ABSTRACT

This article has been compiled by Ms. Rishita Jha, a 1st year student of LLYOD LAW COLLEGE , Uttar Pradesh.

API banking today is decentralizing the control and bringing all products on one platform at competitive prices. By giving users insights into their financial transactions, API banking is paving the path for a new banking environment, where customers have much more power, and can switch between service providers. API assists banks by providing banking techniques that are flexible, safe, and future-proof; which helps them meet the changing demands of their clients while simultaneously attracting new ones. Banking APIs create smooth payment workflows for customers & partners. It makes money transfers easy and diversifies the methods; with UPI and QR code-backed payments.

INTRODUCTION 

Over the past decade or so,  India has registered boom in its digital infrastructure through the development of the “India Stack [ it corresponds to  a  set of  application  programming interfaces  (APIs), open standards, and infrastructure components  that allow Indian  citizens to obtain a range of services digitally.]  The main objectives of  this  initiative have been to promote  financial inclusion through increased access to  financial  services, improve the delivery of public services and benefits, and increase competition in the Indian financial sector. The Indian approach has succeded in promoting large increases in the number of individuals with bank accounts and  access  to digital payment services among India’s large previously unbanked population.

Policies  regulating  the flow of  data  in the  economy—including sectoral policies  such as  open banking frameworks—have  important macroeconomic  and  financial implications. Indian approach toward financial inclusion & digitalization points to important synergies across the provision of public goods. Its greatest promise lies in the trio of — 

(a) digital ID with a low entry  cost,  

(b) a system of open APIs facilitating inter-operability in payments, though in a regulated space,

(c) and perhaps most importantly—a mechanism to operationalize individuals’ control over their personal data.

Until as recently as 2011, access to financial services remained low in India, with only 35% of adults in India possessing a bank account, well below the average of  other  emerging market economies. The financial sector landscape was dominated by the public sector, with 61% of banking assets held by public sector banks (IMF,  2019). The advent and rapid growth of new financial technologies such as mobile money and digital wallets offer an innovative technological solution to fill the financial infrastructural gap and alleviate frictions related to the limited use of formal financial services. This is because the use of mobile money allows consumers to perform financial transactions in a relatively inexpensive and reliable manner, eliminating geographic barriers.

WHAT IS OPEN BANKING ?

Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then use the customer’s shared data. Open banking is a driving force of innovation in the banking industry. By relying on networks instead of centralization, open banking can help financial services customers to securely share their financial data with other financial institutions. For example, open banking APIs can facilitate the sometimes onerous process of switching from using one bank’s checking account service to another bank’s. Through the use of networked accounts, open banking could help lenders get a more accurate picture of a consumer’s financial situation and risk level in order to offer more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before taking on debt. APIs are considered a more secure option because they enable applications to share data directly without sharing account credentials.

Open banking will force large, established banks to be more competitive with smaller and newer banks, ideally resulting in lower costs, better technology, and better customer service. However, banks can take advantage of this new technology to strengthen customer relationships and customer retention by better helping customers to manage their finances instead of simply facilitating transactions. 

Regulatory and market forces have combined to fuel the expansion of Open Banking APIs. Here are the two great reasons behind its growth – 

1. Open Banking API Growth is Being Driven by Regulation :    As mentioned, every dominance are having its own terms of banking to meet the desired customer experience and benefits. The business finance sector is continuously working on technological advancement, eventually, it has encouraged the usage of Open Banking APIs.
2. Market Forces Driven Open Banking API Growth :   New potential for cooperation between banks and outside developers has been made possible by developing new technologies and the growth of fintech businesses. The story of Open Banking has been fueled by banks’ ability to work with these developers to produce cutting-edge goods and services thanks to Open Banking APIs.

RISKS OF OPEN BANKING –   Open banking APIs are not without security risks, such as the potential for a malicious third-party app to clean out a customer’s account. Much broader concerns would simply be data breaches due to poor security, hacking, or insider threats and these are likely to remain similar in magnitude of hinderance, it only teen become ever bigger issue as more data becomes interconnected in more ways.

 

WHAT IS APPLICATION PROGRAMMING INTERFACE (API) ?

