Fintechs Point to Institutional Resistance for Open Banking

Large Asian banks — trying to both mitigate risks and avoid new services cannibalizing existing ones — are moving slowly on collaborating with fintechs, but their smaller competitors are seizing new opportunities.

By Michael Switow

That’s according to Todd Schweitzer, chief executive and founder of Brankas, an Indonesia-based fintech startup that operates across Southeast Asia. «Mid-tier and smaller-tier banks in Asia really believe in open banking, because they see it as a way to grow their business without opening branches,» he said at the Singapore Fintech Festival 2019 on Monday. «A lot of large banks have a legacy attitude to protect their assets. The top two to three banks in each market are still quite protective.»

Open banking refers to processes enabling banks to share client data with third-party providers; it lets fintech companies create a broad range of new financial services and aggregates information for consumers across financial institutions.

Privacy Issues

In more affluent countries, open banking can make it easier for consumers to review their entire holdings, across institutions and asset classes, in a single application. But privacy issues and resistance from some stakeholders make fully adopting open banking more of an aspiration rather than a current reality.

Advocates of open banking argue it will also increase banking and credit card penetration in communities not currently viewed as cost-effective investments by mainstream financial providers. For example, less than ten percent of Filipinos have a credit card, while one in two Indonesians does not have a bank account.

Change Economies

«The economics don’t work for a bank to offer a better consumer product in a market like the Philippines, Indonesia or Vietnam. If they have an extra dollar, it just makes more financial sense for them to put it into their legacy corporate lending business. What open banking can do is change those economics,» argued Schweitzer.
Financial inclusion

«Once a bank is able to provide open APIs [Application Program Interfaces], they don’t need to build more branches or build everything in-house. It becomes a lot more cost-effective to offer a new type of consumer loan product or an entry-level bank account. Open banking and financial inclusion are two sides of the same coin,» he said.

Crucial Step

Around 69 percent of adults globally, or around 3.8 billion people, now have a bank account or a mobile-money provider, up from just 51 percent in 2011, according to the World Bank’s Global Findex report for 2018. Having a bank account is considered a crucial step in escaping poverty. Around 1.7 billion adults globally remain unbanked, the report said but noted around two-thirds of them have mobile phones, which could help them access financial services.

In Singapore, the Monetary Authority of Singapore (MAS), in collaboration with the World Bank Group’s International Finance Corporation (IFC) and the ASEAN Bankers Association, launched the API Exchange (APIX) last year to support financial innovation and inclusion. APIX has attracted positive reviews from market analysts such as Deloitte’s Michael Tang.

Frustrated Startups

«It’s a bit like a toy store of lego blocks,» he said who leads Deloitte’s global financial services digital transformation and innovation practice. If your challenge is customer onboarding, why would you actually build any of that? It allows Tier 2 and 3 banks to essentially assemble the business process, without the capital costs and arguably the operation cost, depending on the business model,» Tang added.

While regulators are much more open to financial innovation than just a few years ago, the pace of change is still not fast enough for many in the industry. «Regulators are trying to adopt this wave of digitization technology into their framework,» observed MUFG Bank regional executive for Asia and senior managing executive officer Noriaki Goto. «They take a sandbox approach, but what I see is, it’s a little difficult to get out of the sandbox. That’s making a lot of startups frustrated.»