The Impact of Open Networks on Embedded Finance
Delving into India's open network landscape to understand Embedded Finance and its real-world applications.
Hi there!
This week on Eximius Echo, we explore the rising phenomenon of open networks in India and its impact on Embedded Finance. The emergence of open networks signifies a potentially revolutionary change in how online transactions are carried out. In response to this change, non-banking entities rapidly embrace the concept by building embedded finance infrastructures. These infrastructures have the potential to significantly reduce barriers for digital networks in providing financial services to their customers, with the capacity to support over 100 million potential borrowers.
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The Growth of Open Networks in India
The advent of open networks signifies a significant shift in digital infrastructure. These decentralised systems allow universal market participation, irrespective of the platforms or applications individuals prefer.
This breakthrough has paved the way for new opportunities across various sectors, notably in FinTech, by introducing embedded finance. Embedded finance seamlessly integrates financial services into non-financial platforms, offering users access to financial services within their familiar digital environments. Forecasts indicate significant growth in the embedded finance market in India, with a projected CAGR of 30.4% until 2029, reaching a market size of $21 billion (Research and Markets).
While similar initiatives have been undertaken in developed regions like the USA, Europe, and Estonia, India stands out as a leader. For instance, the European Union's Payment Services Directive 2 (PSD2) mandates banks to share data with third-party providers. However, the scale and scope of integration seen in India, particularly with initiatives like OCEN and the ongoing expansion with ONDC, are unparalleled.
Impact on Embedded Financial Services
The implementation of the Digital Personal Data Protection Act, of 2023 has further propelled the adoption of open networks across use cases. This act primarily focuses on regulating the collection, storage, processing, and transfer of personal data in the digital realm. Prioritising privacy and security, the DPDP Act aims to establish a robust framework that addresses the complexities of data management in the digital era.
Due to these measures, open data ecosystems now facilitate data bridging, breaking down barriers between different data silos to empower users. Users generate data through various services and products they utilise but often struggle to leverage it effectively to access enhanced products and services across other domains. These ecosystems allow for efficient cross-leveraging of data.
Utilising this, the digital economy in India is undergoing a transformative shift with the introduction of four pivotal frameworks: the Account Aggregator (AA) Network, ONDC (Open Network for Digital Commerce), OCEN (Open Credit Enablement Network), and ABDM (Ayushman Bharat Digital Mission). Each of these frameworks plays a vital role in reshaping the landscape of digital transactions, lending, and personal financial management, and fostering an inclusive and efficient financial ecosystem. Let’s dive deeper into each of these.
Account Aggregator
The Account Aggregator (AA) system stands as a game-changer in facilitating access to loans for individuals and small businesses. It simplifies the process of sharing financial information digitally across various platforms seamlessly. Banks share financial data, lenders request financial data, Non-Banking Financial Company Account Aggregators (NBFC-AAs) act as intermediaries connecting banks and lenders, while third-party services collaborate with AAs. Our portfolio company, Finarkein Analytics leverages open data ecosystems, primarily the account aggregator system to empower clients to construct workflows for consent-based data sharing across lending, insurance, and asset management sectors. Since the launch of AA, they have captured over 30% of volumes across the segment.
OCEN
The Open Credit Enablement Network (OCEN) is playing a key role as a catalyst in the e-commerce and marketplace lending arena. Through standardisation and streamlining of the credit delivery process, OCEN fosters smoother interaction between lenders and digital platforms. This initiative empowers marketplaces to provide customised credit products tailored to their ecosystems, thereby boosting capital flow to small businesses and consumers within these platforms.
ONDC
The Open Network for Digital Commerce (ONDC) is poised to revolutionise lending opportunities for Small and Medium Enterprises (SMEs) and Micro, Small, and Medium Enterprises (MSMEs). ONDC's mission is to democratise digital commerce, creating a level playing field for all participants. By fostering interoperability among various digital platforms, ONDC cultivates an inclusive ecosystem where consumer lending solutions like Buy Now, Pay Later (BNPL) can flourish. This initiative fosters fair competition and also ensures broader access to financial services for SMEs and MSMEs. One of our early investments in this sector was in Shuru in 2022. Shuru is dedicated to fostering local business connectivity through its location-based community platform.
ABDM
The Ayushman Bharat Digital Mission (ABDM) is driving innovation in healthcare financing, bridging the gap between healthcare providers and consumers. By establishing a unified digital health infrastructure, ABDM aims to streamline both health services and financial transactions. This framework supports lending within the healthcare sector, facilitating customised financial solutions for patients and businesses. Consequently, it improves the accessibility and affordability of healthcare services. One of our portfolio companies, Eka.care, is harnessing ABDM to construct a connected digital healthcare ecosystem comprising doctors, patients, and labs. Their goal is to create and maintain longitudinal health records for patients.
While these are the initial days of open data ecosystems with infrastructures and frameworks evolving, the potential for future use cases and innovation around them is immense. From embedded lending, insurance, treasury management, and distribution of bundled offerings, each of the networks has multiple use cases that they can facilitate.
In conclusion, the rapid growth of open networks and embedded finance in India offers substantial opportunities to redefine the financial services sector. Despite potential hurdles in implementation and market dynamics, they hold the promise of fostering innovative solutions that promote financial inclusivity and efficiency. We eagerly anticipate witnessing more startups harnessing the core tenets of the internet to construct architectures that foster inclusivity, flexibility, and equitable access for all.
If you're an entrepreneur building in this space, we would love to hear from you. Please write to us at pitches@eximiusvc.com with your ideas.
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