How Open Banking Accelerates Digital Transformation in Finance

In the span of 25 years, technology has fully transformed how the financial industry operates as a whole. Many processes within the banking ecosystem that used to be completed manually are now done digitally, even more so since the COVID-19 pandemic started. Institutions across different industries have expanded their efforts in embracing this digital transformation era, ensuring that they remain relevant in an evolving landscape and effectively respond to the market’s growing demands for personalized and seamless digital transactions.

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According to Statista, in 2021 alone, US$1.59 trillion is spent on digital transformation technologies and services worldwide and is forecasted to reach US$2.16 trillion by 2023.

What is Digital Transformation in Finance?

Statista also stated that digital transformation is loosely defined as the incorporation of digital technologies throughout the organization, streamlining existing procedures and generating new ones, with the aim of enhancing customer satisfaction.

In finance, this refers to the use of technology to innovate financial services. Its general objectives align with those commonly associated with digital transformations within comparable industries, with a particular emphasis on the customization of banking and wealth management experiences for individual consumers.  Prominent strategies to achieve these goals include the incorporation of Artificial Intelligence (AI), data analytics, and the implementation of advanced mobile solutions.

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How does Open Banking Accelerate Digital Transformation?

Although open banking has only gained popularity in the last few years, it has become one of the drivers in pushing digital transformation within the financial industry. With the use of APIs (Application Programming Interface), seamless data exchange will happen between financial institutions and third party service providers, allowing businesses to gain customer insights more efficiently and shape the future of finance through data analytics. Furthermore, APIs allow customers to easily access financial products tailored to their needs, improving their overall experience.

The implementation of API-driven open banking presents a mutually beneficial opportunity for traditional banks and fintech service providers to collaborate and drive successful digital transformation. Banks can leverage their established consumer base and regulatory expertise, while fintechs can capitalize on their innovative business models and expand access to a broader customer base, particularly the unbanked and underbanked.

Use Cases of Digital Transformation via Open Banking

Buy Now, Pay Later (BNPL)

The Buy Now Pay Later (BNPL) trend, which has gained popularity during the pandemic, prioritizes high purchase conversion rates by offering customers interest-free installment plans for their online purchases. Many e-commerce companies have offered their own BNPL options, such as Amazon Pay Later, Gojek’s GoPayLater, or Shopee’s SPayLater. According to Worldpay’s 2020 report, this is a US$97 billion industry worldwide and is expected to double by 2024.

Implementing open banking into Buy Now Pay Later (BNPL) allows providers to gain real-time, accurate insights into their customers' credit history at the moment of purchase, thus enabling them to make more efficient and effective approval decisions. Ultimately, this will also help to minimize human errors during the process and enhance approval rates over time.

Micro, Small, and Medium Enterprises (MSME) Lending

Despite MSMEs (micro, small, and medium-sized enterprises) representing a significant portion of GDP in developing countries, they have faced numerous challenges in obtaining capital funding. Data from the World Union of Small and Medium Enterprises suggests that 41% of MSMEs in emerging economies struggle to secure financing, resulting in a funding gap of $5 trillion. This is partially attributed to the difficulties MSMEs face in providing banks with the necessary documentation, e.g. bank statements, proof of identity, tax records, and more.

However, open banking presents an opportunity to streamline and improve the efficiency of this process. By utilizing a secure API, lenders can directly access accurate financial data from MSMEs' bank accounts (with customer consent), allowing for more informed credit decisions in a shorter time frame. Additionally, open banking allows lenders to monitor the performance of ongoing loans, reducing the risk of non-performing loans.

Payment Initiation Services

Open banking utilizes advanced technologies to enhance the customer experience by enabling direct payments from online banking accounts and cloud services, eliminating the need for routing information. This improves financial reporting and offers multiple payment options within a single payment interface, resulting in faster processing times, often within minutes or hours, allowing for greater flexibility and efficiency in the digital transformation of finance.

Southeast Asia is a rapidly developing market with a significant potential for growth in payment initiation services through open banking, particularly due to the high proportion of unbanked or underbanked individuals in the population. With an increasing trend toward digitalization, a study led by Google predicts that the transaction value of digital payments in Southeast Asia will reach an estimated $2 trillion by 2030.

As the development of digital financial services continues to integrate across all aspects of the banking and financial industry, it’s a good time for you and your business to enter the open banking ecosystem and gain more competitive advantage. Trusted by more than 200+ businesses around Southeast Asia, Ayoconnect has various Open Banking and payment service APIs ready to cater to your needs. We have everything from direct debit to recurring payment systems for you.

Ready to #MoveForwardwith us? Contact us for a demo here!

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