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Is regulation enough to propel Open Banking adoption?

Recently, the European Commission set out its intentions to advance open banking with the introduction of PSD3. The update to its Payment Services Directive (PSD2) shows a commitment from the EU to realise the potential of Open Banking, and it’s one welcomed by the industry.

Hans Tesselaar, executive director at BIAN

Hans Tesselaar
Hans Tesselaar, executive director at BIAN

While PSD3 sets out several key changes to realise its goal of driving Open Banking adoption forward, the aim to standardise payments across the EU with its move from a directive to a regulation poses the question: is widespread adoption possible with regulation alone?

The benefits of regulation

A new Payment Services Regulation will update and replace elements of PSD2 to ensure its rules are applied more consistently across Europe. This new regulation will bolster Open Banking by enforcing better API functionality, allowing smoother payment data sharing and eliminating unnecessary steps hindering data flow.

Apart from refining PSD2, these proposals enhance user control via a centralised dashboard, ensuring easier management of data sharing. In addition, new measures like increased bank cooperation will support the industry’s attempt to combat fraud and elevate consumer confidence.

This regulation puts FinTechs and banks on a level playing field, giving technology providers more control over the service they provide to customers through easier and more secure data sharing, while reducing infrastructure costs.

Europe is not the only country taking a regulatory approach. The UK for example, a pioneer in Open Banking innovation on a global scale, has been prioritising regulation since the launch of Open Banking in 2017 by the Competition and Markets Authority (CMA) following the introduction of PSD2. Now, its recent announcement from the Joint Regulatory Oversight Committee, regarding its commitment to a long-term regulatory framework, reaffirms its commitment in the area.

While these regulatory measures allow fintechs and banks to implement Open Banking more effectively and aim to give customers a seamless experience, independent regulation does limit innovation without the correct considerations.

The realities of regulation

The state of open banking is still very immature, but there is no denying its growth. The number of users worldwide is forecast to reach 132.2 million by 2024, a significant increase from the 24.4 million users in 2020.

Countries like the UK risk reducing their role as a driver of progress without the access to the wider European population that it had before Brexit, as an example. And as the European market is predicted to be the largest open banking market by 2024, the continent as a whole would do well to collaborate to better understand customer needs, react to market demand and expand further.

Being open to learning from global examples and listening to industry leaders, including larger banking institutions with global influence and international exposure, will be important to ensure successful practices are promoted, which will encourage open banking more widely within these countries and different regulatory frameworks.

Meeting the demand

Focusing on regulation must not overshadow market demand, and looking at countries with a market-driven approach, such as Singapore, will reveal what governments and organisations should be prioritising when it comes to open banking.

Singapore’s market-driven stance has led to high open banking adoption. 90% of professionals consider open banking either a ‘must have’ or ‘important’ and a further 90% agree that it has also had a positive impact on the industry and made it more collaborative. This is despite no mandatory requirements.

Adoption has accelerated in APAC over the past few years due to the opportunity it has to make the industry more collaborative and the potential to bring about fairer and more equal financial services. However, the space remains in the early stages of development. Many banks are just starting their digital transformation journeys, and struggling with core legacy systems and closed or outdated architectures. This is why overcoming these barriers and industry collaboration will be at the heart of open banking adoption.

Coreless banking

Regardless of a regulatory or market-driven approach to open banking, banks must create an ecosystem with fintechs, providers and aggregators. This is to boost the speed at which best-of-breed products can be implemented to meet customer demand and make the most of the opportunity that lies within the open banking space.

A coreless banking solution will be key to empowering banks to overcome issues around interoperability and selecting the software vendors needed to obtain these best-in-class solutions for each application. In turn, this will promote industry collaboration and ensure customers are provided with the optimum service to further encourage open banking adoption.

Coreless banking implies that each of the needed (IT)-services works seamlessly together. If this is established, financial institutions can migrate to a “best of breed” environment so they will have the ability to utilize and combine third-party solutions to deliver the best open banking services for their customers.

This means banks can focus on incorporating the technology they need to enable open banking services and respond to customer demand – regardless of whether this is from a regulatory or market-driven starting point – at a faster and more efficient pace.

The answer lies in collaboration.

Is regulation enough for open banking adoption? The short answer is no.

Whether countries decide to push open banking from a regulatory standpoint, or adoption is driven from the market demand, industry collaboration will be the answer. This will enable greater innovation, so from PSD3 in Europe, to Singapore’s market demand, the industry can unlock the ultimate outcome for open banking with an open attitude.

CategoriesAnalytics Cybersecurity IBSi Blogs RegTech

Identity Verification for FinTechs: Ensuring Security and Compliance

Vivek Sridhar, Neokred
Vivek Sridhar, Chief Business Officer at Neokred

For Neo banks in the financial industry, digital onboarding is becoming more crucial. Neo banking is the name given to a new breed of digital-only banks that provide a broad variety of financial services via online and mobile platforms.

