The difference between API Banking, Open Banking and Neo Banking

An Indian perspective to the latest banking trends

[Reading time: 4.5 minutes]

I work in Fintech - the industry that's filled with buzzwords. The latest ones doing the rounds are the topic of this article - API Banking, Open Banking and Neo Banking.

A lot of people (and I'm not surprised, but even bankers and those working in fintech) tend to get confused between the 3. Understandably so; they're all related. That's why I thought of writing a brief article to explain these concepts so that people get a fair idea about what's what; and of course, so that in the next networking event (or now, webinar), they're able to throw these buzzwords and get some eyeballs ;)

Without wasting much time (because I myself hate reading long articles) I'll get to the point.

Let's start with API Banking: It's simple. Banks offer their APIs to partners, like fintech players, who can implement these APIs and create solutions for their target segment. An API (for non tech folks, in layman language) is a code or a program that is written and lies on the bank's server, and can be run from another server to do a specific task. For example, a wallet company like Paytm, Phonepe or any other may use Account Credit APIs of the bank to transfer money from the user's wallet to his bank account. In such a scenario, the wallet company will call the Account Credit API of the bank whenever the user clicks on a button to "Transfer money to savings account". This will then run a code (program) on the bank's server and execute a credit transaction to the said bank account of the user.

Account Credit is one use case. There are hundreds of thousands of such use cases where companies use APIs of banks as building blocks for their solutions. It can be used to check the KYC status of the user, or for the user to view his account balance, or for the user to make a payment to someone else's bank account, or even to open a new savings account. Since the banking and transactions part of any product (things like debiting and crediting accounts) can only be done by a bank, so fintechs and other players in the market build their solutions on top of the APIs provided by the banks, and use the bank's infrastructure by implementing these APIs

Now let's look at Open Banking. Open Banking is a European concept. A few years ago, the second Payment Services Directive (PSD2) was given out to banks, enlisting a lot of points. The crux of this directive was that banks in the European Union should be enabled to share data of their users with individuals or entities who need that data. This would be done only after taking the user's permission, known as consent. This concept can enable a lot of crucial information sharing between entities for the customer's good. Imagine this: a bank is sitting on terabytes of data of its customers, about their account balance, transactions, repayment history and what not. Now if one of its customers needs a loan from a lending company, currently, there is no easy way of getting the customer's financial data to evaluate his risk profile. But with Open Banking, all that the customer will need to do is request for his banking and transaction data from the bank, or provide consent to the lending company via the latter's app to access this data. Once the prospective lender has that data, they can evaluate the customer appropriately.

Lending is just one use case of how Open Banking will help. There are tonnes of use cases that will transform banking in a way we can't even imagine. Something as clean as a single app to view your entire banking history, with multiple bank accounts, loans, credit cards, all in one place, may be possible with Open Banking. Or something as complex as payments would be simplified because merchants will not need Visa or Master Card to access bank accounts. It can be done directly, and therefore save a lot of money on transactions.

However, Open Banking is a European concept. In India, we have a similar concept called Account Aggregators. These Account Aggregators are entities appointed by the RBI to enable such kind of data sharing between Financial Institutions. To keep this article short, I won't get into details of the hows and whys. If you need any details, you can refer to the website https://sahamati.org.in/

Let's move to Neo Banking now - the latest buzzword in the fintech space! A Neo bank, again, is not an Indian concept. There are no regulations with regards to "Neo Banking" in India. In western countries like UK, Australia and others, a neo bank is essentially a purely digital bank, which operates without any branches. These are entities that have a banking license, but are completely online. Why these are a hit, is because they have lower operating costs, and therefore they're able to offer better interest rates to customers. In case you want to know more, you can check out the list of Neo banks on the wikipedia page for "Neobanking". Like all wikipedia pages, it may not be accurate, but it'll give you a fair idea about some banks in this space.

Now you may wonder what Neo banks in India are about. Niyo, Open, Walrus, Jupiter are some names you may have heard as "Neo banks". Essentially, these are fintech companies which are offering banking products and services, where the underlying banking transactions are done from their partner bank via APIs (API Banking, remember?). Indian regulations do not allow for a 100% digital bank. However, these startups claim to offer a banking experience to the users which is purely digital. Can they technically be called Neo "banks"? No, they do not have a banking license. Are they offering "Neo banking solutions"? Yes, they are. So what we call them is a matter of subjectivity.

At my current company Fingpay as well, we're building a neo banking solution. However, this is for Indians at the bottom of the pyramid, who do not have access to basic banking facilities due to them being in a remote geographical location, or having no access to bank branches or due to a lack of banking knowledge. We're aiming to get the under-banked population to access banking and financial services with the click of a button.

To sum up the article, API Banking enables fintechs and other entities to use banking APIs and build solutions and offer these solutions to customers. Open Banking enables banks to share data with other entities. And Neo banking is essentially banking without branches (or in India, accessing banking services without going to a bank). In India, Both Open Banking and Neo Banking are impossible to do without banking APIs, so these APIs form the backbone of most new buzzwords and concepts in the banking ecosystem.

I like to write on various topics ranging from startups, innovation, fintech and (occasionally) even philosophy. Let me know if you wish to read on anything in particular. Would be happy to help!