OPEN BANKING CONCEPT IN INDIA by-Nikita Mistry

1.1. ABSTRACT

With the Advancement into technology and the coming age of digitalization the market of Fintech and the concept of Open Banking has seen a boost into the society. India, by using the two-way Hybrid Model is taking the advantages and reaping the benefits from such concept. However not fully bloom yet, this UPIs have the support from the UOI as well the key private players such as ICICI, HDFC & Kodak. Data Localization Norms for Ensuring the smooth working of PSO’s are some of the reformatory steps taken, enabling and encompassing its users and providers with protection over Data Privacy. With the Benefits, Crucks and Nooks of such Payment system follows it like a shadow but with proper watch and reforms the practice can be made effective & effortless and harmless.

Key Words- Open Banking, UPIs, APIs

List of Acronyms and Abbreviations

APIs Application Programming Interfaces

FIU Financial Information User

FIP Financial Information Provider

NPCI National Payment Corporation of India

NBFC-AA Non -Banking Financial Company – Account Aggregator

OB Open Banking

PSOs Payment System Operations

PFM Personal Financial Management

RBI Reserve Bank of India

SME Small-Medium Enterprise

TPPs Third party Financial Service Provider

UPI Unified Payment System

CHAPTER-I PRELIMINARY

REVIEW OF LITERATURE

The information compiled into this research paper is from various independent internet resources, Research article, and the master circulars being adopted by the RBI for safeguarding the user from this interface. One of the articles explains about meaning of the Open Banking and how it can benefit the SME from usage of it while the describes about the two- way hybrid Model adopted by Indian Government in terms of OB. The Information inculcated into the RBI circular revised in 2019 directs the NBFC-AA for adopting and carry forward the policies & regulations in Respect of lender/customer relationships as well. One author states the risk regarding the data privacy and data mining involved with granting consent to such UPI via APIs and TPPs while other author lays down the details for steps taken by to protect its citizen from such threats. Other details of Information are further discussed via Research structure under this Paper.

1.3. STATEMENT OF PROBLEM

The present study with the help of a doctrinal method intended to focus & understand the Concept OB and how well its roots have grip over the Indian payment system. Besides, the study also endeavoured to find as to what are the key problems/ issues and risk Involved with such Financial Services to its end users and the TPP’s along with some of the benefits associated with it. Finally, the study also took a critical view of the need for stringent rules and policies in order to protect/ safeguards the Interest of such consumers from the usage of it. Protection and the suggestions made by certain bodies have been subjected to a critical review. The study has been geared by the key feature that it’s about time

for the Indian Banking sectors to Know the Benefits of such Revolutionized platforms and mines the ladder towards economic success/ Consumer satisfaction.

1.4. OBJECTIVE

To study the Concept of Open Banking such as APIs and UPIs use in
To examine the Initiatives being taken by the Indian regulatory and private
To critically Analyse the risk factors along with reformatory measures adopted by
To provide few preventative measures in order to safeguard and protect the Interest of the consumers/customers from exploitation of such

1.5. HYPOTHESIS

Open Banking is a financial service Operation with the use of APIs enabling its users to procure sensitive Info. Regarding their financial status under a single hood which can further use for transactions between various Banks or to the TP Applications.
Various Private sectors has Enable their APIs to Fin-Techs in order to offer better financial services to the consumer along with the Initiatives adopted such as PCR, DEFA, OCEN.
Advantages of these UPI’s or OB involves to absence of Screen scraping along with effortless and paperless transactions by one user to another into the real Thus, making it less time-consuming and effective in its purpose.
Major concern regarding this OB is the data privacy and security issues because such system makes it easy prey for the Cyber-attacks in turn leading to wrongful benefits to

1.6. RESEARCH METHODOLOGY

In respect of objective, doctrinal research design has been adopted. The paper will be based from various readings such as newspapers clippings and Research articles. The information will be collected mainly from secondary sources such as independent internet resources, websites and RBI Circulars. This research paper is based purely on theoretical aspects and focuses towards understanding the

Concept of OB along with its probable benefits and risk Encompassed. It also derives the answers for the research problem related thereof.

