This comprehensive guide explores the transformation of traditional banking services into modern, re-bundled banking functions that optimize customer experience through API-enabled technology and digital innovation.
Traditional banking services are being transformed into optimized modern banking products through re-bundling. This process is similar to how digital education has transformed traditional university courses - instead of requiring complete degree programs, students can now select specialized courses that meet their specific needs.
In banking, re-bundled services work similarly. For example, when purchasing items online, customers who don't have credit or debit cards can choose from multiple payment options including net banking, UPI, mobile wallets, cash on delivery, or Buy Now Pay Later (BNPL) services.
FinTech companies act as the medium of transmission, converting traditional banking services into re-bundled optimized banking products and services to ensure a flawless customer experience. API-enabled technology has created opportunities to provide customized and customer-friendly products, fundamentally changing the structure of financial institutions from a products and services perspective.
Re-bundling traditional banking systems bridges the gap between what conventional banking offers and what customers expect. While traditional banking functions may offer a wide range of services, they often lack in providing a superior customer experience. API-enabled technology has created numerous opportunities to provide customized and customer-friendly products.
Re-bundled banking functions create new revenue streams for financial services providers. Mobile wallets and Buy Now Pay Later (BNPL) services have created new revenue resources. The following monetization models are available:
Financial institutions and non-banking players (API users) can agree to work on a shared revenue business model, tying up with API providers to offer a broad range of financial services and products.
The pay-per-use business model focuses on per-use, per-transaction, or per-API call charges, ensuring customers are charged only for the services or products they use.
The subscription model offers customers a fixed subscription plan (monthly, quarterly, or annually) allowing them to use the product or service for a fixed period along with other subscription benefits. This is one of the most common business models startups adopt.
A one-time setup charge enables customers to pay only once and use the services for the rest of the period. These charges are typically high as the user is charged only once and will use the services and products for free thereafter.
Freemium allows users to use the financial service or product for free for a certain period. Examples include free one-month trials or free limited use of APIs.
The data-based monetization model refers to monetizing data that the organization has access to, which could be in raw form or converted into analytics and charts. For example, banks can share customer data (confidentially and without tampering) with third-party financial services providers to optimize user experience.
Previously, Small and Medium Enterprises (SMEs) and individuals could not secure financial assistance, limiting their business growth. Thanks to API technology, financial services, especially lending services, are now easily accessible.
Re-bundled banking functions are more user-friendly, self-explanatory, and offer a flawless banking experience that enables anyone to efficiently perform banking transactions. Users can easily track transaction history, saving significant time in searching and recording.
Modern banking products and services bring innovation and fresh approaches to banking and payments while optimizing customer offerings by fundamentally transforming the financial value chain.
Re-bundled banking functions are more transparent and clear in what they offer and how they work, fulfilling customer needs for transparency and confidentiality simultaneously.
Neobanks are digital-only banks, the fruitful outcome of non-bank fintech firms that offer banking services entirely online. From account opening to making deposits to lending money and offering credit/debit cards, neobanks have paved the way for complete digital transformation in the banking system. All these services are provided for minimal (or sometimes zero) fees.
By 2026, neobanks are expected to generate approximately USD 400 billion while addressing the significant challenge of not having a physical branch.
Neobanks offer financial services to customers on an online platform without any physical presence. Since RBI does not permit such neobanks to operate as licensed banks, they rely on partnerships with various banks to offer financial services.
Neobanks function as an umbrella under which various financial services providers work together to provide a varied range of simplified financial services. They generate marginal revenue from the difference in the rate at which money comes in and the rate at which they lend it.
Since they only have an online presence, their operating costs are relatively low, allowing them to pass savings to customers by offering better services at cheaper rates. They are customer-centric, and without physical branches, they put more effort into resolving customer problems.
The preliminary aspect that goes negative against these banks is their online-only presence. However, the benefits are more prominent than the disadvantages.
The global FinTech funding jumped by 96% in 2021 compared to 2020, which remained almost at the same level as 2019, despite being an unprecedented year.
FinTech companies have leveraged technological advancements to provide customer-centric financial services through neobanks. They have filled the gap for customer expectations of enhanced credit facilities, one-tap payment options, accessible financial products, and services that can be customized as per their needs.
