The Future of Finance: How to Cope With Open Banking In Emerging Asia
JAKARTA – IDFinancials.
For more than a decade, Asia has been the largest regional banking market and as the continent’s massive middle class continues to grow, McKinsey expects personal financial assets in the region to reach US$69 trillion by 2025, or 75% of the global total.
However, in recent years, traditional banks have been disrupted or have faced stiff competition from fintech startups — be they pure-play digital banks or e-commerce platforms offering quasi-banking services. These players have catered to largely ignored, low-margin, high-risk customer bases, namely those in rural areas of emerging markets.
Despite the significant growth in Asia’s banked population, a third of the world’s 1.7 billion unbanked people live in just four Asian countries: China, India, Pakistan, and Indonesia.
Often left to state-owned financiers or developmental banks due to smaller margins, increased hand-holding, and issues assessing creditworthiness, these customer groups have been targeted by innovative fintech brands offering tailored products such as P2P lending, crowdfunding, and for micro enterprises on e-marketplaces, invoice financing.
Examining the Asian digital banking scene
A 2020 Working Paper by the Consultative Group to Assist the Poor examined three case studies of digital banking across emerging Asia, revealing some common features. The successful ones tend to:
- Leverage data analytics to better understand target customers
- Develop affordable products tailored to customer needs
- Offer streamlined digital on-boarding processes
- Blend offline and online customer engagement
The final feature above is worth highlighting for its relevance to Indonesia, an archipelago nation where even e-commerce unicorns like Tokopedia and Grab have invested heavily in online-to-offline solutions that cater to customers in rural areas.
According to a 2019 survey by the local Financial Services Authority, Indonesia’s financial inclusion rate stood at 76%, marking an increase of some 40 million unbanked adults from 2017, when the rate was nearly 50%.
One path traditional banks can take without reinventing the digital wheel is open banking, a concept centered around the sharing of bank data with third parties, with the goal of opening up the banking industry and encouraging innovation.
Exploring the concept of open banking
If you’re still fuzzy on what open banking is, here’s an easy way to wrap your head around the concept: You’ve just picked out a new laptop on your favorite e-marketplace. It’s time to check out and make payment. When doing so, you notice that you’re able to apply for a bank loan directly through the site. In fact, the whale process is integrated. There must be some sort of technical cooperation between the site and the bank itself. This is one example of open banking.
Through application programming interfaces (APIs), customer data is shared securely and seamlessly between banks and third parties which enables the creation of new apps and services. These apps can be plugged into banks’ own systems to offer new or improved services to their customers, or non-bank services that require customers’ banking data.
Allied Market Research figures put the global open banking market at US$7.3 billion in 2018, and this is expected to balloon to US$43.2 billion by 2026 at a CAGR of 24.4%.
Key drivers of open banking
Two key financial services will drive this growth: banking and capital markets products, as well as payments. In terms of distribution, the app market far outpaces other channels.
Not only is open banking a cheaper alternative to doing everything in-house, it is also a more effective way to reach customers and collate richer, more in-depth data via partnerships with apps.
For decades, traditional banks have been seen as having “moats,” protection against the threat of new competitors or substitute products. Historically, these have been things like making it hard or expensive for the customer to switch products, or just creating and relying on economies of scale.
But today, the massive scale and market shares that traditional banks have long enjoyed no longer represent durable moats in the long term. Neither do difficult, complicated, and opaque customer onboarding experiences. Fintech brands are offering easy, seamless experiences for customers looking to open accounts, make payments, and get loans.
Nonetheless, traditional banks still have the upper hand, with years of brand name recognition among customers and access to rural areas via brick-and-mortar branches and other networks. Via open banking, banks can lend their know-your-customer expertise to third parties, while gaining access to a richer level of customer data across different apps (e.g. spending behavior and transaction volumes).
The Emerging Payments Association Asia suggests three key elements for successful open banking: open APIs, fintech ecosystem, and adoption of new technologies.
Open APIs are simply APIs that are made publicly available for developers to use and connect to their platforms, or build products from. The public nature of open APIs helps improve interoperability of new apps and services — allowing more developers to build products and more customers to access services backed by the same APIs, while giving banks easy consolidation of customer data.
A healthy fintech ecosystem of consumers, financial institutions, and regulators can benefit from lower costs and improved products via open banking. Open banking offers a competitive and innovative environment through the transfer of consumer data.
With developers constantly innovating products with open APIs, banks will be introduced to new technologies, which they can in turn can leverage to create better products and services.
Traditional banks and stakeholders must build out their own open banking initiatives — or form strategic alliances — if they don’t want their lunches eaten by new fintech startups.
Digital transformation is no longer a ‘maybe’ proposition. It is a ‘must.’ It’s a defensive move to avoid being left behind in the open finance arena. Banks that embrace open banking while protecting customer privacy and data stand a decent shot of building digital moats.
Featured image credit: Unsplash