Ecosystem orchestration and ecosystem enablement are at the core of open banking and open finance, which is very different from how the financial industries have operated for the last century. If you look at the last century of the financial services industry, we had great successes and banks having trillion dollar assets on their books. They built massive enterprises in the process. Because of open banking, successful firms are no more looking to build massive enterprises; they are looking to build successful ecosystems. That is how the future of the financial services industry will emerge, where ecosystems will be much more important than enterprises.
If you look at industries that have gone through massive disruption, say Spotify, Netflix, and Amazon, they are no more distributors. They started their business proposition by becoming a distributor and solved the last mile challenge of accessing different industry products and allowing customers to access products through digital channels. But, now, they are manufacturing, curating, and delivering the product. This is a full stack transformation.
The financial industry is still undergoing massive changes. We don’t have a way to do full stack transformation unless we reimagine the financial world in how banking and financial products are built. But full stack transformation will still take time and a lot of effort from the ecosystem participants to come together.
Because the financial industry deals with actual money people earn, it does not leave room for mistakes. That’s why the financial services industry is massively regulated. There’s a challenge and reimagining things from the ground up.
There is reimagination and rebuilding of the monetary products that have existed for so long. Monetary products, like fiat currency, treasury bonds, foreign exchange reserves, etc., are all undergoing transformation.
But, in the financial services industry, in particular, the reimagination of banking products hasn’t happened in a big way. We have digital bank accounts, zero brokerage investment accounts, and an on-demand insurance plan. However, a lot is still pending if you look at the primary attributes of the Financial Services product.
We often think of open banking and open finance as primary contributors to solving the distribution problem. And if you look at history, they certainly contributed a lot to solving the distribution problem because they allow fintechs and non-banks to embed financial products and enable distribution channels to customers.
But suppose you look at the larger picture of open finance. In that case, it includes sharing data between regulated and sometimes non-regulated entities, depending on how the regulatory structure is placed in the country. But the core focus in almost every geography is that data sharing must be with the customer’s consent.
The customer is in charge of sharing data that the financial institutions have held for so many years with anyone, whether an individual, a small-medium business, or an enterprise, who will help them unlock value. The decision is left to the cognizance of the customer with whom they will share the data. But if you look at the larger picture, it also enables bankers and fintechs to create new products. It is not just about small-sized credit products but also credit products that never existed before.
This re-imagination of financial products is possible today because of data availability to financial services manufacturers.
The distributors get access to data and can onboard customers through digital processes. They are the massive beneficiaries of open finance because that’s how open finance enables massive gain distribution. So it doesn’t matter who manufactures the product; the distribution can happen through third-party channels. And that is how distribution is a massive beneficiary of open finance.
The full stack re-imagination of the financial services industry can be facilitated and accelerated by how open finance takes shape in different parts of the world.
The Rise of Open Finance
Open finance has evolved over the years. A lot of credit is given to the regulatory bodies in the UK, who started the process. In 2015-2016, it was realized that financial services almost control 80 to 90% of the assets and current accounts, etc. That led to the launch of open banking technology, an open banking data aggregation platform for themselves and the end customer to perform simple account aggregation functionality. Then the fintechs joined the bandwagon and acquired many customers; they acquired a lot of funding from venture funds and bigger banks like JP Morgan, who invested in Plaid alongside Goldman Sachs. So regulators are onboard banks and fintechs. They also act as data providers rather than just accessing data from other banks. Entry of players like Stripe. Apple, Visa, and MasterCard, through acquisition and in-house products in the open finance segment, will accelerate the momentum.
All open finance has been taking shape in different countries. The phenomenon has truly gone global. Along with developed markets, emerging markets also enjoy the benefits of open banking and open finance. In India, we haven’t made it mandatory for banks to share data with a third party. This is primarily considering the large distribution of customer segments who may not understand open banking, even after many customer awareness campaigns. That is why regulators have not mandated data sharing. However, there have been significant nudges from the Central bank and the Ministry of Finance that banks have to participate in open banking and open finance. This bodes well for the industry in India.
In India, the government has collaborated with the ecosystem to build a digital public infrastructure called India stack, which has many components. These components work together to unlock significant value for the incumbent banks and digital entrants from other industries. This enables exponential growth in the industry, as we have seen with the micropayments.
The quest to become a SuperApp
In the Indian market, there’s a lot of noise and hype around SuperApp. Everyone wants to become a super app eventually because that is how people see the future of bigger ecosystems and enterprises. In India, we have TataNeu, which can be a SuperApp. We have Flipkart, a digital e-commerce company that has built quite a few things in and around e-commerce.
SuperApps are not just combining different services for the customer. It is also allowing data sharing between different apps that the consumer uses. So that demand side efficiencies can be unlocked by the SuperApp.
