Banks have traditionally been the custodians of our personal data.
They know how much we earn, spend, borrow and save through various points in time. This treasure trove of data enables them to offer products and services based on our needs and reduces their downside risk.
t the same time, restricted access to this data has traditionally led to a concentration in the number of companies that can provide financial products and services to consumers.
Now, a combination of government regulation and market forces has caused a new global movement in this space, called ‘open finance’, where a host of new players can access this data securely to offer new products and services.
This data sharing is enabled through a digital ecosystem, which helps retrieve information with limited effort or manipulation.
For consumers, this enables a friction-free consumer experience – greater convenience, increased access to financial services, and improved product options.
Likewise, for businesses, open finance enables access to a larger customer base, customization of products, accurate credit risk evaluation, stronger customer service, and fraud protection.
Open finance is evolving in different stages across markets.
In some countries, such as the UK, the pace of adoption has been fast, with regulators acting as a catalyst. The Competition and Marketing Authority mandated the development of an ‘open banking standard’, where banks were asked to share customer and transaction data through digital ecosystems with third parties.
In the United States and China, this transition is driven entirely by market forces, with companies establishing relationships between themselves.
Success in other markets
While markets around the world play catch up, what is certain is the need for a digital ecosystem for enabling seamless information exchange.
Leading the charge is Plaid, a San Francisco based company – by connecting fintech developers, financial institutions and consumers, Plaid’s financial data network makes it easy for all players to securely link and access data.
Through their APIs (digital tools to integrate multiple data sources), Plaid works with more than 80% of US’s fintech apps.
As a first mover in this space, they have enjoyed a significant advantage due to network effects – their platform’s value to users increases with the size of their network, which in turn makes them the preferred choice for new players.
They have seen exponential growth since 2013, with a 100% plus CAGR year on year for the last decade.
Seeing the immense importance of the intermediary, Visa moved fast to acquire Plaid for a valuation of 5.3 billion in 2020. Acquiring Plaid would have compounded Visa’s addressable market, providing a foot in the door to fintech service providers around the world.
However, the Department of Justice moved to stop the deal, alleging that it would limit competition in the space.
Since then, Plaid has continued to expand at breakneck speed, backed by a $425 million fund raise (at a valuation of nearly $13.4 billion). Apart from adding Microsoft and Google as customers last year, they increased their overall customer base by 60%.
Why SEA
‘Banking the unbanked’ has long been a catchphrase in the fintech sector, as the region is home to ~300 million people who are not part of the conventional banking system, even though ~80% of the population made at least one transaction online in the last two years.
The question arises, why are these people not served by traditional banks?
Because of the high cost to serve in smaller towns through traditional banking methods, incumbents put limited thrust on onboarding these customers.
Further COVID exacerbated the situation as it led to the closure of branches, resulting in customers not having adequate access to financial services.
On the other hand, fintech products in SEA were on a roll during COVID, as consumer e-wallet usage jumped 45% compared to pre-pandemic times.
Looking ahead, e-wallet transaction volume is expected to increase over 200% by 2025, according to a report by Google, Temasek, and Bain & Company.
Startups soon realized that the financial inclusion of customers did not require a conventional bank branch approach – solving their pain points by relying on APIs and tech to integrate fintech products became a massive opportunity.
Moreover, the growth of internet penetration in SEA enabled rapid adoption and paved the pathway to monetization for these startups by developing revenue streams through affordable subscription and fee-based models.
Apart from the local populace, these products also helped to serve expat populations in SEA by significantly reducing the cost of remittances
Key Players leading the change
Brankas, Brick, and Finantier are trying to replicate the Western open banking methods in a fragmented region, in countries like Indonesia and the Philippines, where bank branches are far apart.
Brankas, which was founded in 2016, the independent financial management and payments platform based in Indonesia offers a suite of embedded finance APIs to develop, rollout, and manage digital experiences across various use cases for Southeast Asia, from digital banking, online credit scoring to e-commerce and gig economy payments.
It has raised over $20 million in a Series B funding round recently and aims to scale its network of financial institutions and technology companies, expand its product menu of banking-as-a-service APIs serving customers across six markets in Asia, and double its 100-person strong team.
It also plans to deepen the capabilities of its payments, data, and banking-as-a-service API product menu in Indonesia, the Philippines, and Thailand. It also has partnerships with top digital banks and fintech leaders in Vietnam and Bangladesh that will go live in early 2022.
Founded in 2020, Brick now has more than 50 paying clients and supports more than 13 million API calls and almost one million consumers a month.
Online lending is its biggest vertical, followed by personal financial management apps, where its APIs power the budgeting function, bookkeeping and accounting apps used by businesses
Other customers include investment firms, banks, and some of Indonesia’s largest conglomerates, including Sinarmas Group and Astra Financial.
A third start-up in this space, Finantier offers credit scoring and account aggregation that allows businesses to build customer profiles from both financial and non-financial sources, as well as payment initiation solutions that enable money transfers via licensed payment gateways.
Unlike Brankas and Brick, which operate under a pay-per-usage model, Finantier offers a product-as-a-service (PaaS) model – the firm does not charge setup fees or draw revenue from transactions.
Other notable open finance upstarts include Hong Kong-based Finverse.
Way Forward
With the scene being very nascent, current players think there’s plenty of room for more players to come in and competition among API startups is already heating up.
Looking at the success open finance players have achieved in the West, more players are expected to enter this space in SEA as well.
The upside is that more entities will be working towards educating the market.
However, the main challenge remains the lack of awareness in the market, not just from consumers but from other stakeholders as well. While consumers are slowly adapting to a tech-heavy lifestyle, regulators are still learning and designing the open finance regulations in their country.
Moreover, despite improved service, consumers are slow to trust start-ups in this space. Mass adoption may take time, and startups will be required to perfect their service in order to garner customer trust.
Eventually, the fundamental rule ‘Customer is King’ will prevail and open finance startups are here to stay and evolve the financial service model.
Since customers don’t have access to adequate financial services cost of remittance to destination countries is one of the highest in Southeast Asia.