The New Banking Lexicon For The 2020s
Think banking and you think cash counters, interest rates and bad loans. No. Scratch that. That’s so last decade. In this decade, if you want to talk banking, you’ll need to know about a lot more than just loans and interest rates.
From account aggregators to API-banking and neo-banks, the financial sector lexicon is changing as we speak...or read. So if you want to at least sound like you know what the financial sector is all about, read on.
BloombergQuint brings you some of the must-know terms of the 2020s. Feel free to write back with your own ‘financial sector must-knows’ for the new decade.
Let’s start with the relatively easier-to-understand concept of account aggregators. You may soon, in the next few years, find yourself signing up with one. Those who are behind the concept believe the AA system will change your life. Or at least your financial life.
Account aggregators are essentially digital vaults of all your relevant financial documents. The AA system in India, which is yet to come online, will allow customers to store their bank statements, investment records and other financial details. Why do this? Well, the next time you need to apply for a loan or an insurance product you can simply give the service provider access to all your documentation with the click of a button by allowing them access to your information stored with the aggregator.
By making customer consent central to the account aggregator system, the probability of misuse or improper storage of customer data can be reduced.
There is banking, retail banking, corporate banking....and now there is API banking. And what is that, you ask?
APIs or application programming interfaces are computer programmes that connect one software to another. API banking involves a bank opening up a part of their systems to allow a third party to offer customers a service built on the bank’s existing infrastructure.
Sort of like using railway tracks to offer a new train service.
So, for instance, when Yes Bank Ltd. or ICICI Bank Ltd. launched API services, it meant that they opened-up parts of the information technology system so that third-party firms can build new services. A payments company can therefore, through APIs, use the banks’ settlement system to process and clear payments, without needing to build the same, for example.
So is open banking the same as API banking? It sounds similar.... But no. Open banking functions through APIs but is not the same.
API-banking is a technology service provided by banks to all third-party firms, provided they meet the banks’ standards and guidelines, whereas the APIs for open banking platforms are tailor-made and restricted to a only a few fintechs that form partnerships with the banks.
Open banking fintechs are also called neo-banks or challenger banks.
These firms have a specific target market in mind, such as micro and small enterprises, that require not only banking and payment services but also tools to manage payrolls, accounts and inventory. Using APIs, neo-banks can bundle a set of banking and payment services as part of their product proposition.
Several neo-banks have emerged in India recently, but a true open-banking market requires conducive regulations and standardisation of contracts, products and technology. The U.K. was one of the first jurisdictions to create regulations for open banking.
‘Banking as a Service’ or BaaS
If you come across the term ‘Banking as a Service’ or BaaS, feel free to roll your eyes. What is fashionably being referred to a BaaS is companies trying to offer a complete suite of banking services to their customers in order to grab a higher share of their wallet.
So what you will see being referred to as BaaS will include banks integrating their banking services with other services offered by a non-bank. Using APIs (scroll back up if you have forgotten what that is) you can combine banking services offered by a licenced bank with other services offered by a non-bank. Banks earn a fee while non-banks will be able to attract and retain customers through convenience or rewards.
What’s an example of this? Think banks providing payment services to public enterprises like the income tax department, the Indian railways and even local government bodies.
Digital Or Virtual Banks
You’ll also start to hear more and more about digital banks and virtual banks. Most recently, Singapore’s decision to give out digital banking licences for retail and wholesale banks has garnered much interest.
In India, fully digital banks are not yet allowed. The closest we came to digital banks was the concept of payment banks, which had too many restrictions attached to succeed financially. In the years that follow, digital banks will probably became a reality in India too.
Now this concept is finally one that is easy to understand. Its a bank without a physical presence. Unlike neo-banks which bundle a set of banking and business services through an online or mobile application using API-banking, digital or virtual banks are standalone entities. They have their own balance sheets by which they accept deposits and provide credit, with the advantage of low operational and infrastructure costs.
There’s also open payments.
We won’t repeat ourselves because open payments function on the same principles as open banking.
Open payments enable payment service providers and/or any organisation to accept payments through APIs or a ‘payments rail’. A ‘payments rail’ is like any infrastructure project, only in the digital world.
The Unified Payments Interface and the Bharat Bill Payments System are public payments rails. Any licensed bank or payments company can build services atop these rails.
Smart contracts are not exclusive to finance but are being used in finance, and so fall in the ‘good-to-know’ category.
Contracts that are electronically stored and controlled commonly via blockchain are known as ‘smart contracts’. These contracts cannot be amended by any one member without the consent of the counter-party.
These contracts become useful in segments like supply-chain finance, by leaving a record for all parties in the transaction, thereby improving transparency.
Gamification of Finance
A few more things you want to be aware of.
Gamification of finance is among them. Sounds worrying? It actually is because the fintech folks are using this to get more information on you.
Smartphone-based games are devised to educate customers about various products, which allow them to make better decisions and reach their goals. By playing these games, customers can get rewards or discounts and even special products.
All good, but remember in the digital world: If you aren’t paying for a product, you are the product.
While you get some rewards, the fintech firms can gather more and more data, including behavioral patterns, about you.
We’ve all heard about IoT or the Internet of Things. The use of this concept in finance is now growing.
Imagine walking in a shopping mall, browsing through a story and within seconds you get an alert on your bank or payment application that the same store will offer you a 5 percent discount on any item of your choice if you purchase it on the bank’s card or payment wallet.
A fintech IoT solution combine multiple sets of data received via sensors from individual and merchants to pitch products and services.
This is not an exhaustive list by any means. And we look forward to adding more items to the list as we hear from all the bright fintech minds out there. But as you go about designing and/or explaining new complex fintech terms, remember the age-old KISS principle still applies to almost everything.
Keep it simple, stupid.