A major area of focus for governments in developing nations is to provide financial services to the marginalized and vulnerable populations living in the remotest areas of the region. For instance, in the last few years, several DBT schemes have been launched in India, China, Brazil, Indonesia, etc., to improve the level of financial inclusion.
Along with such governmental schemes, the advent of modern banking models has also helped marginalized communities enter the formal economy. The emergence of open banking is one such example wherein banks and financial institutions allow third-party applications to access customer data to provide a wide range of services seamlessly. For accessing, sharing, and utilizing data, these third-party enterprises usually use application programming interfaces to connect users with payment providers, lenders, and insurance companies.
Many economists consider open banking a revolutionary idea as it helps consumers make and manage their banks accounts more efficiently. First proposed by Henry Chesbrough, an American professor at the University of California, Berkeley, the idea has become quite popular in developed and developing countries. For example, countries such as Nigeria, Australia, and the US have framed policies to support the integration of open banking models. Even the European Parliament constituted a team to assess the utility of this model in various countries of the region.
Transitioning toward an open banking model for better financial management
Recently, Allied Market Research published a report on the open banking market accounted for $13.9 billion in 2020, is expected to gather a sum of $123.7 billion by 2031, registering a CAGR of 22.3% during 2020-2031. Many economists have also stated that open banking transactions may reach up to US $330 billion in the next few years. The wide range of financial services offered to the common masses through this innovative model has increased its popularity. Many banks and monetary organizations are launching APIs to offer loans, credit lines, and insurance policies to their customers. In this model, customers allow third-party companies to access their data including spending patterns and fiscal behavior. Based on this information, these companies recommend certain monetary schemes that are tailored to suit the beneficiaries’ needs.
Moreover, these software applications also support digital payment technologies to help users transact with other entities seamlessly. In many countries, the penetration of Internet services has increased exponentially, thus allowing people to send and receive money through online channels. Furthermore, the launch of 5G services has also contributed to the rise in demand for digital wallets and mobile payment systems. Additionally, the expansion of the e-commerce sector has increased the preference for an open banking model as it supports online shopping, bill payments, and other such services. Finally, these APIs recommend customers certain steps or approaches to optimize their spending and efficiently manage their savings, thereby helping the user achieve financial autonomy and independence.
Technology integration creating new investment opportunities in the sector
Despite its numerous advantages, certain challenges such as security and privacy risks have restricted the growth of the open banking industry. Several surveys conducted by banks and financial organizations show that people are hesitant to allow third-party companies to access their data. The rising threat of cyberattacks has further increased the skepticism among the masses regarding sharing their financial information with other enterprises. To address these issues, fintech companies are deploying advanced technologies such as AI and blockchain to reduce fraud and misappropriation of funds.
Blockchain technology is based on a decentralized ledger system that allows stakeholders to record each financial transaction securely. This innovation ensures high standards of privacy, transparency, and security in every fiscal service that is being provided to the user. Blockchain-powered s ow being used to secure consumer consent for utilizing their data to offer various financial products. These contracts are immutable, thereby maintaining their authenticity even in case of cyberattacks. Furthermore, fintech businesses are utilizing these technologies to complete KYC processes, thus reducing the chances of errors in the identity verification of customers.
Insurance companies, too, are transitioning toward open banking to offer personalized indemnity policies to their customers based on their unique needs. One major trend witnessed in the industry is the use of blockchain and smart contracts by agricultural credit societies to offer peer-to-peer lending services. These services are being offered through APIs to do away with brokers and intermediaries, thus reducing the cost of loan servicing.
Mastercard and Standard Chartered leading the shift toward open banking
In the past few years, the open banking industry has experienced huge growth due to the rising competition between different companies to expand their footprint globally. These players have recently launched certain unique solutions catering to . In April 2024, Standard Chartered, an international cross-border payment bank, unveiled its open banking marketplace for IT companies to test and deploy their APIs. On the other hand, in October 2024, Mastercard, a card services corporation, announced the launch of Connect Plus, an online platform that helps users manage their accounts efficiently. lets customers manage the permissions companies have for accessing and sharing their data.
In essence, , the idea of open banking has gained a lot of significance among governmental financial organizations and private banks. The various advantages offered by this new fiscal model have made it quite popular in developing countries that are trying to bring marginalized sections of their population into formal banking channels. The integration of blockchain technology is expected to impact the industry positively in the coming period.
✍ **𝑨𝒓𝒕𝒊𝒄𝒍𝒆 𝒘𝒓𝒊𝒕𝒆𝒓: Akhilesh Prabhugaonkar
