One important reason why economists worldwide regard Indian banking is its continuous adaption of upcoming technologies. How Indian banking fares against other emerging markets is just one aspect; important is how it has revolutionized itself to take itself to the doors of the unbanked.
One path-breaking initiative was 'core banking.' It created a computer-based interface for both the bank and its customers. An amount could be deposited and withdrawn from anywhere. It facilitated a cashless economy through internet banking and debit cards.
Indian banking is going to up the ante this year with the advent of 'API Banking.' Yes Bank, followed by ICICI Bank, has already declared its adaption. API Banking is going to integrate several aspects of banking together.
An API is 'Application Programming Interface.' Its primary purpose is to connect to different applications. When you open a profile of Instagram, the photos you see are one application and the 'follow' button is another. However, when you open the page, there is an API called in the background. Its purpose is to bring both applications on one interface. This is what API does.
The API Banking
The banks are planning to open a limited portion of the customers’ or business’ information to some third parties. These parties will be able to connect to your data through their APIs. Hence, it is also called as ‘Open Banking.’
These third parties may belong to various sectors of finance. It may be insurance companies, home loan companies, or stockbrokers. All these companies will have access to your data. They will try to bring you the products catered to your requirements.
How is it revolutionary?
Until now, all our data is stored in the centralized 'core banking system.' Now suppose your data is shared with a home loan company. They would now know your CIBIL score and if your credibility is high enough, they will come up with the best possible plans for you.
The same is with other financial products like Insurances or Credit Cards. If your credit card spending is high and you do not default on your payments, should you not get some high-end products available at attractive prices?
Even for businesses, accounting information can be maintained online to minimize redundancy.
Even on the bank's side, it has far-reaching benefits. If there is no API banking based third parties, banks will have to provide these services on their own. It will cost high to innovate, develop apps and then maintain them. Moreover, the bank will have to invest in hardware because their servers would be clogged with a variety of services. Instead, this would now be the headache of the third-party.
Not only it is going to be cheaper in this way, but it is also scalable to a larger customer base.
In addition, the availability of integrated data will improve transparency. Any discrepancy around of any sort of data will raise the eyebrows. Hence, the frauds could be checked, prevented and caught. This integration will uplift the financial industry together.
Some friends might consider initially trying such experiments on a small scale and later scale up if successful. In fact, RBI too thinks the same way. They have already done one such experiment that has been successful beyond words. This experiment was UPI (Unified Payment Interface).
Also, read the Impact of UPI on e-wallets.
National Payment Corporation of India (NPCI) created UPI. Banks gave access to the account information of customers to third parties through this UPI. We could now see BHIM, PhonePe, Google Pay and other payment gateways coming up. All these are third party applications (none owned by the bank) that facilitate sending and receiving money through UPI.
Open Banking or API Banking is just one step ahead of it, not limiting banking to just transactions.
It is true that with more data comes more vulnerability. Data Privacy is an issue, especially when India does not have any data privacy laws. We assume banks to be the custodian of data and not its owners. Hence, data privacy is an important issue.
However, it should be cited that in most cases, APIs receive anonymous data. It is nothing more than a generic statistic, like in case of loan offers. See when you send money through 'Google Pay' or 'PhonePe' app. When you want to send money, you only type the UPI address or mobile number. The app's API sends this information to the bank server.
Banks allow the account number tagged with the sender's and receiver's UPI to start the transaction. After the security pin input, the money is transferred, the transaction is closed. In this entire scenario, we do not see if the sender's or receiver's account number or account balance or any other personal information is revealed.
Moreover, banks would still have access to see what certain APIs are requesting. They will also have the final say in the way the third party is going to use the information received through the API.
API Banking or Open Banking is indeed the future. It will decentralize the control and bring all products on one platform at competitive prices. This would make banking much cheaper.
However, there are some concerns that are better addressed beforehand. Other than data privacy, which is the most important issue, we have issues like consolidation of services. What would happen if only a few platforms are able to take control of all the services? In that case, small banks would perish from the competition. Low competition means low quality of services and higher costs.
If these concerns are met, API Banking would surely transform the banking as once core banking did.