– By Bhavik Vasa
Small businesses face many challenges in securing finances from institutions. While MSMEs provide over 30% of GDP growth and over 100 million employment opportunities, just 11% of MSMEs have formal access to finance, and over 60% of their loan demands still need to be fulfilled. The credit gap for micro, small, and medium-sized businesses (MSMEs) in India is estimated at 20 to 25 trillion.
To bridge the credit gap, the government of India launched the Open Credit Enablement Network (OCEN), with significant contributions from iSPIRT, an Indian software industry think tank. OCEN is a set of standards that creates a framework for small-ticket financing with a brief tenure by enabling distant lenders to conduct business in remote areas and permitting access to data from other sources. It will become a virtual credit marketplace by bringing distributors, lenders, and borrowers together in one location.
OCEN is part of the larger global open banking arena, which clocked transactions of $57 billion in 2023. The UK, EU, Singapore, and South Korea are among the major global economies exploring open banking/lending efforts. Interestingly, the US, Canada, China, and Japan have taken a cautious position and have yet to explore open banking.
The UK& Payment Services Regulations (PSRs) provide secure payment services, using over 40 billion payment transactions in 2022. Regulated by the Financial Conduct Authority (FCA), the UK had 200+ authorized payment institutions in 2023, up from around 150 in 2017. By early 2023, over 6 million consumers and businesses were using Open Banking-enabled products and services.
The European Union’s open banking framework, particularly under the Payment Services Directive 2 (PSD2), has given customers more control over their data. Its 2,000+ licensed payment institutions and 1,000+ registered account data providers PSD2, facilitating over 20 billion transactions annually, are estimated to attract 64 million users across Europe by the end of 2024. There has also been a marked improvement in security protocols across the European Economic Area (EEA).
Singapore embraced open banking initiatives in 2016 with 12 APIs governed by the Monetary Authority of Singapore (MAS). Singapore has robustly adopted open banking, led by initiatives like the Singapore Financial Data Exchange (SGFinDex) that consolidates financial data from banks and government agencies, enabling consumers to access their information through the SingPass system securely.
With over 50 financial institutions and around 350 fintech firms using the APIX platform, a collaborative innovation platform, this initiative has spurred numerous partnerships between traditional banks and fintech companies. The DBS alone launched the largest developer platform in the world with 155 APIs across 20 categories.
South Korea currently has two types of infrastructure to support its open banking initiatives: the My Data program and institutional-level open banking services. My Data is similar to India’s Account Aggregation, which gives individuals the right to choose who they share data with.
By September 2020, more than 50% of the adult population in South Korea was using some form of Open Banking. Within two years of launching, 100 million registered accounts were using open banking in the country across 30 million users. Some 100+ financial institutions have created 50+ new products and services. The average daily open banking volume was 1.7 trillion South Korean won in 2023, up from about 1.4 trillion won in the previous year.
There are efforts to create global standards for open finance and to encourage cooperation and data exchange across borders. The global initiatives also focus on the ongoing evolution of regulatory frameworks to reflect significant advances in fintech and digital banking.
In the future, OCEN can collaborate with global open banking initiatives to make financial services more accessible, interconnected, and efficient across nations and regions. Through a common technology interface, it will simplify financial management and facilitate access to cross-border financial institutions.
By leveraging interconnected financial systems, small enterprises can access much-needed funding, enhancing credit availability for small businesses in neglected geographies and promoting inclusivity.
Other than international collaboration, we will require regulatory alignment and innovation, a strong technology infrastructure, standardization of systems, and customer trust to make this a reality. Strong regional players will eventually dominate global credit markets.
In summation, there are plenty of use cases for OCEN-like systems like the UK’s PSRs, EU’s PSD2, Singapore’s open banking initiatives, and South Korea’s MyData initiatives. Global economies are embracing them with emphasis on data security, data privacy, and boosting customer confidence. While certain countries have opted for market-driven open banking, others have formulated regulatory-driven systems. But collectively, they will continue to rise and enhance credit depth, and inclusion.
(Bhavik Vasa is the Co Founder & CEO at GetVantage.)
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