As neobanks serve the underserved, unbanked consumers, they are rapidly paving the way for the digital banking ecosystem where financial products and services are available to almost everyone as per their needs, all at a meager customer acquisition cost.
FinTech companies enabling digital payments, API-enabled card issuance, digital KYC, and ID proof verification services also contribute massively to such neobanks. While SMEs and MSMEs contribute significantly to the Indian economy, neobanks are making it possible to continue growing due to their easy accessibility of products and services.
According to the Digital Banking Report by the financial brand©, digital banking transformation was the top priority for banks in 2021.
Digital banks are licensed banks that offer banking services and products on a digital platform. In India, a digital bank is a bank registered under the Banking Regulation Act, 1949 (The Act), which issues deposits and provides lending services along with the entire suite of banking products and services allowed by the act. Such banks rely predominantly on the internet to offer such services.
Unlike neobanks, digital banks may have a physical branch apart from their online presence. Digital banks offer all traditional banking services and extended modern banking products and services to enhance customer experience. These banks use APIs, web-based solutions, and process automation to fulfill increasing customer demands for secure and smooth banking. Users can access digital banks 24×7 through the internet on computers, mobile phones, and other compatible smart devices.
Digital banks can be of four types - nonbank and challenger banks.
Nonbanks are non-bank players that offer financial services such as credit cards, credit facilities, and mortgages, but they may not necessarily accept deposits. Some nonbanks obtain EMI licenses only to provide small and medium amount loans.
Challenger banks are budget-friendly and easy-to-use digital banks that challenge traditional banking services by offering banking services to underserved customers. The term became popular in the UK and referred to recently launched small banks that compete with big financial institutions.
The terms digital, online and mobile banking are often used interchangeably, but each has its meaning and purpose.
Digital banks have tapped the market that traditional banks could not. They offer easy financing to customers who cannot get them otherwise from conventional banks.
Digital banks provide smooth customer onboarding to open a bank account online without visiting the branch.
Since they save capital by not having a physical branch, they offer services at quite a low cost. It is relatively cost-effective for customers who cannot afford traditional banking services.
Since digital banks work on an algorithm set for each transaction and service provided, they are free from human errors and accurately perform transactions.
Digital banks offer services anytime, anywhere. Customers can make payments and receive money in their account without waiting for banks to open.
Digital banks are quite prepared about cyber security and safety of each transaction performed digitally. Digital banks are leading the competition of data security over other conventional banks.
Brick-and-mortar banks are usually too rigid on eligibility for certain types of facilities, whereas digital banks are processed faster and are flexible on offering services.
The user experience of digital banks is so seamless that customers can perform banking transactions effectively and safely while also enjoying the banking experience.
Although digital banks are constantly working on providing secured transactions, they also carry certain risks, and they are not yet easily accessible due to certain regulatory restrictions.
Digital data is prone to hacking, and every piece of information on the internet can be hacked. Digital banks carry the inherent data risk of cyber theft.
Digital banks may not always work fast or may not work if the server is down. Since it relies on the internet and the server, the server's downtime may cost billions.
In India, digital banks will be given banking licenses, but the RBI has not notified it. Moreover, certain digital banks may have licenses to offer restrictive services which may not meet customer expectations.
Since digital banks perform transactions online, it carries identity theft risk where details of a person's identity may be leaked and misused for other personal gains. Data privacy may not always be practical.
Digital banks do not require a physical branch to exist, and hence, it has a significant drawback of impersonal banking. Banking transactions will be online, and customers will not have a physical branch where they can visit and ask queries.
However, customer queries can be resolved more efficiently without them visiting any branch. New-age technology also provides chatbots that can help users ask questions, and with digital banking, it can be determined by just dialing one phone number.
In simple terms, embedded finance is a smooth integration of financial services and products with other financial service providers or non-financial services and products or technology. Embedded finance refers to attaching financial services and regular non-financial services, products, and technology in one place.
For example, an e-commerce merchant selling fashion accessories also offers a small, instant credit facility on customers' purchases from his platform without moving to any third-party webpage. In this example, fashion accessories are non-financial products, and offering instant small credit facilities integrates financial service with the non-financial product.
