By Raunak Dembla, Founding Team at Decentro
India has the second-largest unbanked population in the world, and according to a recent report by the Reserve Bank of India, on a scale of 100, India’s annual Financial Inclusion Index in 2021 stood at 53.9. A significant portion of our country remains outside the realms of digital finance and financial inclusion and relies on informal sources of credit.
If Unified Payment is present in the Indian Economy, a financially inclusive model is its future. With accessibility being the main pain point when it comes to services offered by the financial institution, a bridge like API comes in handy by providing a simple and secure way for institutions, big or small, to connect with other businesses and services.
The awareness of the impact of an effective API for a company wanes off with the more prominent players. However, just to reiterate the efficiency, from a financial institution perspective, between 2019 to 2021, the percentage of financial institutions that invested in or developed APIs increased from 35 percent to 47 percent, with another 25 percent planning to do so in 2022. Additionally, companies can experience up to 47% better business results when they adopt a robust API strategy.
In the face of these staggering numbers, the unbanked segments, players with no access to traditional banking services, have presented themselves as untapped segments for API solutions. Financial institutions can integrate with various platforms, including big names such as Zoho, that enable the India Stack, comprising elements such as Aadhaar, Aadhaar Enabled Payment System (AEPS), Unified Payments Interface (UPI), e-KYC, etc. The affordability and accessibility of such platforms hold the key to the financial literacy of the unbanked segment.
Broadly, the impact of API solutions can be categorised into the following three categories,
1. Deeper penetration
One of the key benefits of APIs for financial institutions is the ability to reach a wider audience. By connecting with other platforms, institutions can get individuals and small businesses needing access to their services. In India, 50% of total bank accounts are dormant, and nearly 23.3% of Jan Dhan are dormant accounts. Only 18% of MSMEs are financed by the formal sector. According to the India FinTech Report 2019, the MSME financing gap stands at $240 billion, and the consumer lending gap stands at $300 billion By providing a simple, secure, and automated way to communicate with other media, APIs are helping to increase financial inclusion and provide more people with access to the financial services they need.
2. Better security
APIs are a set of protocols and routines that enable communication between different software applications. With protocols comes the promise of a secure and controlled way for financial institutions to access the data and services of other platforms. By using APIs, institutions can ensure that they are accessing accurate and up-to-date information while also controlling who has access to sensitive data. This helps to reduce the risk of fraud and security breaches.
3. Higher Efficiency
The integration of a digitally transformative approach, with API being a case in point here, primarily revolves around efficiency and automation. According to a recent study, the financial industry will spend around $37.1 billion on IT and operations for AML and KYC compliance in 2021, a 13.4% increase over 2020. Designs for flexibility and scalability, a single API connection can connect a financial institution’s system to a variety of identity data sources and services, including identity verification, ID verification, Document Verification, AML/CFT worldwide watchlists, and others. This helps to streamline operations and reduce the costs associated with manual processes.
While these impacts are at a market level, let’s delve deeper into industry specifics.
The rise of APIs has enabled financial institutions to facilitate seamless data transfer between banks and NBFCs (Non-Banking Financial Companies.
APIs also allow the fintech to streamline customer data and insights.
For example,
Facilitation of financial data transfer between Banks and NBFCs:
One of the greatest benefits of the flexibility with APIs is to bring together data from myriad sources in one place, via Account Aggregation for its effective use. APIs are making it possible for banks and NBFCs to share this data securely and efficiently. By using APIs, financial institutions can easily exchange financial data, such as account balances, transaction history, and credit scores, in real time. This helps to improve the accuracy of financial data and reduce the risk of errors.
Helping FinTechs to streamline customer data and insights:
APIs are helping fintechs to simplify customer data and insights into aggregated enriched data that showcases highly relevant trends and patterns. With the future of banking dependent on personalised financial offerings, APIs are becoming an essential tool in driving this trend. For example, YES Bank came up with the YES Fintech Developer portal in November 2019. Its API sandbox includes more than 50 virtual APIs and is harmonised with the YES BANK’s strategy of keeping customers at the core and envisaging and co-creating solutions. This strategy has enabled the bank to customise its digital solutions for its clients.
As we advance to achieve the $5-trillion mark and attain the vision of an ‘Aatmanirbhar Bharat,’ we must recognise that this is not possible without rural India’s contribution. For this, we need to create an equitable and sustainable ecosystem. Financial inclusion underpins this. Having witnessed the evolution of APIs from plug-and-play tools to the actual solution for the banking and fintech sector, this solution’s versatility makes it perfect for the unbanked segments in the Indian context. By leveraging these APIs, financial institutions can help increase financial literacy and empower people to manage their financial lives more effectively.