The growing demand for interconnected and digitized financial systems emerged as a revolutionary innovation that offers the unbanked and the underserved communities, which are usually "beyond the radar" of traditional financial institutions, to migrate into formal financial services.
Todd Schweitzer, founder and CEO of open finance-focused fintech firm Brankas, said open finance allows customers to connect a financial product to a third-party application through API (application programming interface). It also promises to exploit data to create broader financial products and services tailored for the lower-income sector, particularly the micro, small and medium enterprises and women.
"Traditional banks must build a brick and mortar branch to reach those far-flung populations," Schweitzer said. "For a bank traditionally, to reach that population, they're building a branch. They're running cash, logistics, cash, trucks and boats to get cash to the province. They have physical security, they need to have IT infrastructure, and they need to find staff for the branch, right?"
Schweitzer explained that the cost of serving this population through a brick-and-mortar branch model does not make sense, adding that a rational decision for these banks is to say, "Ah, don't bother because that's a low -income community. They're hard to reach and forget about it."
"That is fundamentally why 50 percent of Filipinos are unbanked," he added.
With the open banking innovation, financial institutions can share customer accounts and transaction data that APIs could be applied, allowing insights and tailored-fit financial facilities for the unbanked.
Transparency
Indeed, the Bangko Sentral ng Pilipinas asserted that all consumer classes would benefit from this business model but more so the unbanked and underbanked.
With open banking, transparency will be achieved such that underbanked consumers who can pay will be identified and, therefore, will be charged less. Financial institutions charge more for lower-class consumers as part of their risk mitigant (of payment default).
And rightly so because they need more data and insight to assess if the customer has indeed the capacity to pay. Open Banking will thus uncover the 'real' capacity to pay, accurately separating the "good eggs" from the "bad eggs." This situation is a win-win for both the firms and the consumers.
Open finance can unlock certain customer groups previously unreachable or not worth it by the banks, Schweitzer said.
He added that the financial services marketplace where credit products, including savings products, payment products, remittance, and all sorts of financing, could offer these services to traditionally unreachable customers by partnering with banks that provide the API.
"The banks can serve that population without building a branch, and they can deliver financial services more cost -effectively to that group. So the result is you now have a banked population. They don't have to rely on five-six (loan sharks) or travel a half-day commute to the branch. They can access financial services through the app based on their day-to-day activity," he added.
Data sharing
At the core of the "open" concept is the exchange of data amongst interoperable platforms and the ability of market regulators to collaborate with economic stakeholders to find their equilibrium in the seemingly contrasting priorities of regulation and innovation.
"Open finance is more than data sharing. But it is a starting point," Schweitzer pointed out. "The reason that matters in the Philippines is you do not have a credit bureau or some central database here."
The lack of a central database poses a credit risk for lenders because there is no singular source of data to determine a borrower's credit score. If someone is on a blacklist, the lender can verify any pending loans and other critical information.
Borrowing in the Philippines is tedious for the borrower and the lender, involving volumes of documents, like ID, certificate of employment, bank statements, among others. But these documents can be faked, and the system is prone to fraud.
"However, if I, as the borrower, instead of giving the paper, permitted to share my employment verification, bank transaction history, and other outstanding loans. And if I agree to share that in an automated way with the lender, then the lender is getting verified data and can make a faster decision," he added.
The other significant improvement open finance can make related to data is matching transactions.
Schweitzer added, "Imagine a business and an online business with hundreds or thousands of daily transactions. They have a whole team of people just doing transaction matching and figuring out which line item in the bank transaction statement matches which customer order or which supplier payment. They do the manual matching one by one, which is too tedious."
However, he said that providing automated data that connects the customers' accounts with some accounting software could make it easier to keep a real-world view of your finances.
"Through open finance technology, populations or industries that are not traditionally fintech who do not access to financial services will have access," Schweitzer said. "By providing APIs that support startups using open finance, we can reach new populations and create new products."