Embedded finance has opened many revenue sources for FinTech companies.
Embedded finance has enabled many new revenue sources by allowing FinTechs to create modernized banking products and services that even non-bank players can integrate with their products or services.
Almost every organization enhances its customer base by offering/adding more products and services related to its existing product or service. For example, a merchant selling high-value items may enable embedded finance and integrate with the insurance provider to offer instant insurance service at the time of checking out from his webpage.
Big data is a large and complex data set that is hard to read or manage, and detailed analytics is required to interpret and create helpful information out of them. The use of big data will enable FinTechs to understand the market trend and customer expectations that will ultimately help them create a customized service or product that will bridge the gap of customer expectation and offers by the existing players.
Diversification is the key to increasing business and customer reach. As more and more FinTech companies evolve, more products and services can now easily be integrated into the services and products already offered.
For example, a car distribution company selling car insurance along with every new car purchase or a telecommunication app provides free learning courses on its app.
While in the Software-as-a-Service (SaaS) business, a software-making company would approach a bank to use its software to enhance their customers' banking experience. In BaaS, banks integrate with third-party service providers to offer the latest banking products and functions faster and easier than before.
Moreover, the development of banking APIs has enabled new BaaS business models to cope with increased customer expectations.
Consumers, especially GenZ, tend to use more FinTech products, and other age groups are also joining the race in massive numbers. The key contributor to the increased customer base is more trusted offerings and services, and customers started trusting more of these FinTech products than their traditional sources.
The customers of this generation are more demanding; as technology advances, they want smoother, faster, and more accessible products and services without much effort. For example, a young group of people planning to watch a movie can book movie tickets and cabs, order food - everything from just one app.
The limitless benefits of AI have played a pivotal role, and it will continue to do so for the years to come in enhancing the customer base for an enterprise. AI helps analyze large data sets (big data) and convert them into more meaningful information and analysis that will indicate which embedded finance products an enterprise should use to increase customer reach.
Although the opportunities in embedded finance for FinTech companies are vast and unimaginable, it also carries specific challenges that every FinTech player will have to address.
More FinTech firms mean more competition, and more competition means better quality. However, every FinTech company will have to be conscious of its competitiveness to create a sustainable business model. Focusing on meeting customers' expectations and constantly adapting to the latest trends could help them stand strong in the competition.
Technology changes faster than its acceptance in organizations. As technology advances, FinTechs must use it to offer a better customer experience. Otherwise, customers will quickly shift to other service providers who adopt technologies faster to meet customers' expectations. Faster adoption of the latest technologies can be the key to developing more customer-friendly products and services.
Ensuring the safety of the data gathered will be crucial from the regulatory point of view and in building customers' trust. Customers will automatically stop using your product or service if it is more prone to data leakage. A robust IT infrastructure with frequent security audits could solve the issue of data security and safety.
Super app refers to the combination of multiple services such as food, entertainment, grocery, fashion, cab, and financial services under one application in your mobile phone. For example, Paytm offers payments, cab booking, food ordering, shopping, short-term lending, entertainment, and many services just under one app.
Gone are the days when you have to sift through various apps on your phone, remember passwords for each, and complete transactions separately in each application. Just as you get access to multiple stores in the shopping mall, including entertainment and food, super apps work as a one-stop solution for different requirements.
The reason why super apps are gaining more popularity is that a large group of the population in India is well-equipped with smartphones and well-versed with technological advancements.
To be considered a super app, certain services must be available in the app:
Super apps can bridge the gap of enhanced customer demands and existing offerings by traditional financial institutions through a super collaboration of FinTech companies and financial institutions. There are three enablers that can make this collaboration fruitful:
To enable data flows, the use of APIs and open data is required by financial institutions and FinTechs can be offering APIs and an analysis of the open data to create a rich data flow.
FinTechs and Financial Institutions may join hands and build a super app to offer comprehensive services in one app to enhance their customers' experience.
To be competitive, financial institutions will have to understand how customer data can be best used and build analytical capabilities using FinTech firms' support.
