Open Banking

Never in the history of Indian Banking that so much is happening, in so short a time – be it payments, lending, collections – large scale disruptions and disaggregation of different segment of banking services – by various start-ups.  To top it all, open banking as a concept has started gaining traction in India with enabling infrastructure through Open Credit Enabling Network [OCEN] and Account Aggregator [AA] models. To understand this and more as to what is in store for Indian Banks, we had the opportunity of hearing from Shri Saurabh Tripathi, MD and Senior Partner, BCG on January 7, 2022.  This session is part of our series of Expert Talks which we organise on Fridays.

While it will be a pleasure to listen to him directly, from the video recording (appx 1 hour), we are prompted to collate some of the points of reckoning for quick reference. We strongly suggest that you take your free time to listen to him directly.

What is changing?

  • Share of semi-urban and rural customers in loan retail lending has been steadily rising. This is independent of shocks caused by COVID and one-off events
  • Branch density in India has been growing steadily, but remains well short of developed nations
  • Success of UPI – Number of transactions gone through the roof.
  • Also, many merchants have started putting QR codes leading to lower cash utilization. This would lead to cash digitization.
  • Daily cash transaction moves from other modes to digital modes which leads to presence on digital statements which are machine readable. This helps banks to evaluate and provide credit to both the person paying to the merchant and the merchant itself.
  • Bank Statements have higher ability to predict the ability to pay of any person

Neo-banking landscape:

  • 45% of total Digital transactions are actually happening on non-bank platform à 75% in next 5 years – not be surprising though transactions may continue to happen in banking platforms as well. 5% of savings account on non-bank platforms currently and this may go up to 25% in FY 26.
  • But for neo banks, path to profitability is only through lending
  • Given RBI’s existing policies, digital banking licenses may take longer time.
  • The neo-banking platforms might therefore need to consider seeking registration from RBI to operate as NBFC.

Enabling lending through tech:

  • It can be reasonably expected that by FY26 the bulk of banks’ digital services will be originated on and available through third party platforms and therefore, in the future, lending process will be facilitated by availability of data from third-party platforms and service providers
  • Borrowers’ data that lenders require for their assessment will be available on third-party platforms (GST, Electricity bill, Utility bills, EPFO details, MoC registration data etc.,) and data providers (like an Account Aggregator), made accessible to the lender on demand and per consent of the borrower.
  • Bank Statements combined with information collated by Account Aggregators from GST, MF Data, Insurance Data, Income Tax etc. would make the predictability of ability to pay higher and enable further credit.
  • Even in secured lending, processes can be expedited, through digitization of records (land and property records) and financial assets
  • This would be enabled by OCEN (Open Credit Enablement Network), which will provide a single set of APIs to connect and integrate all lenders – enabling it to act as a super Account Aggregator
  • Open availability of data will ensure high levels of transparency in the system, in turn resulting in competition among lenders
  • Massive potential with Open Network for Digital Commerce [ONDC] – can create a digital ecosystem connecting many players, all of whom can be involved in providing banking services / lending. Any platform that receives customer traffic can become a loan service provider [LSP]
  • There can be ‘big tech’ play that sits on top of banking solutions to capture customer relationship. A public stack through ONDC, or some such solution can level the playing field for smaller players.

Valuations and market caps

  • We should see changes in the market cap shares of financial services companies.
  • In the future, the share of PSU Banks and NBFCs are likely to go down, while the share of Private Banks and Fintech companies are bound to rise – core banking solutions with banks presently in operation, are not able to match fintech’s in uptime / availability and may need to be upgraded to keep up with the pace and competition.
  • Cybersecurity may be another key issue to address
  • Even within Fintech, payments accounts for the largest market cap currently. But this will soon be overtaken by lending tech
  • BNPL is another area that will scale massively, and will soon surpass credit cards in customer base

Way forward:

  • Unlock potential for embedded finance by neo banks
  • Pivot to sector specific digital ecosystem solutions for industry with embedded finance
  • Leverage existing networks such as FPOs, dairy collection centres, post offices, ration shops
  • Build partnership business units
  • ‘Federated lending’
  • Build tech, AI, and digital talent
  • For Global banks, the standard has been that 10.3% of staff are tech staff. This figure is at <2% for Indian banks. Over time this gap will have to bridged
  • Apps and products must be designed keeping customer experience at the fore front
  • Collective action as an Industry – as a SRO or Association to bring in changes from regulator depending on market requirements.


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