The convergence of real-time payments and open banking holds promise for consumers – and the banks that serve them – in multiple ways.
Picture this. You plan on buying a home. And even before you apply for a home loan, your bank is prompt enough to assist through the mobile app. It acts as a trusted advisor to help ease the cumbersome process of homebuying and introduces you to a series of partners like insurance companies, movers, designers, lawyers… all of this over and above providing for a loan approval tool. Now isn’t this customer experience re-defined? While you might expect a bank to simply help you through the mortgage, it does more, a lot more.
The question therefore is, how does a financial institution go that extra mile to serve its customers? Simply put, when banks open-up the existing customer data to third parties, a framework called open API, it leads to seamless customer experience. And cherry on top - Facilitating access to this data on a real-time basis thereby enabling real-time payments. Result - The home buying experience simplified.
The arrival of ‘open’, and the world’s indefatigable passion for ‘instant’ or ‘real-time’ has opened the floodgates to a variety of opportunities. Both open and instant are unprecedented in their potential impact on bank operating and business models and it’s interesting to see how both these trends are set to transform the banking space in India as we know it. It is also interesting to note that the emergence of open banking and real-time payments is an outcome of the collaboration between enablers of financial technology and financial institutions- a synergy which has led to the evolution of an advanced ecosystem with banks operating at the backend and fintech at the front-end; technology making access to banks, a breeze.
Traditionally, open APIs and instant payments have been treated as distinct topics, and within financial institutions they had separate budgets, that sat within separate business divisions, and often had very different objectives. But things are changing – rapidly. Today, open banking and real-time payments are both part of the wider modernization and digitalization efforts that are changing customers’ relationships with their banks and the usage of financial services in general. This modernization requires changes in thinking, processes, and technology, but it reduces costs and increase revenues in the long run.
Japan serves as a perfect example of a collaborative model between financial institutions and fintech players. The government expects more than 80 Japanese banks to begin releasing APIs by 2020 in order to facilitate partnerships with innovative fintechs – a move in line with the European Services Directive. One way to look at it is that the modern-day customer demands and values ‘friction free’ payments, which has led to inextricably linking of open APIs and instant payments in practice.
The explosion of activity in real-time payments and open banking globally has made payments transformation a key strategic initiative for financial institutions around the world. In India, transactions via the unified payments interface (UPI), the country’s flagship payments platform, crossed a value of Rs. 1 trillion in December, according to NPCI. This growth has been possible with regulated architecture and standards which has helped proliferate its adoption. The country is leveraging latest technology to simplify financial services and UPI is a fitting testimony to that. Since the innovation of UPI, apps like Google Pay have hit the right notes by making use of a bank’s API and providing seamless front-end for the customers.
In fact, many banks in India have open API or instant payment projects that are underway at the industry level, but their regulatory details are still being worked through. The Reserve Bank of India has been supportive of open banking as a concept by playing the role of catalyst for recent innovations in payments and has also consolidated expert opinions on the pros and cons of open. Hence, we can expect regulations around open banking down the line which will make it easier for the ecosystem to adopt.
The convergence of real-time payments and open banking holds promise for consumers – and the banks that serve them – in multiple ways. Consumers get convenience and speed of response, which encourages them to consider new financial services suppliers, while banks can reduce costs through automation and ensure a first touch with newer prospects, making it a win-win situation. However, the challenge for banks goes far beyond technology. Digital transformation and working with new players will require a shift in perspective, and the acceptance that not all innovations will generate an immediate profit. Some will help retain or attract customers and ensure the profitability of other services, such as lending or wealth management. But incumbents do not need to reinvent proven market ideas. With an API-enabled solution and clear innovation strategy they can integrate new products and services, offer customers the option to use these, and capitalize on the increased transaction volumes and new customer data to further strengthen their customer relationships.
A healthy amalgamation of ‘open’ and ‘real’ will pave way for a future that enables digitalized banking in a way that provides new experiences, possibilities and opportunities for both consumers and banks.The author is Vice President and Country Leader, South Asia, ACI Worldwide.