It seems obvious that the more financial services providers know about their customers, the better they can serve them – and the better that is for an economy. But relevant financial data is often fragmented and inaccessible, leaving consumers, small businesses, banks, fintech and entire economies counting the cost.
Indeed, an open data framework is a key to unlocking the full value of a modern, digital financial system. With consent and appropriate safeguards in place, data-sharing allows individuals and small businesses to 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.
The economic benefits are especially compelling in emerging markets, where open data regimes are a powerful catalyst for financial inclusion.
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.
The potential boost for Southeast Asia could be even greater since the region ranks ahead of India in terms of digital adoption but lags in access to traditional, bank-provided financial services.
Countries in Southeast Asia should accelerate their push towards open banking, allowing more financial data-sharing with user consent.
Doing so will drive financial inclusion, improve the quality of financial services and give economies a meaningful boost as the benefits flow through to consumers, small businesses, and financial service providers.
Smartphones and bank accounts
Sixty-five per cent of Indonesians had a mobile phone contract in 2019, versus 52 per cent of Indians, with Mobile Association Intelligence predicting that smartphone penetration in Malaysia, Singapore and Indonesia will reach nearly 90 per cent by 2025 leapfrogging more mature markets such as Australia and Japan. By contrast, less than 30 per cent of Southeast Asia’s population is banked, compared with India, where over 80 per cent of the population have opened a bank account.
Mobile phones have already allowed consumer super apps such as Grab, Gojek and Shopee to reach the region’s young and increasingly affluent population with a growing range of embedded financial services, bringing new users into the financial system.
COVID-19 has accelerated this adoption of digital finance largely triggered by digital wallets. Mobile wallet users in Southeast Asia are expected to triple in the next five years.
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More importantly, mobile apps and business-to-business digital platforms are now engaging with hundreds of thousands of small businesses and merchants previously ignored by the formal economy.
SMEs account for 60 per cent of GDP and more than 95 per cent of employment in Indonesia, for example, yet remain largely excluded by banks and financial institutions for credit and other financial services.
To serve these new customers more effectively, though, banks and fintech need access to consumer and small business data – with the data owners’ consent.
Startups such as Brick and Finantier in Indonesia have been leading the way in developing APIs that achieve this.
Open financial data ecosystems could make a real difference by allowing the unbanked and underbanked to access credit based on e-wallet transaction data, for example, or by sharing their utility or phone payments history.
Small businesses may borrow based on their sales history via e-commerce platforms, while financial institutions can expect lower processing costs and credit losses.
Consent-based open data sharing also improves the customer experience, removing tedious, paper-based onboarding processes and allowing more tailored products. For example, credit repayments could be scheduled according to the historical sales cycles of a small business owner.
Regulatory support
India has recently introduced the account aggregator, a new category of licenced intermediary which will help customers share their financial data with third parties in a safe and controlled manner.
The research by Flourish and McKinsey notes that, since India’s retail and SME sectors currently have little access to credit, the potential for value creation through open data sharing is much higher than in developed countries.
For exactly these reasons, countries like Indonesia can expect disproportionate benefits from increased digital adoption – if the right data-sharing protocols are in place. Regulators and policymakers have a crucial role to play in setting the standards for seamless data exchange.
In Southeast Asia, Singapore has taken a leading role in developing API Exchange (APIX), a cross-border collaboration platform for the ASEAN fintech sector that is already three years old. Indonesia and the Philippines are developing open finance frameworks, and Malaysia is studying the concept.
Regulators need to stay on top of this trend by adopting an accelerated path that lays out the approach and encourages the ecosystem to evolve and benefit collectively.
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The sharing of financial data must come with careful controls to prevent personal information from being misused– such as for discrimination against certain customer profiles– or falling into the hands of hackers.
A regional standard would also pay dividends by allowing fintech and financial institutions to scale their offerings and bring a wider range of services to less-developed markets.
Southeast Asia is a diverse and dynamic region where limited access to the traditional financial system prevents economic growth from reaching its full potential. As the digital revolution gathers pace, regulators should spare no effort in creating a fair, efficient and inclusive financial system capable of supporting rapid economic growth.
The article is co-authored by Tilman Ehrbeck, Managing Partner, Flourish Ventures.
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