Banking – The Poster Child

AI, Open Stack & blockchain are set to make banking the poster child of resurgent India. Banks, Regulators and Government need to seize the moment.

Retail payments match the heft of Indian software services in bringing global acclaim to India. Much has been written about the UPI platform including, the so often quoted, advisory from Google to the US government to copy UPI. Payments account for over half the Fintech valuation. Banks, much chastened for failure with bad corporate loans, have a major achievement to feel proud. In coming 5 years, as they extend UPI’s underlying open stack philosophy from payments to lending and daily banking, Indian banks would be nurturing the “model banking of the future”. None of the large economic blocks – US, EU or China – have yet managed to gain traction with open architecture for their banking due to legacy (US), geopolitics (EU), or simply path dependency (China)

Indian banking has the opportunity to be the poster child for the modern day banking paradigm globally. India has already shown the way in payments via UPI. However, the same approach needs to permeate lending and data.

Trends that will change the banking industry include 100X explosion in machine readable data for lending, extension of open stack beyond payments to lending and daily banking, drive of credit to SME and Tier 2 (and beyond) India through embedded finance and focus on sector specific digital ecosystem finance solutions.

There is a need for the banking industry to come together for industry wide initiatives to strengthen the position. The FIBAC report, by BCG in association with FICCI and Indian Banks’ Association (IBA), features the key imperatives for banks, regulators and government bodies to come together to leverage tech, AI and Open Stack to make banking a poster child of resurgent India.

Aggregators to transform lending with 100X more data per small business customer

Rise of small ticket digital transactions and growing popularity of QR codes at small merchants catches the headlines but the real transformative change is the growing ‘thicknesses of bank account statements of small merchants with rising number of digital payments received by them from identifiable repeat customers. Power of bank transaction analysis in enhancing the discrimination power of credit scoring models is empirically established. With the introduction of aggregators, the financial data across a range of financial institutions and government agencies can be provided to any lender of customer’s choice within minutes based on consent. This will create a step change in speed of access and eligibility for loans for small businesses as the machine-readable data available for credit approval, monitoring and collections per customer grows 100X with twin impact of UPI and aggregators.

OCEN to extend open stack idea from payments to lending

UPI is proof of the concept that banking can be envisaged as an open tech stack interconnected to each other and to external entities to reach customers for sales and service. We already notice 95% payments on UPI being originated on 3rd party Payment Service Providers (PSP) who are digital platforms with large customer traffic. The next phase of evolution will take the concept to lending with introduction of Lending Service Providers (LSP) who can leverage API to connect potential borrowers to all possible lenders onboarded onto the Open Credit Enablement Network (OCEN). This introduces transparent competition in lending – banks’ core profit pool. It will disproportionately advantage players with advanced data analytics capabilities for credit scoring and fast response times. Value in Fintech space will shift from payments to lending as FinTech’s get a level playing field in access to data hitherto confined to bank’s closed systems.

Open stack beyond lending to daily banking

Extending open architecture beyond lending to daily banking is just a natural forward step. We already have many Neo banks who provide “daily banking” to customers with a bank operating as utility in the background. We envisage more than 75% of all digital payments and digital loans and 25% of digitally opened accounts to be on 3rd party platforms in 5 years. The power of 3rd parties to originate banking transactions will grow manifold as number of digital platforms with sizeable customer traffic grows rapidly

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– ET Edge Insights