API penetrating the banking and lending sector in India
Fintech players constantly bring in automation to deliver a seamless banking and lending experience.
Financial services are currently undergoing a slew of changes due to new-age fintech businesses. Third parties can innovate, build on and offer new goods and services using Indian banks’ application programming interfaces (APIs). As a result of the transition, they can perform banking operations and access banking data to develop innovative financial services. Customers can use them to complete transactions, check account balances, apply for loans, and receive payment instruments like credit cards.
API assists banks by providing banking techniques that are flexible, safe, and future-proof; which helps them meet the changing demands of their clients while simultaneously attracting new ones. Banking APIs create smooth payment workflows for customers & partners. It makes money transfers easy and diversifies the methods; with UPI and QR code-backed payments.
For instance – ABC Bank opens its core banking system to a solid Banking as a services (BaaS) player, such as Decentro. It also allows any third party to access the bank’s core system to execute banking operations such as account opening, loans, cash transfers, card issuance, and many more via APIs given by the bank. Decentro makes API calls to the ABC bank’s server to execute financial functions. Businesses use Decentro’s API to access multiple banking APIs and provide banking services. By leveraging API, businesses can extract the following outcomes:
Ensures Smooth User Onboarding
KYC forms an integral part of a business cycle, even if the business doesn’t reside in a fintech or banking domain with strict guidelines for background checks for users. While starting, it would be easier to perform this verification. It helps set up a real-time automated workflow with API banking, that runs the documents submitted by a user, be it a PAN card or driving license, and verifies it instantly. Furthermore, it performs KYB verification for business customers to stay in compliance with Anti-money Laundering & Terrorist Financing Laws.
Simplifies Real-Time Transaction Reconciliation with BaaS
It further helps in ensuring customer satisfaction through innovative Banking-as-a-Service (BaaS) products, ushering in an era of collaboration. Nonetheless, non-banks are integrating with bank APIs to develop and provide several fundamental financial services to their customers. There is a significant boom in the platforms that provide the API-based BaaS layer; as on the front end, it tends to host a variety of fintech startups along with non-bank enterprises.
On the back end, its middle layer connects with other regulated entities and banks. The API platforms provide infrastructure, non-bank enterprises and fintech integrate financial services into non-financial goods and the underlying banking and other partners provide the regulatory foundation. API banking employs virtual accounts to trace the source of every payment via a company and make ledgers up to date and the bookkeeping process efficient, in real-time.
Additionally, open-banking API services allow fintech and other companies to process vendor payments quickly, share account balances in real-time, provide wallet, card or other issuing services, and enhance the visibility of cashflow, cash position etc. It further helps minimize administrative and other barriers to financing such as creditworthiness check, applying for a company loan and more. With API banking, businesses can launch a cards program, issue prepaid instruments to customers, employees, and partners, and enable them to make cash-free purchases.
APIs in Lending Sector
Initially, customers lacked options and choices for embedded lending offered by software companies and payment platforms. Banking APIs simplify the process for an NBFC or fintech lender offering lending services as a core product, or as an extension by leveraging embedded finance.
Various types of lending APIs such as onboarding, credit underwriting, loan fulfilment and collection help businesses know users’ credit scores before providing loans, disburse loans quickly for a great customer/partner experience and streamline & speed up the process of collections from users. In addition to providing benefits to partners, embedded lending solutions can also benefit SMBs customers.
Through APIs, payment partners can create customized loan solutions based on the needs of their customers. In future, banks will change the responsibilities of various stakeholders in the BaaS ecosystem by increasingly outsourcing the distribution of their financial services and products to third-party fintech companies and others. The task of innovating to develop and boost customer engagement and meet new-age expectations through personalization and value-added services will be assigned to third parties. These third parties will further be responsible for supporting banks in growing their clientele and entering unexplored markets.
A natural extension of the banking sector is the nascent lending economy which is seeing its time in India in the recent past. The Indian API industry was estimated to be worth INR 798 Billion in 2020 and now, is projected to reach INR 1,307 Billion by 2026, at a CAGR of 8.57 %. For all stakeholders, banking and lending APIs have undoubtedly opened up a wealth of possibilities in the fintech industry.
There is a significant development in embedded banking, open banking, account aggregation, and co-lending along with API-driven financial infrastructure. Additionally, it makes security critical necessitating measures such as effective identity for access control and secure data transfer protocols. Third-party fintech innovators offer diverse banking features, streamline financial services, and gain a competitive advantage by introducing innovative fintech products and services in the market.
It is crucial to understand that to address the vast range of financial needs in a diverse economy like India, collaborative efforts rather than competitive ones are needed. FinTech adoption rates in India are at 87%, significantly higher than the global average of 64%. By 2030, the Indian FinTech market is expected to reach $1 trillion in AUM and $200 billion in revenue. As the Indian FinTech ecosystem matures, the top growth strategies include expanding into technology investment, improving operating efficiencies, new markets, and ecosystem partnerships.
As a result of the Indian regulatory framework being participative and iterative, FinTech has been adopted in a way that promotes customer-centricity and adapts to changing market conditions. Banking APIs facilitate this by creating an environment where everyone benefits, including end users, non-banks, and banks. As APIs and API banking evolve, the financial services landscape will witness a massive change.
(The author is Mr. Rohit Taneja, Founder & CEO, Decentro and the views expressed in this article are his own)