That’s how the WeChat story of massive growth and scalability is not just the supply side efficiency that WeChat enjoyed. But because they understood the entire digital footprint and behavior of the customer, they were able to build a massive ecosystem that services all the needs of the customer from one app. That’s how we feel; a SuperApp will have a lot of interplay with open banking.
Platform finance: from unbundling to re-bundling
On the FinTech side, many players started small with one proposition, and that phenomenon was called unbundling of finance. You build one product for one customer segment, which a traditional bank underserves, and then you perfect that service for that customer. Then you move on from there.
The whole re-bundling is not just around financial services but also clubbing lifestyle services that the customer uses. This interplay of financial services with lifestyle services boosts the arm because data sharing will happen based on customer consent.
Fintersection: Crossover between BNPL and Neobanking
Many neobanks, which started with a current account savings account and prepaid card and debit card products, are now moving to add Buy now pay later to their portfolio of services to bring credit products to their customers. So, they are taking a step toward becoming a credit provider.
On the other hand, BNPL companies are launching digital banks like products like debit cards, bank accounts, and other payment products to leverage full engagement opportunities that the customer base that they currently have presents to them.
If you consider a traditional snapshot of India, people talk about different companies across payments, lending, investment, insurance, etc. This is a very traditional way of looking at the FinTech industry. A better way to look at the FinTech industry is where there’s a lot of overlap between payments, companies launching credit products, liquid companies, launching payment gateways, neobanks, etc. Then you have financial software or infrastructure platforms, enabling a lot of innovation that we see in the market. A lot of overlap between different sectors of the company has started to happen, enabling a more granular and useful level of data available in the industry to build and distribute financial products. So that’s the way the FinTech landscape is evolving in India.
Future of Fintech
At Whiteside, we look at it a little differently. We look at six categories that have a lot of interplays. If you look beneath the surface, we have FinTech players, where the technology takes prominence, where they are either building the tech stack or the middleware on which financial services will be offered. Then you have financial services providers, the customer-facing companies who either use one or more of these technology providers to build their solution or participate in the technology layer themselves.
Stripe just launched an open banking and open finance product. They have been doing digital finance for a long time in partnership with banks and payment networks as a payment facilitator and acquirer. They have a product called stripe treasury, their embedded finance platform that they offer to fintechs and anyone who wants to launch a financial product in partnership with their banking partners. They partnered with Shopify last year, which allowed them to go into building platforms and get access to all the customers that Shopify would have. And in decentralized finance, they have started enabling merchants to accept crypto.
If you look at the Indian counterparts, that’s where the opportunity is. Almost all the companies in the global technology providers section are either unicorns or nearing the unicorn valuation. But if you look at the technology providers, I strongly believe that the next set of unicorns from India should come from this space. And not just because there’s an opportunity to build technology infrastructure, which will propel the industry’s transformation, but also because India has a massive talent that many global companies use.
Why is open finance an extremely important trend?
Open finance has an interplay with Future of FinTech themes.
On the digital side, banks like Calling and Chime partner with many data aggregators in the UK and the US to enable digital onboarding, marketplaces, and account aggregation for customers. Green finance companies like Cogo and Doconomy partner with companies in Europe to enable access to data that can help banks and fintechs calculate their customers’ carbon footprints. Then you have platform companies like Douugh and Revolut trying to build a platform or a financial SuperApp. They have their respective partnership with open finance lists. Lastly, the decentralized finance players have just started partnering up with open banking, especially on the payment side, to enable on-ramp access to defy products by making payments to fiat money. So that’s how the interplay between open finance and other emerging FinTech teams makes the whole thing super important.
The open banking stack in India
The account aggregator layer is the primary thing that differentiates this stack from other players. These players are data blind, so they are not allowed to do a lot of data analytics and build workflows. We have another layer called technical service providers, or the TSP, which will come into play significantly. The other noticeable piece is the industry infrastructure, which separates how India is very different from other parts of the world. This industry infrastructure is something that the government and the regulatory bodies, and other ecosystem participants have jointly built together. Because the government owns it, it allows unfettered access to anyone who is regulated and who should get access to those kinds of infrastructure. So that sets the tone for massive disruption in the industry.
A few months back, India launched the NDC platform, the open network for digital commerce, which has set up an interoperable and ecosystem-level business model for digital commerce in India and set up a digital banking unit in India.
To conclude, this is how we look at open finance and how the industry is evolving. We will not stop at open finance but move towards an open economy. An open economy is a logical transition from financial services to other industries like e-commerce payroll and utility healthcare. Data sharing will happen across industry participants and not just inside the financial services industry participants.