Account aggregators do the simple task of compiling various accounts of customers such as bank accounts, business accounts, investment accounts, insurance accounts, and credit card accounts.
AAs collect, consolidate and share customer banking information (with their consent) using APIs in real-time in a data-blind manner with the financial institutions. The financial institutions then analyze the details gathered to understand customers' profiles to offer better lending options and other banking services as a whole.
In India, the RBI governs the functions of the AA to safely share financial and other confidential details to the financial information user in the AA network without having to worry about the data being tampered with.
The AA procedure consists of three key players:
The user of the financial information means the financial institutions from where customers want to avail of the financial services.
The financial information provider means any bank, mutual fund or insurance company, Non-Banking Financial Company (NBFC), or other financial institution holding customers' details.
The account aggregator will play a role of a middleman who will obtain data from FIPs using APIs and pass the details to the FIUs.
Here's an example of a customer who wants a car loan from the financial institute (the FIU):
The core purpose of having AAs in the banking system is to have a secure way of data sharing to offer a hassle-free user experience while ensuring easy accessibility of certain banking services to all, including small businesses. The opportunities that the AA framework brings in the open banking ecosystem focus on four major segments:
The AAs will be disrupting the traditional lending market by allowing every individual and small and medium-size business to avail of short-term credits of small amounts. For some individuals with no credit history, borrowing had been a significant obstacle in obtaining short-term finance. The AAs will bring parity in the lending and borrowing system by size and duration of the borrowing.
The wealth management service providers such as brokers and mutual funds will be better positioned to offer quick solutions for personal wealth management strategies as customers' real-time details can be accessed through the AA platform.
The AAs will be the crucial information providers for the insurers as they will have access to customers' spending patterns, their healthcare details, and other premium responsibilities. It will help them curate the insurance policy suitable to their needs and spending behavior.
The bank statement is a pivotal statement to filing income tax or GST returns. The introduction of the AA framework will automatically allow direct and indirect tax portals to fetch bank statement details, which will reduce a lot of time in the preparation, collection, and verification of taxpayers' details.
There are challenges that need to be addressed, issues that should not be overlooked, and concerns that are already being discussed by the concerned authorities.
The security of the shared data is the biggest concern since AA was being considered in 2016. Although the data transmission occurs safely without the users' data being tampered with, there lie some inherent risks for every piece of information shared online. The cyber frauds and anti-money laundering issues are yet to be addressed as a detailed Standard Operating Procedure (SOP) are awaited.
Since the data is shared among various FIUs, the issues related to data privacy need to be addressed well before its misuse. The concept of electronic consent is therefore brought to ensure the data is accessed and shared only once the customer approves it to be shared.
Without a robust IT infrastructure, the existence of AAs will be a question. The overall IT infrastructure will ensure smooth API implementations, audit of licenses, privacy frameworks, and other IT designing requirements are built carefully.
The success of the AA framework will be decided as more and more users start accepting it positively. The issue of customers' resistance to adopting such a system is also one of the significant concerns.
Open banking has API aggregators in the center of it. The API aggregators are the API of the different APIs. It is essential to know that two APIs can never be the same as each API is unique and has its own standard usability. Irrespective of what BaaS product you want to create, the API aggregators offer a standard and unique API that will ease your integration with banks and other financial institutions.
For example, Cashfree Payments has built a single platform of multiple open and partnership APIs that will allow you to integrate with other banks to build your banking products or services.
Banks need API aggregators since they are well-connected with the developers and know what they need. Similarly, developers will also require API aggregators as they are in the center of open banking without which their product development could be incomplete.
This guide has covered the re-bundling of banking products into the latest banking functions. Although there might be new additions year after year, these products will remain at the core of modern banking functions.
In the next module, various stakeholders you will come across while building your BaaS product will be discussed.
Banking and payments in India over the past five years have transformed significantly. Tap and pay, paperless credit facilities and contactless KYC verification are some of the key changes that we are experiencing thanks to the digitization of these services. Moreover, our banking habits have also evolved drastically that we almost forgot when we visited [physical branches].
Cashfree Payments offers Banking as a Service solutions to help businesses build modern banking products and services.