Open Finance: The Future with Embedded Finance, Digital Banking and Mobile Payments
Today’s financial services have transformed from exclusively brick-and-mortar establishments to digital platforms and APIs, fueled by technological advancements and evolving customer expectations. Open Finance has emerged as a key driver in this transformation.
This article explores the potential of Open Finance, and in connection, Embedded Finance, in the context of the Philippines while highlighting its benefits and implications for the financial services industry and beyond.
Understanding Open Finance
Open Finance refers to “the practice of allowing third-party financial service providers access to customer financial data, with the customer’s consent, through Application Programming Interfaces (APIs)”. This open sharing of data enables the creation of innovative financial products and services, fostering competition, and empowering customers with greater control over their finances.
According to Business world’s article entitled, ”Open finance in the Philippines” “Open finance in the Philippines is the growing adoption of digital payments. The country has one of the highest rates of mobile phone penetration in the world, with over 80% of Filipinos owning a mobile device. This has enabled the rapid growth of digital payments, which are expected to reach $20 billion in value by 2025.”
Advantages of Open Finance in the Philippines
A. Enhanced Financial Inclusion: Open Finance can bridge the gap between the unbanked and underbanked populations by facilitating access to financial services through non-traditional channels, such as mobile wallets and fintech platforms. In recent times, several notable fintech advancements have significantly contributed to the promotion of inclusivity. According to Investopedia, These developments encompass the expanding adoption of cashless digital transactions, the emergence of low-fee robo-advisors, and the ascendance of crowdfunding and peer-to-peer (P2P) or social lending platforms. These advancements have played a pivotal role in fostering financial inclusion by enabling greater access to financial services and opportunities for a wider spectrum of individuals.
B. Personalized Services: With access to customer data, financial institutions can offer tailored products and personalized recommendations, improving the overall customer experience.
C. Increased Competition: Open Finance encourages competition among financial service providers, leading to more competitive pricing, better products, and improved customer service.
D. Streamlined Processes: By leveraging Open Finance, manual and paper-based processes can be replaced with digital solutions, resulting in faster, more efficient transactions.
How Embedded Finance Fits In
Embedded finance involves integrating financial services into non-financial platforms, such as e-commerce websites, ride-hailing apps, or social media platforms. By embedding financial services seamlessly within these platforms, customers can enjoy a frictionless experience, and financial institutions can tap into new customer segments.
According to an article in PWC, “ It has been clear for some time that embedded finance is defying conventional wisdom surrounding banks by surfing a wave of very powerful trends: increasing digitisation, a focus on customer-centricity and the growing power of ecosystems. As applications reach into areas previously ring-fenced by traditional financial infrastructure—payments, lending, savings, and banking licenses—the opportunities and implications for business model transformation have also quickly intensified.”
Benefits of Embedded Finance in the Philippines:
A. Improved User Experience: Integration of financial services within popular platforms simplifies transactions, eliminating the need for multiple applications and logins.
B. Data-Driven Insights: Embedded finance generates valuable data on customer behavior and preferences, enabling financial institutions to refine their offerings and better understand their target market.
Challenges and Considerations:
a. Data Privacy and Security: Open Finance presents unique security and regulatory challenges. Robust regulations and cybersecurity measures must be in place to protect customer information and privacy.
The Banko Sentral ng Pilipinas or BSP has been actively working on establishing data privacy and security guidelines for Open Finance initiatives. In an article of Zico Law,the BSP announced its intention to issue a circular that will provide a regulatory framework for Open Finance, emphasizing the importance of data privacy and security.
Financial Inclusion: One of the significant challenges in adopting Open Finance, most especially Embedded Finance solutions, in the Philippines is ensuring that all segments of the population have access to these services. While the advancement of fintech and digital banking has the potential to reach underserved communities, there might be barriers to entry, such as lack of access to smartphones or reliable internet connectivity in remote areas. Addressing these issues is crucial to promote financial inclusion and prevent a widening digital divide. A great hypothetical example of Financial Inclusion is mplementing agent banking services in rural areas, where local retail shops act as financial service points, allowing individuals without direct access to traditional banks to perform basic financial transactions.
