Open banking’s greatest opportunity in Asia Pacific is India because it has the region’s largest population of underbanked people.
Most Indian adults have a bank account but commercial banks only the top 100 million enjoy access to financial services, such as loans, insurance, or wealth management. There are up to 800 million people with bank accounts but who are excluded from the formal finance sector.
Banks don’t serve them because the costs of doing so outweigh the amount of business these people can provide.
Zero CAC
“The cost of processing a financial product, and the cost of customer acquisition, is very high if you are using traditional means of distribution,” said Upasana Taku, co-founder and COO of MobiKwik, one of India’s largest mobile-wallet and buy-now pay-later fintechs, speaking at the recent Fintech Festival India.
“India is bound to go digital because we can build a platform in which customer acquisition cost [CAC] trends close to zero,” she said. “It’s still early days but it is possible.”
Taku says MobiKwik pays very little, just Rs10 to Rs30, for the majority of its new users. In turn its technology lets it offer micro-sized products at scale, with insurance policies priced as low as Rs99 and BNPL loans of Rs500, leveraging the balance sheets of financial institutions.
“We can attract the user, understand their needs, and cater all sorts of products at different ticket sizes,” Taku said. “As more traditional financial institutions adopt open banking, we expect it will be possible to make money at lower ticket sizes and serve the next 500 million Indians.”
Banks resist
Open banking is the use of application programming interfaces (APIs) to streamline the sharing of bank data with third parties. Embedded finance is the business model that results, which non-banks (such as a fintech or an e-commerce platform) provides users with financial services. The use of APIs means banks may still be the ultimate providers, from payments to credit to investments, but on a white-label basis.
Indian banks have been reluctant to sign up to open-banking relationships. India has no regulatory mandate forcing banks to share their customer data with third parties. Banks such as State Bank of India have gone to great length to build their own apps modeled after Chinese superapps, because they fear losing the direct connection to the customer.
Embedded finance solves banks’ distribution problems to less affluent users, and slashes operational costs. Because partnering with a consumer-facing platform can bring a bank a huge user base, open banking can turn profitable quickly.
The danger to banks is in the longer run, in which they lose branding and pricing power: retailers will be able to choose banking partners purely on who offers the lowest interest rate or other terms, turning banks into dime-a-dozen commodities.
India’s infrastructure
The question is: do banks have a choice? If they are viable as serving the wealthiest families and big corporations, then they don’t need to bother with sharing customer data. But in India, the weight of future business is increasingly with the vast market of the underserved.
Moreover, India’s government has also created the infrastructure to make open banking easier. Aadhaar, the state-built national identity database, brings down the costs and risks of sharing customer information (assuming customers give their consent and understand what they’re agreeing to). Its affiliate, United Payments Interface (UPI), enables common standards for digital payments. Aadhaar also provides a sandbox in which banks and fintechs can experiment with collaborative models.
The country also has begun to issue digital banking licenses, and these new players are building businesses explicitly based on open-banking partnerships.
Anubrata Biswas, CEO of Airtel Payments Bank, cites Amazon’s entry into India as a leading example of how it consumes APIs from multiple banks to provide a range of financial services to its users. “Embedded finance has moved the locus of control from the bank to the customer-facing company,” he said, speaking at Fintech Festival India.
Customers are changing
Airtel Payments Bank was founded on the understanding that brick-and-mortar branches were too expensive to reach new customers. “Partnering with consumer companies is the only way to drive down costs,” he said.
Biswas says his bank is both serving its telco parent’s captive userbase as well as reaching new customers for savings, payments, investments and loans via APIs. “We’re now the fastest-growing digital bank in India,” he said, as well as the largest purveyor of microinsurance policies.
Biswas says UPI makes it more efficient to reach rural customers. He says two or three years ago, only 15 percent of newly acquired customers in villages would be signed up to use UPI to make domestic mobile payments. Today it’s 45 percent. “The consumer is changing, and we are reaping the benefits,” Biswas said. “The coming of 5G [telecom bandwidth] will lead to a sharp rise in rural adoption…the case for embedded finance is strong, and there is a clear play for fintechs to make a killing.”
He says open banking is not exclusively for the underbanked, either. “A bigger category, in India and globally, is the low-margin, high-value business.” That’s because embedding a bank’s service into a third party’s platform is a way to bring down costs, which all customers want.
But costs have to come down even more. Biswas says today Airtel Payments Bank processes $1.4 billion worth of payments annually at less than one rupee per transaction. “For embedded finance to work, this needs to shift by a multiple of ten, to less than 0.1 rupee per transaction,” he said. Only by partnering with fintechs like MobiKwik can digital banks drive processing costs that low.
The choice of open banking
This suggests that open banking is amazingly good for users and very difficult for banks that can’t scale. Biswas says India’s fintech industry will lose $1 billion this year in processing payments – a trend that isn’t sustainable.
The fact is that open banking slashes customer acquisition cost if it scales. New, growing businesses have relied on cashbacks and rebates to reach that scale, and industry leaders such as Paytm are only now switching to profitable, organic modes of growth.
Digital banks in India will slug it out to win the huge coming generation of customers. The risks of commodification mean winners must be big enough to preserve some degree of branding power. But there are also market niches that are only now being explored, such as serving specific communities of fishermen, farmers, local language groups, castes.
In a country as diverse as India, the sky is the limit – as long as customer acquisition costs fall further than the sacrifices required to hand power to partners who will own the customer relationship.
