Unpacking Enabling Infrastructure Businesses: A Two Part Series
Part II: A Case Study on Riding the Rising Tide of Open Banking in Southeast Asia
Welcome back to the Innovation Armory! Part II of this week’s mini series on enabling infrastructure technology businesses will unpack the state of open banking in Southeast Asia. Thanks so much to Todd Schweitzer (CEO & Founder) of Brankas and Nirali Zaveri (CEO & Founder) of Friz for sharing your perspectives for this piece! Read on for more about:
The state of regulatory regimes on open banking across Southeast Asia
Why open banking will develop differently in the region, highlighting the differences in use cases, supply side actors, cross-regional dynamics and the focus on MSME applications vs. consumer fintech
How under-banking in the region will impact the relative use of screen scraping vs. API forward approaches
How open banking will help create value for vertical-focused neobanks like Friz, which is building banking tools focused on the creator market in Southeast Asia
Why Brankas has set itself apart as a leading player through its multi-regional approach and growth focus on product APIs
Plaid’s recent acquisition of Cognito and why converging open banking and identity makes so much sense
How the proliferation of neobanking and open banking are gradually deconstructing the switching cost and cornered resource advantages of traditional financial incumbents
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Regulatory Tailwinds in the Region
There are a lot of interesting regulatory tailwinds that already are and will continue to benefit open banking infrastructure players across Southeast Asia. Just looking across geographies, from a regulatory perspective, numerous economies critical to the region have invested meaningfully or recently announced initiatives that will advantage open banking players.
Across Southeast Asia, some of these initiatives and policy announcements include:
The Philippines’ Central Bank’s announcement of a three year strategic plan to incentivize the proliferation of open finance in the country as a means of providing more financial choice to customers, increasing access to financial products and improving the tools available for MSMEs to efficiently run their businesses
Bank Indonesia (BI) released its 2025 Open Banking roadmap that covers payment and banking-as-a-service APIs like account opening and card issuance, with data related policy also on its roadmap
Vietnam’s Prime Minister recently approved a new strategy around financial inclusion that aims to expand coverage across the country for basic financial services including payment, transfers, loans and insurance through diversification of financial infrastructure
Thailand’s announcement that it is setting up rules for the issuance of licenses related to digital banking in the country
Malaysia recently announced a new category of digital banking license and the Central Bank has laid out guidelines on open banking data using APIs
While each of these countries are at different phases in their open banking digital transformation, they are all showing signs of progressing towards an ecosystem that encourages open banking as a means of increasing financial inclusion and fostering more innovation.
The Nuances of Southeast Asian Financial Infrastructure
Relative to the way that open banking has developed in the US and Europe, Southeast Asia has some unique characteristics that change the character, constraints and potential opportunity of open banking:
Nature of Use Case - In the West, the rise of Plaid and TrueLayer brought about a renaissance in consumer fintech applications like Venmo, Robinhood, Mint and more. While these apps created tremendous value for customers, many of the initial Western use cases focused on “consumer conveniences”, e.g. being able to send funds faster to friends after a night out or more real-time budgeting tools to help consumers better manage their own expenses via banking data feeds. In Southeast Asia, open banking can actually be leveraged to help solve critical infrastructure gaps that were either already solved or not as salient issues to begin with in the US. For example, in the US, we have a robust credit scoring system through services like Equifax, Experian and TransUnion, but no such comprehensive credit scoring system exists across the Southeast Asian region. There are also other use cases critical to the financial health and inclusion of the population that are under-optimized like payment remittance and KYC. Also, because credit card penetration is lower in Southeast Asia, non-card digital payment use cases are also incredibly important. These infrastructural deficiencies / gaps increase the need for and opportunity for open banking players to solve a wider array of more critical use cases:
Supply Agents - In the US, the majority of adults receive their financial services through a traditional bank, digital bank or credit unions. In Southeast Asia (and other emerging markets), there is a wider array of players on the supply side that provide banking-light services, specifically through third party mobile wallets, technology conglomerates and from telco operators. Southeast Asia is one of the world’s fastest growing markets for mobile wallets, with the number expected to grow to 440 million in use by 2025 across Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. As of late 2020, the number of non-banks holding e-money licenses was greater than the number of traditional banks across core geographies in the region, with some of the top payment methods in the region including GrabPay (ride hailing), Shopee Pay (E-commerce), Boost Pay (telco) and Dash Pay (telco):
When building out API use cases to sell to other fintechs in the region, Southeast Asian players need to accommodate for a greater array of data, banking-like and payment initiation sources than players in the West. While this increases integration complexity, it also meaningfully increases the head start that a truly interoperable player achieves at scale in aggregating statement, transaction and income data across this diverse base of sources.
Also, by virtue of sourcing financial data from other types of supply agents like 3rd party e-money, telcos and regional tech giants, open banking infrastructure players in the region potentially also have access to a greater variety of non-financial / transactional data they can integrate with financial data aggregation APIs. This creates opportunities for developers to build more creative products on top of these networks.
