Saturday 13th August 2022

Open banking will have its winners and losers

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The launch of an account aggregator (AA) model in September introduced India to open banking (OB). As it matures, OB is expected to benefit our economy in terms of: a) sustainable credit expansion; b) faster credit delivery; c) personalized loan offerings; and, to an extent, d) new financial inclusion. However, whether all stake-holders in the lending ecosystem will benefit from the initiative would depend on their preparedness to embrace OB. OB enables third-party lenders to access a loan applicant’s data (only after her consent) from all other banks that she’s a customer of. While credit bureaus may have already captured her loan behaviour, banks had sole access to their own customers’ data on savings and current accounts. Under an OB regime, a bank’s customer data is no longer exclusive to it.

Account aggregators can further ease credit processes: Consumer and small-business loans have seen a significant reduction in credit-processing time over the past five years or so. Digital access to data from credit bureaus, know-your-customer norms, GST data and a few other factors have driven this improvement. But lenders still had to ask borrowers for their bank statements. Before Account Aggregators (AAs), easily accessing this data digitally was not possible. Applicants would often provide hard copies of bank statements, which lenders would then digitize using optical character recognition (OCR) tools. AAs will smoothen loan processes. They have the tech framework needed to access data from other sources, such as telecom, utility and tax authorities. With their consent-based access to savings/current account data, AAs could change equations in the larger sphere of Indian lending.

The bhowre-ne-khilaya-phool syndrome of some incumbent banks: All incumbent banks have lots of data on the accounts of their customers, not to mention other behavioural data. This is the outcome of years of branch banking and technology investments in capturing and storing such data. However, with the exception of a few private banks and even fewer state-owned banks, most incumbents have not leveraged such data meaningfully. Such detailed information is truly an asset that belongs to the consumer, and banks are custodians of the same. The AA model ensures that this asset is made available upon customer consent to the lending ecosystem, which would then be better able to service her borrowing needs. Data can be used with greater efficiency by those equipped with the requisite techno-analytical capability. Thus, incumbents, which have large customer bases but are poor users of customer data, will cease to have any competitive advantage drawn from data in their possession. At the same time, new-age lenders with superior digital capabilities will not find themselves constrained by limited customer access. Some banks could worry that they have nurtured customer data only to hand it over to more digital-savvy lenders.

Creating a data-driven competitive advantage: For banks, not joining the AA ecosystem will prove short-sighted. Note that a borrower can always take a hard copy of a bank statement and apply for a loan from another lender. Yet, joining the AA ecosystem without planning for proactive customer engagement may give the bank a rude shock in terms of customer attrition.

Needless to say, all banks need to embark on a digital transformation and ramp up their data-analysis capacity. It could start now.

One, incumbent banks must track triggers such as requests for information from AAs, and act by reaching out to such customers with appropriate offerings.

Two, they must pre-emptively identify customers who are dis-engaged or dissatisfied with their services and try to earn their loyalty.

Three, banks must look at their customer data holistically. They have far more data on their customers than what is required to be shared externally via AAs. This includes data about customer interactions with their call centres, websites and mobile apps, as also on branch visits. Such data, properly captured and analysed, can yield customer insights that are proprietary and exclusive to the bank, and could therefore serve as a sustainable source of competitive advantage. Thus, joining the AA ecosystem can act as a strategic trigger for banks to enhance their analytical capabilities.

Immediate winners should be cautious: Existing banks with a track record of digital underwriting would benefit even more than fintech firms from AAs because banks that are digital-savvy will have risk and behavioural models firmly in place to put AA-sourced data to better use. Fintech players will also access this data but may take some time getting their quantitative models up to scratch. Robust models require large and seasoned databases that banks have. Further, fintech startups need to invest in cyber security at par with banks, since they will have access to sensitive data. Any breach may be a setback for OB.

The government needs to further enable the AA ecosystem: Most countries that have OB have enacted strong data privacy laws. India needs to enact a data privacy law soon. This would provide customers confidence and incentivize various players in the ecosystem to invest suitably in customer data protection systems. Also, the government should legally enable data-sharing to the extent needed. Customers may need to give AAs their telecom, tax and utility-bill records, and this needs to be facilitated. This will give a fillip to credit processing and help us achieve our goals of financial inclusion. Not seeing the AA idea through from end to end will restrict the potential of open banking.

Deep Mukherjee is a quantitative risk management professional & visiting faculty at Indian Institute of Management Calcutta

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