1.7. RESEARCH STRUCTURE

For the effortless reading and better understanding of the topic on Open Banking Concept in India, it has been bifurcated into numerous following Chapters. Chapter-I deals with preliminary describing brief background, need of the study along with its methodology and hypothesis. Chapter-II deals with Concept itself along with the Grip in the Indian Regulatory Structure. Chapter-III explains the Initiatives being taken by the Govt./ Industry and some of the biggest Private Sector for cultivating the OB system in India Chapter-IV describes about the Advantages, Risk Involved and Regulatory measures adopted by the Indian Govt. for smooth and effortless running of the UPIs. Chapter-V consists of conclusion/ recommendations in respect of safeguarding the Interest of the consumers and Investors. Lastly, Chapter-VI provides all the documentation/ bibliography from where the information of current research being procured

DATA ANALYSIS AND INTERPRETATIONS CHAPTER-II

CONCEPT OF OPEN BANKING EXPLAINED

THE CONCEPT

financial status from banks /non-bank institutions of their customers/consumers with their consent to the third- party Financial service providers (service vendors or start- ups) which can then use this data to compare /monitor their transaction history and accounts, create marketing profiles from aggregate data etc. It is basically a resource which is reshaping the entire banking Industry and opening growth gates for the Fintech in India as well. For example, third-party personal financial management (PFM) tools like Mint use our bank account information to help track spending and reach other goals. Embedding of banking services on SaaS (Software-as-a-Service) based accounting platform is a classic use case of Open Banking. It also allows SMEs/MSMEs to fulfil their core need of managing customer, make payments to partners and collect money from customers.²

2.2. THE GRIP OF OPEN BANKING IN INDIA

The banking framework/ ecosystem in India has been drastically changed over the few years. It has now moved to the consumption based outside-In approach from the

CHAPTER-III INITIATIVES FOR OPEN BANKING

PRIVATE PLAYERS INVOLVED

In India Fin-Techs are partnering with banks to access data to offer competitive customised financial services as there are huge amounts of valuable data. Banks with the help of technologies such as artificial intelligence, machine learning, IoT, and block chain are staying relevant in the industry. Some of the Top Private Banks such as Kotak, YES Bank, HDFC and ICICI have opened up their APIs to Fin-Techs in order to offer better services to the consumer.⁵

3.2. BY GOVT/ INDUSTRY

Account Aggregator- This concept is in the market since a time now but due the pandemic COVID-19 the launch of this platforms is being delayed in 2020. These entities have operational license to build the AA such as One Money, CAMS credit/repayment history, outstanding loans, ancillary data like overdue utility/ or tax payments. Basically, enabling the lender with the 360 view of the customer’s history and worthiness of such would be marked from this. Risk factor can be asserted and preferable lender can be chosen by the customer. CR will reduce the

⁵ THE IBS INTELLIGENCE, https://ibsintelligence.com/ibsi-news/4-top-indian-private-banks-apis-enabling- innovations-in-open-banking/ , March 30^th 2021.

information asymmetry in the market which in turn is focused to improve the business conditions.⁶

CHAPTER-IV

ADVANTAGES AND RISK INVOLVED

4.1. ADVANTAGES

OB can provide a win-win situation for both such as banks, regulators, and consumers providing them with options for managing their money, borrowing, and making payments. Here are some as follows-

No More Screen Scraping– the earlier generation PFM Apps provides its users with same username and password to login, thus enabling the app to Pick and choose the relevant info. Among various others which was in-turn proved to be time consuming. Here APIs on the other Hand feed apps with direct access to the desired info for example details of your transactions or
Pressure on banks and streamlined lending- OB allows banks to improvise on their services they offer. Banks compete with the PFM tools, competitive pricing and control their messaging services to reach to their customers. This also allows to receive the loans easily as all the information would be complied together, making it easier for the lenders to provide their customers with better loan/ business loan

3. More Helpful Tools-

Open APIs helps the App developers to further extend a helping hand to its users to take control/ monitor on their spending, predicts events on the basis of the account, in-turn suggesting products to save money on etc.