By – Vivek Sridhar, Chief Business Officer at Neokred

These financial institutions frequently build on top of the already-existing infrastructure, and they significantly rely on technology to give customers a smooth and effective experience. The procedure for signing up for and creating a new account with a neo bank is known as digital onboarding. It is a crucial part of the customer experience and has the power to build or break a person’s relationship with a new bank.

For modern banks, identity verification is a vital step in the customer onboarding procedure. Since it serves as the first point of interaction between the bank and the customer, digital onboarding is crucial for neo banks. It establishes the tone for the customer’s entire banking experience. A quick and easy digital onboarding procedure can provide consumers with a good first impression and persuade them to keep using the bank’s services. On the other hand, a lengthy and onerous onboarding procedure can deter clients from joining up or even cause them to give up completely.

Digital onboarding is essential for neo banks because it enables them to gather vital data about their clients, such as their details, income, and financial objectives. Initially, it is vital to prevent fraud and safeguard the bank and its clients from financial losses. Identity verification is the first line of security against attacks when criminals try to open phoney accounts using stolen identities.

Second, regulations seek identification verification. Anti-money laundering (AML) and know-your-customer (KYC) guidelines oblige financial institutions to verify their customers’ identities. Compliance with these standards is crucial if you want to avoid large fines and reputational harm.

Furthermore, identity verification is key for neobanks because it allows them to collect critical information about the consumer, such as personal information, income, and financial goals. A major use of this data is for offering specialized financial products and services.

Who Needs Technology for Identity Verification?

Financial institutions are a popular target for criminals attempting to conceal the proceeds of their illegal activities, Insurance companies, gaming organizations, and cryptocurrency dealers are just a few of the other industries that run the risk of moving money from and to online accounts.

Large amounts of personal data are transferred, processed, and stored by healthcare organisations. As a result, they are a prime target for cybercriminals looking for this valuable data and may also consider using identity verification software to protect their business and customers.

Given the harmful effect, any association with money laundering and financial crime can have on an institution, groups that engage with customers online rather than in person require a KYC plan to protect their clients, build trust and protect their business from fraud and data breaches.

As part of the onboarding process, these organisations must identify and verify users. But it does not end there. They must continuously repeat the process throughout the customer relationship to ensure that they do not pose any risk to the organisation at any time. The verification process should not impede providing an excellent customer experience, but rather should efficiently and securely connect a user’s physical and digital identities.

Identity verification software will be of interest to the teams and individuals responsible for designing, deploying, and managing the efforts required to protect the organisation from the risk of financial crime.

How to Find the Best Identity Verification Software in 3 Easy Steps:

Identity verification is critical for ensuring that the financial institution only deals with legitimate customers and follows compliance regulations. When selecting identity verification software for business, several factors must be considered to ensure that the organization’s decision is the best one.

Step 1: Analyze the Requirements

The decision must also be motivated by the specific needs of the business. The industry, customer profile, nature of online engagements, and user experience all impacts the role of identity verification as well as its correct function.

Step 2: Gauging the Features and Functionality

With a definite knowledge of the necessities for identity verification software, the emphasis moved to what providers choose to offer. Some features are critical to a solution and knowing what they are and how they are presented are critical to deciding on it with knowledge.

Step 3: Gauging Fit

As suggested solutions are considered, the choice of the safest alternative for the organisation should remain focused on meeting the needs of the business. Although there may be cost savings, some solutions require the vendor or in-house engineers to modify systems and do not give the team the flexibility to tailor the solution to the organization’s need

Using Neokred’s ProfileX Product by organizations to eliminate fraud. Organizations that use ProfileX automate the validation, screening, and decision-making processes required to approve good customers faster, stay compliant and reduce the risk of fraud.

AML teams can manage identity and document verification, including non-documentary verifications (name, address, DOB, SSN), watchlist screening, and monitoring using independent and reliable data sources — scanning against different lists and databases to validate identity and checking against known or suspected criminals to defend against fraud with better data.

The no-code flag and review platform provided by ProfileX enables teams to create workflows tailored to their specific use cases. These include synthetic checks that use spoofed or falsified personal information to identify entities.

CategoriesAnalytics IBSi Blogs venture capital

Surviving and Thriving: How Indian FinTech start-ups can insulate against funding winter

Rahul Tandon, Chief Product Officer, Safexpay
Rahul Tandon, Chief Product Officer, Safexpay

A funding winter is a period of reduced venture capital funding during which investors become cautious and risk-averse, resulting in a lack of funds for new businesses. The global economic meltdown has had some knock-off effect on the Indian FinTech industry as well. But the rate of adoption of Indian FinTech is still rising and shining. As per the Economic Survey 2022-23, Indian FinTech companies witnessed a staggering adoption rate of 87% across various sects of users including the underserved and those who belong to the bottom most stratum.

By Rahul Tandon, Chief Product Officer, Safexpay

This beats the global average by 23%. With over 2100+ FinTech companies, India is the third-largest FinTech ecosystem in the world. Despite the challenges, Indian FinTech start-ups attracted investments worth $1.2 billion in Q1 2023, a sharp jump of 126% compared with $523 million raised in Q4 of 2022, according to a report compiled by market intelligence platform Tracxn.