API is generally the tech interface between software programs. In banking, this interfacing is able to facilitate a third-party application to synchronize and connect with a bank’s tools and services. API banking is generally attributed to a group of protocols that make the services of a bank available to third-party companies. It ends up helping both the banks as well as the third-party companies in augmenting their services.

Contributions of API banking —>  

* increase in the visibility of cash flow, due to the enhancement of real-time banking capabilities.

* reduction in a lot of administrative hurdles, there is higher ease in managing one’s finances like applying for a business loan, checking one’s credit score, etc..

* With the help of API banking, enhanced information for reconciliation is now available in real-time, which helps in the processing of vendor and dealer finance transactions faster

* cost of serving the underserved and unbanked has become more economical, as well as the products and services that suit their needs much better are being offered.

* being able to control, analyse and track all financial movements all under one roof.

 * data analytics which is really the core of this revolution. Granting banks the ability to collect enormous data related to customer behavior, enableing them to create more tailored products and services along with targeted marketing initiatives.

APIs being used in India’s financial sector —>

(a) Unified Payment Interface (UPI): It is a real time payment system developed by National Payment Corporation of India (NPCI) which facilitates ‘peer-to-peer (P2P)’ and ‘person-to-merchant (P2M)’ inter-banking digital transactions. It is regulated by the RBI and can be used to transfer funds between two bank accounts based on mobile platforms.

(b) Bharat Interface for Money (BHIM): It is an initiative to enable reliable, secure, fast financial transfer system through mobile phones. BHIM is based on Unified Payment Interface (UPI) to facilitate e-payment directly through a bank. It is developed by the National Payment Corporation of India (NPCI).

(c) Bharat Quick Response (QR) Code: It is a machine readable code consisting of black and white squares. It is the world’s first interoperable Quick Response (QR) code that provides wider acceptance for payments through Visa, Master Card, RuPay Card and BHIM-UPI.

(d) Digital Locker: It aims at ‘Digital Empowerment’ of the citizen by providing access to authentic digital documents to the citizens through cloud storage based mobile application.

(e) e-KYC for electronic verification: e-KYC is the process by which KYC is done. It is used by an authorized organization to verify a customer’s identity digitally via Aadhar authentication.

(f) Aadhar Enabled Payment System (AEPS):  It is a bank-led model which allows online interoperable financial transactions at PoS (micro ATMs) through Business correspondents using Aadhaar authentication. AEPS also allows banking services like cash withdrawal and balance checking for the residents.

(g) Bharat Bill Payment System (BBPS): It was launched by the National Payment Corporation of India (NPCI) on the recommendation of Padmanabhan committee. It allows customers in India to use one single website or outlet to pay all their bills while ensuring reliability and safety of transactions.

(h) Micro-ATM: Micro-ATM is a portable device, based on a mobile phone connection, that allows banking transactions including deposits, withdrawals, fund transfer and balance enquiry. Micro ATMs are used by Business Correspondents to deliver basic banking services after verifying the authenticity of the customer using the customer’s UID.

 

Open Banking API Regulation

The Open Banking API is regulated by a bunch of different bodies and rules to make sure it’s secure and consistent. Some of the main rules and regulations are:

1. Payment Service Providers Derivative (PSD2): PSD2 is an EU directive that aims to make the payments industry more competitive and innovative. This makes it mandatory for banks to give third-party vendors access to their customers’ info through open APIs.
2. Open Banking Working Group: The Open BankingWorking Group (OBWG) was established by the United Kingdom government to examine the advantages and disadvantages of Open Banking. It proposed the development of an Open Banking API standard.
3. Open Bank Project: The Open Bank Project is an open-source platform enabling banks to improve their digital products via APIs quickly.
4. Banking Industry Architecture Network: The Banking Industry Architecture Network (BIAN) is a non-profit organization that aims to provide a common framework for the banking industry.
5. Open Banking API Guidelines: To standardize the usage of Open API Banking, various guidelines, such as the UK’s Open Banking Use Entity’s API standards and the Australian Consumer Data Right (CDR) standards, have been developed.

