How Open Banking Efforts Drive Financial Inclusion

Open banking is a technology that connects financial institutions and users via an API (Application Programming Interface). It can also refer to financial services as part of financial technology, which refers to open APIs that allow third-party developers to build applications and services around financial institutions.

Open banking is touted as a cost-effective way to combat financial exclusion. This issue disproportionately affects marginalized populations, such as minorities, low-income individuals, and remote areas residents. According to the World Bank, financial exclusion is still a concern for many countries. Around 24% of the population in the Asia Pacific is still financially excluded. Even in developed countries like the United States, 22% of the population is still experiencing financial exclusion.

In fact, financial exclusion significantly impacts a country's GDP. A report from Ernst & Young proves that the more access to banking, saving, and lending services a country has, the higher its GDP level will be. Even financial inclusion has the potential to increase the country's GDP by 14-30% in emerging countries like India and Kenya.

However, traditional banks are less suited to provide these services. Most existing banks apply conventional procedures and practices that often skew the public's financial situation. This is where open banking as a solution comes into play.

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What exactly is open banking?

Open banking is a system that provides a financial institution data network to users through an API (Application Programming Interface). Through this advancement, financial service customers can securely communicate financial data with other financial institutions by relying on a network rather than a traditional centralized bank system. This system has used cutting-edge digital technology to provide quick and flexible services to meet client transaction needs.

But then, how can open banking accomplish financial inclusion?

What is financial inclusion?

Before that, let's first talk about financial inclusion. GCAP (Global Partnership for Financial Inclusion) defines financial inclusion as "a state in which all working-age individuals have adequate access to formal service providers for credit, savings, payments, and insurance. Effective access entails providing easy and responsible service at a cost that is reasonable to the client and sustainable for the supplier, resulting in financially disadvantaged people using formal financial services rather than existing informal options".

Simply put, financial inclusion is when a country's productive groups have access to banking services such as lending, storage, payments, and insurance.

How do open banking efforts drive financial inclusion?

Traditional banking tends to build products for high-income customers to maximize profits. This is not surprising, given that these institutions have enormous administrative costs and are less interested in low-income clientele. This then creates a bias in society. Low-income individuals do not have access to the best financial services. While on the other hand, those with higher salaries have a more comprehensive range of service possibilities.

By utilizing technology, open banking makes services more accessible. In fact, this method enables the underbanked and unbanked to conduct financial transactions without incurring hefty costs or going through lengthy traditional banking procedures. It promotes financial inclusion by enabling services such as mobile-only banking, digital wallets, and peer-to-peer (P2P) payments.

Here are some examples of how open banking can help people become more financially included.

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1. Reduce access barriers

Registration procedures such as complicated KYC (know your customer) can pose high-cost barriers for customers, especially those who do not have their bank accounts (unbanked). By extending open banking capabilities to include telecommunications, social media, electronic money, and other data types, KYC can be replaced by a simpler and straightforward approach, such as SIM card registration.

2. Supporting SMEs

Open banking helps small and medium enterprises (SMEs) to manage their business by providing affordable financial tools. They can use these tools to streamline various business processes, including accounting and financial management.

You can automate traditional business operations like bookkeeping using an open banking system—no need to keep track of transactions in the general ledger again. Furthermore, open banking enables SMEs to discover funding sources that are aligned with their corporate objectives, such as market expansion.

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3. Providing easier access to credit

A well-designed open banking solution allows customers to gain access to broader insights. This way, customers would have a better chance of getting credit approval. Moreover, open banking's alternative financial data can assist customers in precisely assessing their financial capacities. The financial data in question includes payment of cellular bills, payment of utility bills (electricity, air, gas), and payment of rental fees.

4. Building a financial profile

Open banking improves data sharing and customer payment information to build an accurate financial profile. That way, unbanked people can still qualify for more financial products and services. They can also get personal financial services and budgeting information in open banking. This will help them to be more knowledgeable about financial concerns.

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5. Providing control of personal finances

Open banking leverages data and AI (artificial intelligence) algorithms to assist people in understanding their financial condition, provide tools to help them improve it, and make more informed decisions. The open banking system also makes it easier for people to learn more about personal finance. As a result, they can choose which insights are most applicable to their lives.

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Open banking can inspire people to participate more actively in the global economy in the long run. The public can use this open system to access digital payment products and services such as pay-to-person (P2P) and pay-to-merchants (P2M). Moreover, open banking also allows the unbanked and underbanked to take advantage of open-loop systems such as Mastercard's debit or virtual credit cards. Financial inclusion can then be accomplished right away.

Now, you can be a part of the open banking ecosystem with Ayoconnect, a provider of financial API platforms. Ayoconnect aspires to create a more accessible and inclusive Indonesian financial infrastructure through a variety of innovative API-based products. Ayoconnect also contributes to developing an open banking ecosystem by providing an interactive platform that allows product developers to rapidly and easily deploy the financial capabilities that users require. Learn more here.