4. Increase in Financial Market-

With the arrival of more clients in OB, the diversification of APIs and services will be greater. In this way, there will be numerous offers adapted to the needs of everyone.

Customer Satisfaction:

Today’s customers are always looking for more. With OB, financial institutions will have so much more to offer to their customers and keep them satisfied.⁷

⁶ The Digital Fifth, https://thedigitalfifth.com/top-open-banking-initiatives-in-india/ , March 30^th 2021.

RISK INVOLVED

Data sharing and privacy issues:

Nobody prefers to share their private Info. Especially related to where Finance is involved and all this APIs, TPPs relies on such data to carry on their business. Transactions/ balances held by these APIs poses severe Risks

To Tackle such situations related to the risk mentioned Above, the GOI

came with a Circular as mentioned earlier for the NBFC-AA and also directed Banks/ financial Institutions to identify the probable risk factors and\ accordingly stringent their policies, procedures, laws while keeping a continuance surveillance in order to safeguard the authorization Access. There is an increased watch being kept on the financial sector for the cyber security. RBI even enacted the Data Localisation Norms visa NPCI which states some of them as follows-1. The Payment System Operators (PSOs) will have to ensure after the processing data is only stored in India. And if it is done abroad then it needs to be deleted and back within India under 24 Hrs. from such processing.

CHAPTER-V CONCLUSIONS AND SUGGESTIONS

After having being done with through analysis and research on the topic for open banking related to the country India it can be concluded that OB can be proved Vital Pivotal for the banking sector, consumers and the Fintech firms as well. OB can be defined as a vehicle under which various financial institutions Data or an Individual personal finance data in regard to the API’s can be made available to its users with the Third- party Applications as a service provider as well. In India there has been a Hybrid Model for the Open Banking such as UPI and NBFC- AA. Various Initiatives have also been taken by both the Govt. to boost the OB Concept in India such as OCEN, PCR, and DEFA by making these interface User Friendly and secure friendly. Biggest private sectors such as ICICI, HDFC, Kotak have also made their APIs available for the customers for smooth and effective financial Transactions. As seen from the data, however there is a flip side to every coin and here too there are probable risk Factors being involved for this UPI’s from the cyber security level. Threats, swiping of bank accounts, financial terrorism are to name some few among others. Data privacy and breaches regarding those were the main concern for the Indian Regulatory and to curb the situation various regulatory measures as discussed previously were adopted in regard of the Payment transactions and privacy issues.

In My personal Opinion as everything is getting digitalized & revolutionized in terms of technology and with the Fintech sector being seen Increasingly Booming into India, it is very necessary to keep a close watch and check on this UPIs and APIs. Open Banking can be a best alternative to this traditional finance system. Reimbursements such as Current account comparison services, personal finance management, and easy access to credit services would be readily made available thus empowering them to take control of their finances, make better decisions, and manage multiple accounts through a single application. Stringent rules,

¹ Student at NMIMS-Kirit P. Mehta School of Law.

² THE INVESTOPEDIA, https://www.investopedia.com/terms/o/open-banking.asp, March 30^th 2021. ³ Alex Guzu, The Evolution of Open Banking in India, The Paypers, Nov. 27^th 2020, 09:29 CET, https://thepaypers.com/expert-opinion/evolution-of-open-banking-in-india–1245956,

⁴ THE RESERVE BANK OF INDIA, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10598&Mode=0

, March 30^th 2021.

Justin Pritchard, What open Banking is and how it will affect you, The Balance, Oct. 11^th 2020, https://www.thebalance.com/what-is-open-banking-and-how-will-it-affect-you-4173727

⁸ BFSI ELETSONLINE, https://bfsi.eletsonline.com/open-banking-opening-pathways-for-digital-banking/ , March 30^th 2021.

⁹ Megha Shah, Risks and Benefits of Open Banking, Tech Funnel, May 19^th 2020, https://www.techfunnel.com/fintech/risks-benefits-open-banking/