 

FINTECHS AND API BANKING

Open banking is likely to alter the competitive landscape of the financial services for FINTECH industry, which could increase competition. And which is necessary as it poses a threat of increased consumer costs if it leads to consolidation in financial services, due to the natural economies of scale from big data and network effects. Such market consolidation has already been seen and widely criticized in other internet-based services, such as online shopping, search engines, and social media, etc. Beyond the direct costs of market concentration, similar misuse of customers private financial data could ultimately raise even greater concerns.

keeping aside all the (-)ve prospectives, this is sure that the increasing digital penetration, growth in tech reliance amongst masses and the enhanced multidirectional investment both by government & Private investors, will diversify the market and plough a futile condition for growth of FINTECH esp. startups with new idea or tech.

 

IPR PROSPECTIVES FOR FINTECH in API BANKING ECONOMY

A patent is an right granted for an invention, product or a process that offers a new way of doing something, or offers a new technical solution to a problem. Patentability of any invention needs to fulfill certain criteria such as Usefulness, Novelty and Non obviousness. It provides protection for the invention to the owner of the patent for a limited period, i.e 20 years. Other than software in it’s computer language form all other aspects say it be hardware, software attached hardware, semiconductive material, special arrangements of machine, etc. are all eligible for patenting.

If science, art, and technology are the engines of human progress, Intellectual Property (IP) is the protector ensuring that human creativity gets its due through IP rights. IP rights have encouraged creators, innovators and inventors motivated to solve real-world problems with the use of their imagination and creativity.

The Indian Patent Office (IPO) has not issued separate guidelines to examine AI-related inventions. These inventions are examined as per the Computer-Related Inventions  Guidelines 2017 (CRI guidelines). That is, AI-related inventions are examined based on the subject matter exclusions defined in Section 3(k) of the Indian Patents Act, 1970.

Advantages of Patents in FinTech

(A) Gain market share

(B) Patent applications are significantly valuable and can attract investments from potential investors in the market.

(C) Unlike copyright, patents can protect the functionality of the invention. A FinTech patent prevents third parties from exploiting the method, process and/or apparatus protected by the patent. This allows patent holders to exercise monopoly on their invention in terms of commercialisation or licensing. This creates a valuable revenue stream that boosts the company’s profile substantially.  

(D) Changes in FinTech law are quite dynamic thus, it is always suggestable to tile patent as it would provide some liberty in methodologies of use of technologies.

 

CONCLUSION

Financial services are currently undergoing a slew of changes due to new-age fintech businesses. Third parties can innovate, build on and offer new goods and services using Indian banks’ application programming interfaces (APIs). As a result of the transition, they can perform banking operations and access banking data to develop innovative financial services.

It is crucial to understand that to address the vast range of financial needs in a diverse economy like India, collaborative efforts rather than competitive ones are needed. FinTech adoption rates in India are at 87%, significantly higher than the global average of 64%. FinTech has been adopted in a way that promotes customer-centricity and adapts to changing market conditions. Banking APIs facilitate this by creating an environment where everyone benefits, including end users, non-banks, and banks. As APIs and API banking evolve, the financial services landscape will witness a massive change.

With several banks and fintech firms using Open Banking APIs, India is leading the global Open Banking trend.

 

With the introduction of the Payment and Settlement Systems in 2019, the Reserve Bank of India (RBI) significantly contributed to promoting Open Banking in India. This rule requires banks to grant access to their payment systems via APIs to allow third-party developers to establish new payment solutions.

 

As Open Banking APIs have become popular in India, banks and fintech firms now have greater options to work together and provide clients with cutting-edge goods and services.

Open Banking APIs are anticipated to significantly influence the future of banking in India as the country’s fintech ecosystem develops further.

 

CITATIONS->

https://www.fidypay.com/open-banking-apis-india/

https://cxotoday.com/cxo-bytes/api-penetrating-the-banking-and-lending-sector-in-india/

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https://vakilsearch.com/blog/patent-landscape-for-blockchain-technology/

https://cxotoday.com/digital-payments/api-banking-how-it-is-revolutionizing-indias-banking-sector/

https://www.indiacode.nic.in/bitstream/123456789/1993/1/A1999-47.pdf