Cross-Regional Demand - The top 8 e-money providers in Southeast Asia are cross-regional and span across borders. 4 out of the top 5 have a meaningful presence in at least 6 countries in the region.
Across regions, most of these players have either set up or are in the process of setting up their digital bank. Some of these are through partnerships, for example, Grab and Singtel’s consortium to set up a best-in-class digital bank in Singapore. Another example is LINE Corporation’s partnership with KEB Hana to expand digital banking coverage into Indonesia, following its expansion in Thailand and Taiwan. Because some of the largest e-money players on the supply side are uniquely cross-regional, it becomes incredibly important for open banking players to start scaling their cross-regional network quickly from day one in order to be the preferred partner for these cross-border players. While the larger regional tech giants will not necessarily want to work with any one player exclusively, I believe they are most likely to prefer partners who they can work with across each of their core geographies in order to improve their portfolio-wide interoperability. This dynamic also makes the winner-take-all network effects in this region potentially even larger so long as the supply-side remains cross-regional.
SME Digitization - A recent Bain study found that only 16% of MSME businesses in Southeast Asia are truly digitized with only 10% having advanced payment automation, bank card readers, etc. While estimates range, these businesses account for >89% of institutions on a unit basis, >50% of employment and 30-50% of GDP in these regions. Relative to the US, where much of the early use cases in open banking were consumer finance focused, I believe much of the innovation and greatest value initially in Southeast Asia will accrue to small businesses who will benefit from a wide range range of services offered by API players and built on top of these ecosystems that will help truly digitize these local economies:
These MSMEs in the region have historically been meaningfully underserved by traditional financial institutions who perceive these businesses as too costly to serve. The digital finance and lending applications that can be built leveraging open banking APIs will help address this large funding gap. Per estimates from the SME Finance Forum as of 2018, this finance gap easily amounts to over a $100 billion gap across Indonesia, Malaysia, Thailand and Vietnam even if you assume meaningful improvements in access since then:
A lot of the regulatory schemes in the region are also really focused on driving MSME digitization to accelerate financial inclusion, so positioning open banking as enabling these commerce-related use cases is most likely to continue to garner favorable / preferred status from regulators.
Greenfield Banking - Some estimates indicate that over 70% of the population in Southeast Asia is unbanked or under-banked. In Vietnam, Philippines and Indonesia, less than 25% of the population currently uses online / mobile banking products per the World Bank:
Because traditional banks in the West were historically horizontal in nature, e.g. generally didn’t cater to a particular affinity, much of their digital challenger counterparts have also been horizontal in order to run the greatest chance of disintermediating the Goliaths of banking. In Waking the Sleeping Giant in the Global Financial System, I discussed how credit unions can play a role in creating more bespoke fintech experiences by converging affinity-based workflow tools and best-in-class banking-light capabilities in tailored verticals. Because the broader banking market is under-penetrated and less sophisticated in Southeast Asia, I believe we will see the emergence of more verticalized neobanking solutions rather than the primarily horizontal proliferation we have seen in the West. These verticalized neobanks will tailor their workflow experiences to the unique needs of their vertical populations and open banking infrastructure will help to amplify the reach and power of these verticalized neobanks across borders. One example of a verticalized neobank I am watching closely in the region is Friz, a neobank for freelancers and creators in Southeast Asia. Friz offers bespoke banking and workflow solutions to creators to afford a verticalized banking suite that uniquely meets their needs:
There is an opportunity to turn the creator rewards vector into a full-fledged marketplace for third party creator software solutions. More saliently, you can probably see how Friz can build its own native software workflow solutions to add additional value around its initial fintech categories. For example, by building out creator channel management tools by aggregating invoices across platforms or creator-specific business insurance tools. I caught up with Nirali Zaveri, CEO & Founder of Friz, to learn more about how open banking is helping spur additional innovation in verticalized neobanking in Southeast Asia:
“Open banking creates the ability to utilize disparate sources of information from multiple players in a fragmented banking ecosystem and create tailored services for specialized audiences. Increasingly, different players have a disjointed image of specific segments of customers and stitching together a full picture enables the creation of highly specialized products that can improve approval rates, pricing and access to financial services. This is especially true for freelancers and small business owners that earn incomes in multiple different accounts, spend through multiple sources but do not qualify for traditional banking products because no one bank has a complete idea of how much they are earning or spending.”
