Since the COVID-19 pandemic started, the finance industry has undergone significant changes as it shifts towards an online economy. The banking sector was forced to adapt as more and more people began to work from home, opting for cashless transactions and using online banking on a daily basis. This is where the role of open finance comes in, becoming a major player behind why banks could undergo a faster transition in adopting a new digital culture.
What exactly is open finance?
Open finance is an extension of open banking, which is a practice of sharing software and services for core banking functions, such as billing, with external partners like banks, retailers, and e-wallets. In addition to the core services offered by open banking, open finance may include more digital services like loans, mortgages, pensions, and more.
In short, open banking and open finance allows non-banks to offer competitive financial services to customers, all without the hassle of hiring expensive in-house development engineers or buying another company's technology. It will not only allow banks to create innovations in the financial industry, but also facilitate the integration of financial services for non-banking firms (retail, insurance, etc.).
The role of open finance in the digital transformation of banking
Open finance plays a key role in the digital transformation of banking by enabling the easy sharing of financial data. Customers can store their financial information in a centralized location and choose what they want to share, leading to the development of new financial products and services. Some of the digital solutions created from this include using artificial intelligence to check fraudulent processes, e-Know Your Customer (eKYC), enabling customers to open a banking account online, and many more.
Banks also can form a synergy with tech companies to provide their financial services to non-bank entities, expanding their customer base to places they couldn't cover before. A large population of developing nations are still unbanked or underbanked, but since the pandemic, many are starting to open up to the idea of transacting via online and mobile payment.
According to the World Bank’s Global Findex 2021 database report, in 2021, 76% adults globally either own an account at a bank, other financial institutions and/or mobile money providers. These numbers went up from 68% in 2017 and 51% in 2011. Statista also reports that the total worldwide transaction value in the digital payments segment reached US$7.5.2tn in 2021, and it's projected to reach US$15.17tn in 2027.
Benefits of open finance adoption by digitized banks
Through open finance, the digital transformation in banking does come with several positives. As briefly mentioned earlier, the benefits of digitalization is not only changing the overall banking landscape, but it also diversifies the financial services that non-bank parties like e-commerce merchants, insurance companies, peer-to-peer lending firms could provide for their customers.
Hence, what are exactly the benefits of digitalization in banking powered by open finance? Let's discuss it below.
(1) A larger customer base
There's been a considerable shift of demands for banks and financial institutions to provide online and digital services after the COVID-19 outbreak started. This is especially true in Asia, where the focus on technology and mobile banking has increased significantly as online payment transactions increase in popularity.
According to McKinsey’s 2021 Personal Finance Survey, Asia's consumer share that actively uses digital banking has skyrocketed to 88% in 2021, while this number was only 65% in 2017. The institution also reported that 60% of Asian consumers are now open to switching to a 'direct bank'. These are branchless that only offer their services digitally such as Sea Limited's SeaBank and Tencent's WeBank amongst many others.
Another target market that banks should consider is the large unbanked or underbanked population-- especially in emerging nations. 70% of Southeast Asians are either underbanked or unbanked, but a lot of them have access to smartphones. A Google-led study stated that the e-wallet penetration towards the unbanked is especially high, expecting to surge by 58% in 2025. If banks are willing to adapt to the new infrastructures of open finance, they can open access to these tech platforms and allow various forms of digital initiatives, including cross-platform money transfer with little to no fees.
(2) Provision of better customer service
In recent years, customer wants and needs have evolved significantly, with individuals seeking more efficient and seamless experiences in all areas of their lives-- including their finances. To meet these expectations towards an on-demand approach for business and retail banking, banks will need to adapt to the new trend of data transparency and more open banking.
Open finance allows banks to provide their customers’ bank data (with customers’ consent) to third parties like e-commerce and retail companies, aiding them to pursue new distribution channels that may not be available through traditional banking systems. As data transparency becomes more prevalent, consumers could, for example, access micro-insurance plans that weren't offered via traditional financial institutions. On the other hand, banks can also cooperate with fintech firms to provide, let's say, direct debit services to automate monthly utility billing through a customer's credit card.
Ultimately, digitalization in banking supported by open finance will remove the barriers to communication and collaboration with the entire financial industry. It raises the standards of the customer experience that both non-banks and banks can provide in an ever changing world. KPMG also states in a report that at the end of the day, it's all about adding value:
“As new offerings start to influence customer expectations – and as customers start to understand and assess the value of their data – many banks will have little choice but to shift towards more open models (if only to reduce the friction between ecosystem partners) as they strive to offer better customer experiences,”
(3) Increase in financial inclusion
By embracing open finance, the banking and financial sectors can support financial inclusion and empower customers to take control of their financial lives. Open finance allows access to credit, personal financial management, and payment services for those who may not have been able to access them through traditional means.
In addition, open finance has the potential to reduce inherent biases within the industry. Alas, it represents a major step forward in the democratization of finance and has the potential to fundamentally transform how financial services operate for both consumers and financial institutions.
If you want to be a part of the exciting future of open finance and grow your business even further, then now is the right time to do so. With great synergy currently happening between financial institutions, tech companies and other players in the ecosystem, Ayoconnect can help connect your business to 1,000+ service providers and over 200+ consumer platforms across Southeast Asia. Whatever you need, we have the right open finance API tailor made to your needs.