Subrato Bhattacharya, Senior Consultant, TCS BaNCS
Financial services have always been a networked industry. With mobile phones, expanding use of affordable infrastructure, millions of people around the world have a chance of making use of life-changing financial services for the first time.
1.7 billion adults worldwide did not have a bank account as of a World Bank report dated 2017. People give a whole range of reasons for not having a bank account — they don’t trust banks, it’s too far to travel to, it’s too difficult to open an account or they don’t have the required documentation. But over 50 percent of the time, the reason they avoided banking was that they didn’t have enough money to meet the minimum balance requirements or they couldn’t afford the fees and charges of maintaining that account.
Now, another aspect - over two-thirds, among the un-banked, have a mobile phone. Hence, great optimism surrounds the ability of digital channels to expand financial inclusion, and with good reason.
Open banking is just one of several initiatives that support financial inclusion and innovation. Open banking can be a game-changer for the under-banked, while can promote ushering in the unbanked.
Open data for inclusion
Open banking/open data can help create value for potentially excluded and lower-income customers in three fundamental ways:
(i) improving access to credit and/or conditions of access,
- Access to credit - un-banked/under-banked individuals get into high-cost debts as formal banking systems are out of bounds. Alternative financial data from the open finance initiatives can help such individuals get access to such formal micro-credits/nano loans.
- Supporting debt rehabilitation services - excluded and low-income customers do not have a steady source of income and hence debts regular part of their lives. Fintechs or third parties can provide solutions that help them consolidate their debts, have them refinanced, add intelligence to their payments, thereby helping them come out of the vicious debt cycles.
- Access to competitive credit products - overdrafts can be costly and many customers in this segment would be likely to access overdrafts unknowingly. Open banking services can alert them to competitive credit products, which would be designed keeping such customer profiles in mind
(ii) improving financial management,
- Improving savings behavior - Automatic savings sweepers that calculate what a consumer can save, and when, based on their financial history, then automatically transfer funds to a dedicated savings account
- Lowering tariffs on household bills - analyze spending patterns, identify opportunities for saving money, create new products for life stage moments of these consumer profiles
- Encouraging healthy financial behaviors - Personal finance and budgeting applications can empower individuals with data insights generated from transaction data—for example, highlighting ways to save or sending reminders on due dates for a regular payment or bill
(iii) facilitating access to accounts if collaborative customer due diligence (CCDD) is allowed
- Overcoming a lack of documentation. Onerous customer due diligence (CDD) procedures can cause high costs for low-income customers or prevent them from accessing financial services because they often lack official identity documents. Open data initiatives, including telecoms (SIM card registration data), Central KYC (cKYC) initiatives could help individuals overcome issues with formal identification.
The immediate challenges
Although financial inclusion is a must, it should also include measures to protect consumers while providing the widest possible access.
- The Lack of Trust - The under-banked and un-banked need to develop trust in the digital financial services and that is currently missing. The reliability and availability of connectivity, downtime and transaction failures resulting from dropped connections affect the trust of consumers. Similarly, cybersecurity and fraud prevention are paramount as the chances of the chances that these marginalized groups would get caught in that dark web is very high. Institutions should provide assurance of secure transaction accounts and the right of recourse when things go wrong.
- Choice of the right technology frameworks - Designs should consider the owners of feature phones or lack of internet connectivity at many places. Products such as balance inquiries, payment initiation, automatic savings sweeping, etc., should work on SMS or USSD menus (i.e., two-way flash messages integrated into a user menu on a feature phone).
The extent to which new technologies and frameworks such as open banking boost financial inclusion and sustainable development largely depend on the infrastructure, regulatory environment, and wider innovation ecosystem of the markets in which they operate. Since it is still early days for open banking regimes, policymakers need to consider how they can design open banking and other data-sharing frameworks from the perspective of financial inclusion. Their concerted efforts will enable innovative financial service providers to serve the market well and to build and scale fintech solutions that support financial inclusion, innovation, and sustainable development.
Disclaimer: Views or opinions represented in this blog are based on the author’s own research and do not represent TCS BaNCS.