What is Open Finance and how can it help Indonesia’s unbanked?

open finance indonesia
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One hundred and thirty million.

That is the number of adults within Indonesia who do not use traditional bank accounts to access financial services such as loans and credit cards. Instead, they utilise fintech services such as digital wallets and peer-to-peer (P2P) lending to fulfil their financial needs.

With over 360 registered fintech companies within Indonesia, the growth of the industry is well documented. However, the financial data of their customers is often stored in silos and not exchanged.

This creates a significant problem for both companies and consumers, as the former lack the necessary information to confidently offer loans and other financial products for the latter. As consumers are unable to access the right financial products to help improve their financial wellbeing, a financial divide is created.

With ‘Open Finance‘, such an issue could be easily solved.

Open Finance is the unbundling of financial data and services to allow companies and consumers to securely leverage their data and obtain a clearer picture of an individual’s financial footprint.

This creates a mutually beneficial relationship for both consumers and fintech companies, as the consequent unlocking of access to more suitable financial products help accelerate financial inclusion and narrow the divide.

Caption: Open APIs are the backbone of Open Finance. (Image Credit: Dailysocial)
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Open APIs are the backbone of Open Finance. (Image Credit: Dailysocial)

Welcomed by consumers

With an open exchange of information, fintech companies can better gauge a consumer’s current financial situation by analysing his/her credit and income data. 

Also Read: How startups can aid Southeast Asia’s Open Banking landscape

This allows companies to offer hyper-personalised solutions that are tailored to the financial needs of consumers. Crucially, this grants the unbanked population access to financial products that they would previously have had no access to without Open Finance.

Besides, the concept of Open Finance promotes fairer pricing. With increased transparency between financial products such as insurance premiums and credit loans, it is easier for consumers to compare prices and features of similar products.

This will help them get more value from their providers and combat scenarios where they are unaware that they are overpaying for a poor product. The increased competition would lead to better products at more competitive prices, with the ultimate winner being consumers themselves.

Open Finance also drives increased financial inclusion by encouraging better financial management. Consumers can have full access to their digital financial footprint, gaining a better understanding of their overall financial position — from spending habits to monthly payments for insurance premiums. 

By being constantly aware of their digital finances, consumers can improve their financial wellbeing, accelerating financial inclusion.

A case in point of how Open Finance can benefit everyday individuals can be found within the gig economy. With gig workers accounting for 56 per cent of Indonesia’s labour force, they represent a sizeable portion of the local workforce.

However, CB Insights had reported that gig workers without a regular income stream often face difficulties obtaining loan approvals or other banking services through traditional financial institutions such as banks. 

This stems from the fact that gig platforms store the financial data of their workers on their platform by embedding them within native digital wallets.

Previously, this data was not exchanged with external financial institutions, hindering them in assessing the suitability of gig workers for loans and other financial products.

However, with Open Finance, financial data from gig platforms are securely aggregated from different financial platforms to assist companies in better identifying gig workers and providing them with suitable financial products.

Benefits for fintech platforms

With open finance platforms like Finantier facilitating the open exchange of financial data, companies can offer an individualised pre-filled signup process for each prospective customer. This reduces the friction needed to onboard and provides an improved customer experience.

Besides, it helps fintech companies minimise operational costs and risks. By accessing financial data such as the income level and credit history of users, companies can better understand the financial position of their clients and generate better credit scores.

Also Read: Finantier secures funding from Y Combinator for its Open Finance platform

This results in higher approvals and lower defaults, helping companies reduce costs while increasing revenue. Open Finance also enables e-KYC (electronic know your customer). With e-KYC, fintech companies can digitally identify their customers to streamline verification processes and reduce fraud. 

Companies can also leverage increased access to user data to develop data-driven processes and offer tailored solutions for consumers. For example, insurtech companies can make use of Open Finance to gain visibility of the historical financial data of customers, allowing them to generate a more accurate risk profile and offer appropriate risk-adjusted premiums. 

Furthermore, it enables the removal of intermediaries as various services, including payments and claims, are seamlessly embedded into the platform, resulting in better engagement and lesser drop-offs.

Financial equaliser

Ultimately, Open Finance democratises access to financial services, benefitting both consumers and fintech companies. It levels the playing field for consumers and helps drive financial inclusion within the country. 

Access to equal financial services should be a right, not a privilege. Open Finance is making this statement a reality.

This post was originally published on Finantier’s blog.

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Image credit: anthoni askaria on Unsplash

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