As the following examples demonstrate, regulators and policy makers in some markets drive changes to support startups and companies that work to charge less. They do a terrific job of fostering innovation and what I call creating #REALVALUE.
According to FIS, India has cultivated one of the world’s most evolved, sophisticated public digital payments infrastructures since launching the Immediate Payment Service (IMPS) in 2010. As of 2018, daily faster payment transaction volume in the country was 2.8 million, up from two million daily transactions just one year prior, a 40 percent increase.
India’s system employs a digital, biometric ID for its citizens (Aadhar) and has created a remarkable Unified Payments Interface (UPI). This ecosystem unites traditional banks, non-bank mobile wallets and mobile operators and others into a network that allows e-commerce merchants to plug in and grow in scale. Google’s Tez (now part of Google Pay), Facebook’s WhatsApp and more than 70 bank apps now use the UPI, which equips app developers to initiate and collect payments.
According to the World Economic Forum, India has taken massive strides towards financial inclusion over the last seven years. In 2011, 40 percent of India’s adults had a bank account. An overwhelming majority, especially in rural areas, were financially weak and effectively excluded from the formal economy. By 2017, almost 80 percent of adults had bank accounts, according to the Global Findex Database.
Put simply, once the financially weak are part of the mainstream financial system, they can:
access microcredit to generate additional income streams
channel savings into investments and create assets
buy insurance products that protect them financially
help fund their children’s education.
India’s Paytm, with 300 million users and seven million merchants, is a great example of an innovator that has created #REALVALUE. According to Business Today, Paytm claimed 5 billion annual transactions by July 2018 and registered $50 billion gross transaction value—while achieving 500 percent growth in money transfer transactions in one recent quarter.
Think about that. Thanks to Indian regulators and policy makers, millions of merchants now have their cash flow recorded digitally. In the past, these transactions would’ve been cash based and without any trail. With this new digital footprint, they can access loans and other services otherwise unavailable. They can also reduce borrowing costs because credit evaluation is far more effective in a digital payments ecosystem.
How the U.K. embraced open banking
One of the most programmatic approaches to financial ecosystem development has taken place in the European Union, through the Revised Payment Services Directive (PSD2) and the United Kingdom’s Open Banking Standard. A key provision of PSD2 aims to foster competition and innovation for payments service provision in the European Economic Area by opening account access to non-banks. With PSD2, European consumers stand to benefit because it stimulates competition in the electronic payments market and lowers consumer charges and bans “surcharging” for card payments in most cases—including all popular consumer debit and credit cards—online and in shops. This should save more than €550 million annually ($613.5 million) and enhance customer experience. PSD2 also better protects against fraud, abuses and payment incidents thanks to improved security.
Worldwide, U.K. regulators have perhaps most actively driven open banking. Broadly speaking, open banking’s collaborative model shares data through application program interfaces (APIs)—which unite the apps of two or more parties—to deliver enhanced capabilities to consumers.
In 2016, The Competition and Markets Authority (CMA) published a report on the U.K.’s retail banking market, which found complacency among older, larger banks as smaller, newer banks grow and access the marketplace.
To tackle this, they proposed remedies that included open banking, which enables customers and small-to-medium-sized businesses to share account information securely with third-party providers.
Open banking is good news for consumers as open APIs remove long-standing barriers to switching providers. Big banks face the prospect that many customers will seek the convenience of digital aggregators—taking their accounts and prospective profit pools with them. That puts 10 to 20 percent of banking profits at risk.
Open banking regulations drive #REALVALUE because they require banks to disclose performance and fee data, making it easier for customers to compare the offerings and results of financial providers. And with open APIs, customers can readily share their financial information with other providers, if they so choose—as they transfer accounts, manage payments and transact through other banks and non-banks.
Bloomberg notes that ETFs usually account for about a quarter of the daily volume in U.S. stock markets, leaping to nearly 40 percent on some days. In a low-interest rate environment coupled with the search for better value, it’s easy to explain their explosive growth. The average expense ratio for actively managed mutual funds ranges between 0.5 and 1.0 percent; passive index funds carry a typical ratio of about 0.2 percent.
Another area ripe with explosive growth is forex [foreign exchange]—though incumbents rarely make the headlines. Revolut, a fast-growing startup, attracts users with its ultra-low-fee foreign exchange card. They join a group that includes Transferwise and Monzo in helping customers save on overseas transactions as they sidestep the high fees traditional banks charge. It’s important to understand that PSD2 and other initiatives that support open banking are driving this change—and new entrants are seizing on this “unbundling” opportunity to innovate and create #REALVALUE.
Meanwhile Kakao Bank, a new entrant in Korea, made waves when they signed up five million users within two weeks of their launch. And no wonder: Kakao Bank offers a better user experience with easy access and online-only authentication, as well as lower loan rates and fees. An enabling environment that supports fintech often benefits from far-sighted regulators and policy makers who drive change—rather effectively—to generate #REALVALUE.
Parting thoughts: You can innovate towards #REALVALUE, too
When these three critical factors work in concert, innovation with impact results. Can you do it? All over the world the evidence abounds: whether you thrill to the notion of open banking, open doors or the beginner’s fearless spirit of open mindedness.
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