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The bits of code pushing the next leap in online transactions

India has set its own trajectory towards open banking, first with Aadhaar enabling eKYC, and then the launch of unified payments interface (UPI). (Priyanka Parashar/Mint)Premium
India has set its own trajectory towards open banking, first with Aadhaar enabling eKYC, and then the launch of unified payments interface (UPI). (Priyanka Parashar/Mint)

  • Payments serve as a good entry point for digital transactions, but the real game-changer for financial inclusion is mobile access to banks, loans and deposits
  • The main challenge is in reaching rural areas where merchants prefer cash, and digital access is poor

BENGALURU : Angela Strange, general partner at Andreessen Horowitz, an investor in San Francisco-based startup Synapse, likes to call the company “the AWS of banking."

She explains why in an a16z blog. It took significant time and capital to start an online business 20 years ago, when you needed servers, networking, databases, software licences. Then came AWS (Amazon Web Services), which put all that on the cloud and gave access via APIs (application programming interfaces, or the interface that allows apps or programs communicate with each other) with a few clicks. “Today, you can launch a new company with little more than an idea, a laptop and a credit card," she writes.

The financial services industry today is where online businesses were in the pre-AWS era. Starting a fintech company requires multiple partnerships and compliance with regulations, presenting challenges at every turn.

Enter the “AWS of banking". Synapse, which closed a $33 million series B round of funding in June, partners with banks at the back end, taking care of the nitty-gritty of partnerships and compliances. It provides access to anything you would find on a bank’s home page through a suite of APIs. Now any third party, such as a fintech startup, can in turn provide these financial services to its users through the plug-and-play APIs.

From loans, deposits and payments to crypto wallets, Synapse has made a host of services available for businesses and software products in the US. It plans to expand to Canada and Europe.

The indian way

India has set its own trajectory towards open banking, first with Aadhaar enabling eKYC, and then the launch of unified payments interface (UPI). These are government initiatives with support from the tech community. Unlike China where Alibaba and Tencent dominate mobile payments, India has a more open playing field.

As many as 87 apps use UPI to enable digital payments, with Google Pay, PhonePe and Paytm reaching the largest user bases thanks to the spread of smartphones. But the government continues an uphill climb in its push to go cashless. A Credit Suisse report released this year says cash still accounts for 72% of consumer transactions in India.

The main challenge is in reaching rural areas where merchants prefer cash, and digital access is poor. “Much of the early fintech innovation in India has been focused on the top 30-40 million users," says Siddharth Nautiyal, investment partner at Omidyar Network India. “We believe the time is ripe for solutions to deepen access to financial services for India’s next half billion users."

Open banking

Payments serve as a good entry point for digital transactions, but the real game-changer for financial inclusion is mobile access to banks, loans and deposits. This is starting to happen now as banks provide API access to services beyond payments via UPI.

Bengaluru-based fintech infrastructure startup Setu is partnering with banks on one hand and consumer-facing companies on the other to make this happen, like Synapse is doing in the US.

Even as startups are out to disrupt the status quo, aided by a government push to go digital, not all banks are open to change. Despite regulatory demands forcing banks to evolve their business models, only 48% of those surveyed in Capgemini’s World Payments Report 2019 released this month said they are planning to use open APIs beyond the level needed for regulatory compliance.

“Although banks are gradually, though too slowly, moving towards a cloud-based approach, there remains a reluctance to fully embrace open banking," says the report. “Open API is seen as a regulatory compliance game rather than a growth opportunity."

For startups out to disrupt this space, API integration is vital. This is what lets Setu be an enabler of financial services. Rather than trying to reach consumers directly, it sells access to its API suite to other players who are consumer-facing. B2B marketplace Udaan, for example, which brings the benefits of online commerce to manufacturers, traders and wholesalers in small towns, could use APIs to extend new credit facilities and other financial services to its users.

“I think the biggest challenge for fintechs will be to keep operations lean," says Harsha Kumar, partner at Lightspeed India.

“Most efficient models for financial services have traditionally been point-of-sale models–home loans, car loans, motor insurance. Others have involved high distribution and ops costs. The same challenge needs to be tackled online."

Will banks throw a spanner in the works by refusing to adopt open APIs? That horse has already left the stable, feels Setu co-founder Nikhil Kumar.

“Ultimately, both money and data are owned by the user who should have good access to it and use any experience layer that they want."


Graphic: Naveen kumar Saini/Mint
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Graphic: Naveen kumar Saini/Mint
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