for Open Banking Deployments globally. Indians are already using the power of Open Banking (UPI / AEPS) daily and are likely to adapt to newer innovations without much friction. 

By 2027, nearly 40% of the business of digitally savvy banks would be through embedded finance model (and neobanks) powered by Open Banking with ecommerce giants, social media players, mobility leaders, food delivery platforms, fintechs, and other customer engagement platforms. During this period, nearly 30% of businesses would be through their digital platforms (competing with neobanks) like mobile banking, Internet banking, Whatsapp banking.

The article was originally published in The Paypers` Open Banking Report 2021.

About Sameer Singh Jaini 

Founder and CEO of The Digital Fifth, Sameer has been the founding member of Kotak Mahindra Bank, played a crucial role in setting up Bharatiya Mahila Bank, and led core banking initiatives at Citibank. He is recognised as Fintech Asia Top 100 and is a recipient of the Best CIO & Innovation Award.

About Shashank Shekhar 

Shashank is Head of Consulting at The Digital Fifth and has experience in technology infrastructure, Digital banking, Open Banking, and governance. He was responsible for launching one of the first Open Banking Course in the world in 2019.

About The Digital Fifth

The Digital Fifth is India’s first fintech consulting and advisory firm for fintechs, banks and financial institutions. The firm also runs potentially one of the largest digital and fintech training institutions across world. They partner with international fintech start-ups for their entry into Indian Ecosystem as well as take Indian start-ups to foreign shores.