Consumer Education: As Open Finance introduces new financial products and services, there is a need for consumer education to ensure that individuals understand the potential benefits and risks associated with these innovations. Consumer groups can launch public awareness campaigns and workshops to educate consumers about the benefits and risks of Open and Embedded Finance, explaining concepts like data sharing, transaction security, and how to make informed decisions when using these services.
Educating consumers about the security measures, data sharing processes, and how to make informed decisions in this new ecosystem will be vital to build trust and confidence among users.
Interoperability: Open Finance involves the seamless exchange of financial data and services between different institutions and platforms.An example would be establishing a common API standard for financial institutions and fintech platforms, enabling seamless data exchange and transactions between various providers and ensuring compatibility with different systems.
Establishing common standards and protocols will facilitate smooth data sharing and promote healthy competition among providers.
Risk Management: The integration of various financial services and platforms can lead to complex risk management challenges. Financial institutions and fintech companies must develop robust risk assessment and mitigation strategies to prevent potential vulnerabilities in the system. Fintech companies employ advanced data analytics and artificial intelligence to detect suspicious activities and potential fraud, thereby mitigating risks associated with the increased volume of transactions.
Digital Infrastructure: For Open and Embedded Finance to flourish, a reliable and secure digital infrastructure is essential. Today’s platforms and apps can be deployed via cloud infrastructure that could be provided by cloud providers like AWS, Google Cloud, Microsoft Azure.
Along with deploying Open Finance models in the cloud, firms entering the space should consider their cybersecurity capabilities, the speed of adoption for advanced technologies such as distributed ledger technology, and meeting regulatory and compliance requirements for related parties and consumer safety.
Trust and Consumer Confidence: Building trust and consumer confidence in the new financial ecosystem is crucial for its successful adoption. This involves not only having robust security measures but also transparent and fair practices, reliable dispute resolution mechanisms, and effective communication with customers regarding data usage and privacy.
Open Finance, in particular Embedded Finance, has the potential to revolutionize the financial services landscape in the Philippines. By leveraging these technologies, financial institutions can offer innovative, customer-centric solutions while expanding their reach and improving efficiency. Robust data privacy regulations, a supportive regulatory environment, and collaborative partnerships are essential to ensure responsible implementation and maximize the benefits for customers and the financial industry as a whole.
As the Philippines embraces the opportunities presented by Open Finance, it is poised to unlock customer value and create a more inclusive and advanced financial ecosystem.
Amihan Global Strategies specializes in providing comprehensive solutions to enterprises aiming to leverage Open Finance and Embedded Finance technologies. With our expertise and experience, we help businesses navigate the intricacies of these transformative models, enabling them to unlock new opportunities to serve their customers.
Our services include:
Strategy Consulting: We offer strategic guidance and insights tailored to your organization’s unique needs, helping you develop a roadmap for implementing Open Finance strategies and solutions effectively.
Technology Integration: Our team of experts assists with seamless integration of business solutions into your existing infrastructure, ensuring compatibility and optimal performance.
By partnering with Amihan Global Strategies, enterprises can harness the potential of Open Finance and Embedded Finance, drive innovation, and stay ahead in the evolving financial services landscape.
Contact us today to explore how Amihan Global Strategies can assist your enterprise in embracing Open Finance and Embedded Finance for sustainable growth and success.
Amihan is a digital transformation partner that helps companies benefit from opportunities, enhance customer experiences, and develop capabilities through best-in-class digital, data, and cloud services.
Our services include Digital Strategy Consulting, Innovation as a Service, Cloud Enablement, Infrastructure, Managed Cloud Services, and Resilient Operations. We also offer a variety of cloud and data analytics solutions.
To learn more about Amihan, please visit our website: https://amihan.net
Bernadette Valerio holds the position of Marketing Associate at Amihan Global Strategies, where she combines her expertise in graphic design with her extensive experience in the field.