In 2020, India became the world’s largest processor of real-time payments, handling close to 41 million transactions in a day, ahead of China and South Korea. This grew by 30 per cent in 2021—India’s digital transformation results from public infrastructure created by the UPI.
However, to capture the full potential, this digital journey needs to run alongside an open data framework that encourages innovation and connects new customers with the financial system. India has made progress but has yet to unlock the full power of open financial data: that needs to change.
Research conducted by Flourish Ventures and McKinsey & Company shows that broad adoption of open-data ecosystems in India could result in a four to five per cent increase in GDP by 2030.
That potential gain– far higher than in developed economies such as the US, European Union or the UK – underlines the importance of financial inclusion as an engine of economic growth.
An open-data regime, which allows the consent-based sharing of users’ financial data, benefits the financial system.
Individuals and small businesses benefit from improved access to financial services, greater convenience and more choice. In contrast, financial institutions gain from a more efficient system, more business opportunities, and better management of risk.
Multiplied benefit
In India, the potential economic benefit is multiplied because so much of the population is underserved by the traditional banking system. Although 80 per cent of Indians have bank accounts, millions of those are inactive, and many small businesses cannot access formal credit.
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The International Finance Corporation in 2017 calculated that the finance gap for micro, small and medium-sized enterprises (MSMEs) in India was US$230 billion, equivalent to 11 per cent of GDP.
The other big benefit comes from the removal of red tape. McKinsey and Flourish found that automating know-your-client (KYC) processes could save MSMEs in India 175 million hours a year.
More data points would also speed up access to finance. Even after the onboarding process is complete, credit decisions still take several weeks: the average turnaround time for MSME loans from public sector banks is 31 days, according to the Reserve Bank of India.
Open data could also eliminate fraud costs amounting to 4 per cent of annual banking revenues, giving more lenders the comfort to support the sector.
Positive momentum
Happily, India has taken some important steps in the right direction. The introduction of the Aadhaar ID card and the development of the IndiaStack framework – a public infrastructure ecosystem facilitating standardisation of information storing and sharing – has slashed the need for paper checks.
That has reduced banks’ retail KYC verification costs to as low as 30-40 rupees per transaction from up to INR1,000 previously.
Further improvements are on the way. The RBI has also created an account aggregator framework that allows for a consent-based, faster and more efficient sharing of information between financial institutions.
The system is expected to become fully operational later this year: the first licences were handed out in 2020, and beta testing is already underway with public and private sector banks.
A Central Identities Data Repository– designed to remove the need to access multiple sources to verify government data– is also under construction.
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When it comes to financial inclusion, the growing adoption of the Bharat Bill Payment System for digital utility payments holds great promise. Volumes in July reached a record INR94.88bn, more than double the INT37.07 billion processed in the same month last year, according to NPCI data.
As more customers pay their bills electronically, they create payment records that can help them gain access to formal credit – even if they have no other credit history.
In the US, a study by Experian found that including utility data could transform 20 per cent of “thin file” credit customers– or those less likely to gain credit– into “thick file” customers who are more likely to do so.
In India, where a far higher percentage of the population has no formal financial records, access to utility data would be even more important to potential lenders.
McKinsey and Flourish calculated that increased access to credit using alternative data could raise India’s credit-to-GDP ratio by 1.3 per cent— or the equivalent of US$80–US$90 billion of GDP– by 2030.
New platforms
India’s open data framework has already given rise to a new breed of apps and fintech platforms. By aggregating data from multiple sources, companies like Credflow can help small businesses manage their payment cycles. ZestMoney can offer buy-now-pay-later services by connecting retail consumers with lenders. API providers like YAP are helping to streamline the system.
There is more to be done. The Flourish and McKinsey research found that some 60 per cent of the potential value from open financial data is already accessible, highlighting the value of government investments in digital infrastructure. However, to capture the full value, India needs to allow innovation in financial services to blossom.
It is still too hard to set up a business, and India’s financial system is ill-equipped to use these new data sets fully. Banks focus too much on secured lending, and the cost of borrowing for small businesses and end consumers remains prohibitively high.
To capture the opportunity outlined in the research by Flourish and McKinsey, India’s banks and new lenders will need to rethink their approach to unsecured lending.
The RBI has acknowledged that years of mandated lending to the MSME sector have not produced enough progress. Greater innovation in how small business loans are evaluated, underwritten and managed can open up the Indian financial system to a new generation of customers.
An open data environment can enable that process – and accelerate India’s economy.
The article is co-authored by Tilman Ehrbeck, Managing Partner, Flourish Ventures.
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