However, the total funds raised were 55% lower than $2.6 billion raised in Q1 2022. The number of funding rounds in Q1 2023 also experienced a drop of 77% and 39% against Q4 2022 and Q1 2022, respectively. The ecosystem has remained resilient, promoting innovation, improving operational efficiency, and prioritising regulatory compliance to succeed.

FinTechs Modifying Business Model

In the Indian financial services industry, partnerships have played a vital role in sustaining operations and generating cash flow. To adapt, businesses have adjusted their models, forming alliances and collaborations. FinTech companies often collaborate with banks, NBFCs, and insurance firms, leveraging their customer base and accessing resources. Such collaborations enable them to expand their offerings, such as digital lending platforms and payment solutions. FinTechs have also taken steps to conserve cash by scaling back on activities like marketing, prioritising cost-effective approaches. By aligning expenses with revenue streams, start-ups aim for sustainable growth and attracting investor interest.

Innovation is not only in products and services but also in business models. The reason being that entrepreneurs often get funding in a 12-18 month period, those who have not secured consecutive rounds of funding may have a limited runway. As a result, it is critical for FinTechs to run a business, which is sustainable and open to adaptation. Overspending on client acquisition and other unnecessary areas could be fatal for the growth and sustenance of the business. Focus should be on improving unit economics and being conservative with the initial funding. Start-ups, especially in FinTech, can boost their prospects of long-term success by implementing these actions.

Fostering Innovation

Innovation has been a driving force for Indian FinTech start-ups to attract investors and differentiate themselves in a highly competitive landscape. These start-ups have embraced cutting-edge technologies and developed innovative solutions to address the evolving needs of consumers. For instance, they have leveraged artificial intelligence, machine learning, and blockchain to create secure and efficient financial services platforms.

Government support has played a crucial role in fostering a culture of innovation and securing funding during challenging times. The Indian government has introduced initiatives like the “Digital India” campaign and the “Start-up India” program, which provide support and incentives for FinTech start-ups. Such government initiatives have encouraged entrepreneurs to develop innovative solutions, attract investors, and contribute to the growth of the FinTech ecosystem. Furthermore, ongoing innovations such as differentiated banking and insurance licenses, the introduction of Central Bank Digital Currency (CBDC), the implementation of Account Aggregator, the emergence of the Open Credit Enablement Network (OCEN), the integration of Digilocker, and the establishment of the Open Network for Digital Commerce (ONDC) are fuelling continuous progress in the sector.

Enhancing Operational Efficiency

Indian FinTech startups recognise the importance of optimising their operations to save money and exhibit profitability potential. Leveraging technology to increase operational efficiency is a key strategy for fintech companies. By automating manual processes, implementing artificial intelligence and machine learning algorithms, and utilizing big data analytics, FinTech firms can streamline their operations and reduce costs. For example, digital on boarding processes can significantly reduce the time it takes to open an account or process a money transfer. Additionally, chatbots can provide customer service around the clock, freeing up staff time for more complex tasks. These innovations not only lower operational expenses but also improve consumer experience, attracting a wider user base.

Credibility and Regulatory Compliance

FinTech and payment companies in India face a complex and evolving regulatory environment. Compliance requirements include obtaining licenses, adhering to data protection rules, complying with AML and KYC regulations, ensuring secure technology infrastructure, maintaining accurate records, submitting reports to regulators, and undergoing audits.

For FinTech start-ups to receive finance, trust and regulatory compliance are critical. They realise the need of preserving clients’ data, employing effective security measures, and adhering to relevant regulations. With data breaches and privacy concerns on the rise, start-ups have prioritised data security measure while maintaining transparency and responsibility in their operations.

Furthermore, forging solid alliances with banks, financial institutions, and regulatory agencies boosts the legitimacy of the whole ecosystem. Collaborative efforts to build regulatory frameworks, encourage responsible lending practises, and defend consumer interests foster a trust and confidence ecosystem.

The future of regulatory compliance in Indian FinTech and payments looks promising with the government’s push towards digitisation and financial inclusion. The apex bank has been working towards creating a more robust regulatory framework to ensure that the growing FinTech industry remains compliant with regulations. One of the key initiatives taken by RBI is the creation of a regulatory sandbox, which allows FinTech companies to test their products in a controlled environment before launching them in the market.

Way forward

The future of Indian FinTech industry is in position for growth and resilience, overcoming the challenges posed by the funding winter. To attract investor interest, FinTech companies should adapt their business models, forge strategic partnerships, and prioritise sustainable growth. Innovation will remain a crucial factor in setting them apart from competitors, with a focus on building scalable and profitable enterprises while optimising operational efficiency through technology integration.

Upholding credibility and regulatory compliance become paramount, encompassing data security, transparency, and responsible practices. By collaborating with banks, financial institutions, and regulatory bodies, FinTech firms can foster a reliable ecosystem. With government support and regulatory initiatives, the future looks promising for the Indian FinTech and payments industry, as it continues to drive financial inclusion and digital transformation across the nation.

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