Traditional banks often struggle to adapt due to a lack of innovation and personalised services, leaving them vulnerable to disruption.
Open banking addresses these issues by securely enabling data sharing between banks and approved third parties via application programming interfaces (APIs).
This collaborative method sharply contrasts with traditional banking’s siloed data model.
India’s open banking regime is projected to cover over 1 billion accounts, making it one of the largest banking ecosystems globally.
Platform banking goes even further, offering a comprehensive ecosystem of financial services in one convenient location.
In this article, let’s dig deeper to understand the nuances of open banking and platform banking and the future of traditional financial services.
What is Open Banking?
Open banking is an innovative banking practice that offers third-party financial services data related to customer banking and other financial data.
Due to its potential, its market in India is expected to grow at a CAGR of over 22% from 2024 to 2032.
As noted above, banks and non-banking financial institutions use APIs for data transfer, which allows sending data and instructions from one system to another.
Types of Data Shared
- Account Data: Basic information such as account balances, transaction history, and account types.
- Product Data: Information about various financial products offered by banks and fintechs, enabling comparisons and informed choices.
- Payment Initiation: Facilitates direct payments from a customer’s bank account to merchants without the need for intermediaries.
It’s important to note that this banking is not mere centralisation of data but relies on networks. It allows banks to scale their offering without changing infrastructure via partnerships.
For instance, open banking API can facilitate credit analysis services using data shared by banks.
Key Features of Open Banking
Here are some of the key features transforming the financial ecosystem:
Account Aggregation
Standardised data sharing using APIs provides better control and visibility to third parties, allowing secure data access. It further ensures a more streamlined data aggregation in one place, allowing for centralised services.
Consumer Insights
The customer’s data and information can bridge the gap between banking and buying. By understanding their customers’ spending habits, preferences, and financial goals, financial services providers can proactively engage with their customers and offer personalised products and services.
Partnership
Open banking encourages collaboration between financial institutions and provides tailored services to customers by analysing their specific banking practices.
For instance, HDFC Bank, in partnership with Paytm, offers co-branded credit cards.
Innovative Services
The data sharing via API allows entrepreneurs to use such insights to bring novel digital initiatives.
For example, Mint’s VoiceOver enables visually impaired users to track their bank accounts and investments through voice commands.
Fraud detection
Real-time access to data and pattern-analysis tools allows companies to monitor and regulate transactions better and identify suspicious activities ahead.
Financial Inclusion
CGAP research further suggests that more people, irrespective of income and gender differences, are generating digital data trails than ever before. The growth of data trails presents an enormous opportunity to focus more on financial inclusion.
What is Platform Banking?
The platform banking envisions banks as platforms that provide various services, including financial and non-financial services. It takes banks from a mere service provider to an ecosystem builder.
Platform baking is more of a digital bank that uses open APIs and enables third parties to build offerings around the financial institution. It allows traditional banks to offer more customer-oriented services.
For example, the ICICI bank platform provides home mortgages, car loans, insurance, etc., in one place without leaving the platform.
Key features of Platform Banking
Let’s explore the key features of platform banking:
Banking as a Platform (BaaP) Model
In this model, the primary customer relationship is maintained by banks, and they integrate fintech services into their platform. Banks benefit from an increased customer base, and fintechs from increased revenue streams—for example, the integration of loan management systems.
Customer Engagement and Retention
Advanced data insights allow banks to provide new and better services to customers as per individual preferences. Further, offering non-banking services such as travel booking, retail partnership, etc., enhances customer touchpoints, improving engagement.
Cost-efficiency
The seamless integration with third-party services and other partnerships reduces the bank’s operational costs. It allows banks to focus more on their core competencies and innovating new products.
Revenue Diversification
It can include fees from third-party providers, embedded finance solutions, data monetisation, etc.
Comparative Analysis of Open Banking and Platform Banking
Here’s how open and platform banking differ:
Key differences
Data access vs Service provision:
Open banking emphasises customer data sharing with third-party providers through secure APIs.
Platform banking focuses on creating an all-encompassing ecosystem that integrates various services, including financial and non-financial services.
Customer interaction:
Open banking, with its control over data, allows the creation of personalised financial products.
On the other hand, platform banking enhances customer engagement by creating a seamless one-stop-shop for all needs.
Regulatory Environment:
RBI has guidelines for the account aggregator (AA) framework. There is also the Digital Personal Data Protection (DPDP) Act of 2023, to prevent unlawful personal data processing. Compliance measures for open banking are standardised across institutions. Since platform banking often involves non-financial services, the regulations vary as per individual bank’s partnerships and are more complex.
Benefits
- Open Banking: Sharing data via APIs allows for data aggregation in one place, ensuring improved transparency. Further, customer data processing using advanced analytics provides valuable insights to provide tailored service, thus increasing customer satisfaction.
- Platform banking: Offering services in one place eases user experience and enhances service loyalty. Also, the collaboration of banks with fintechs, startups, etc., allows them to introduce new features and keep up with market demands.
Challenges
- Open Banking: Secure sharing of data with third parties and tackling and navigating complex compliance measures remains a significant issue.
- Platform banking: Managing the ecosystem of multiple partners and their specific regulations are hurdles in integrating various services. There is also an increased risk of data breach and misuse with more stakeholders.
Future Implications for Traditional Financial Institutions
Traditional financial institutions grapple with dated approaches and face competition from growing technologically advanced fintechs. This has led to these implications:
Balance product-centric and customer-centric approaches
Banks need strategic adaptations to enhance their API capabilities, collaborate with fintechs, and use customer data insights for tailored services.
Build bank ecosystem
It will ensure the creation of compelling customer value. As per the World Retail Banking Report, 78% of banks prioritise developing ecosystem-based offerings.
Risk mitigation
Increasing data sharing, digital services, and third-party partnerships require robust risk management frameworks to address cybersecurity concerns.
The Takeaway
The two models, open banking and platform banking have paved the way for the evolution of traditional banking systems. Strategic use of these models can lead to a more customer-centric and profitable venture for the banking industry.
Finezza’s innovative Loan Origination Software is designed to streamline lenders’ processes. It offers easy integration with APIs, allowing for seamless data transfer and processing.
Our Loan Management System can help track and manage credit applications, process KYC documents faster, assess lending risks, and make banking and lending decisions efficient and accurate.
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