API 1st vs. Screen Scraping - Plaid initially built out its model in the US by focusing on screen scraping, whereby it accessed consumers’ bank data through consumer provided logins rather than through APIs or a direct integration with the banks. This created a) connectivity issues as the connection wasn’t as reliable when banking sites / applications were updated and b) posed potential user data integrity / privacy issues as well. Plaid relied on this method initially because a) it was one of the most cost effective ways to build out their network and b) lots of financial institutions were averse to sharing their captive user data initially since they saw meaningful financial value in that data lock-in. As open banking is growing in adoption in the West, Plaid has converted more and more of these connections into direct APIs and has even launched Plaid Exchange to help banks manage and deploy their own APIs they provide directly to developers. The hesitancy to launch Plaid Exchange sooner was in part driven by the fact that banking penetration had historically been so high in the US and because of that, banks were sitting on rich datasets of proprietary and valuable transaction, income and data history. There is a greater opportunity and need to take more of an API first vs. screen scraping approach in Southeast Asia because the population has historically been under-banked and therefore the data advantage that traditional banks have is less meaningful. Because the digital banking opportunity is so greenfield, neobanks are incentivized to build alongside open banking players so that they are beneficiaries of the wide array of financial products built to serve consumers and MSMEs in the fintech ecosystem rather than focusing on trying to protect a legacy incumbent data advantage.
Brankas is Making Waves in Southeast Asian Open Banking
The cover photo for this piece implies that open banking players are riding the wave of financial inclusion in Southeast Asia. In reality, a more apt metaphor is that these players are wavemakers that are creating the ecosystem to catalyze more financial inclusion. This graphic of a wave-making pump was just a little more random and a little bit less cool to include on the cover 🙃
Brankas is the leading player in Southeast Asia that is building open banking infrastructure in order to accelerate financial inclusion in the region both for MSMEs and fintech consumers. Its platform includes robust data and product APIs and has operations across the most geographies in the region including in Indonesia, The Philippines, Thailand and Singapore and is rapidly entering new geographies. Its platform includes both data and payment product APIs that connect supply (banks, e-wallets, telco and remittance) with demand (fintech players, MSME tech vendors, ecommerce marketplaces (for payments, consumer finance and merchant finance), and neobanks / e-wallets) across the region:
While Brankas started in data aggregation APIs, it is expanding its suite of product APIs looking to peers in the US and Europe. As competition has accelerated in other markets in the data aggregation vertical, players like Plaid and TrueLayer have been leaning in much more heavily on payment initiation and other product APIs to avoid commoditization on a purely data aggregation basis. I caught up with Todd Schweitzer, CEO & Founder of Brankas and Director at the The Open Banking Exchange, to learn more about the importance of expanding breadth of product APIs as a growth vector in this category, especially in Southeast Asia:
“Southeast Asia presents an exciting set of use cases for "banking as a service" and APIs that enable embedded fintech at the point of use. Only 20% of Southeast Asian consumers use digital financial services today. They are leapfrogging past traditional retail banking products, and signing up for e-wallets, crypto wallets, digital only banks, and alternative sources of consumer credit like buy-now-pay-later. Beyond simple data and payments APIs, Brankas is increasingly focused on "product APIs" that enable our customers - neobanks and e-wallets, ecommerce marketplaces, crypto exchanges, alternative lenders - to publish their own APIs and embedded third party services into their apps.”
One such product category that we are already seeing leading open banking players in the west expand into aggressively is the identity verification and authentication sector. In January, Plaid announced that it was acquiring Cognito for $250 million, in an effort to diversify its product APIs into customer screening, identity verification and AML compliance workflows. Because open banking infrastructure players aggregate financial data from multiple sources (banks, applications, mobile money, telcos), it makes a lot of sense to expand into the identity layer. These data sources can be leveraged to more effectively triage escalation of identity verification cases and make better assessments about whether there is a particular instance of identity fraud. Todd at Brankas also shared his thoughts on the power of combining financial data APIs with identity API layers:
“Identity verification and "know your customer" checks are among the biggest friction points in emerging market fintech. Whereas Singapore's national "Singpass" login allows for one-click access to online government and financial services, the rest of SEA fintech requires manual identity checks for each new user. With enhanced data APIs, Brankas and our peers can enable fintechs to use third-party "auth-as-a-service" for compliance while generating additional data points to better serve their users.”
Progression of Business Powers in the Open Banking Model
The evolution of the open banking model in the West followed a powerful domino effect of knocking down successive business superpowers in incumbent closed banking models to get to where we are today:
Traditional banking has historically had a high switching cost for customers. Opening up a new bank account and switching your provider (thereby losing your transaction and statement history) was a huge pain point to deal with. The rise of mobile neobanking without bank branches has both a) reduced the friction of switching / opening up a new account and b) increased the benefit of a potential switch relative to the underlying switching costs as these banks offer better user interfaces, customer support and more advanced / specialized technical products. The deconstruction of this switching cost in turn helped to undermine the incumbent banks’ cornered resource business superpower. A cornered resource is a proprietary asset that a business owns that can be a source of competitive advantage and incumbent banks have enjoyed leveraging user data as a cornered resource. A lot of the early Western neobanks gave consumers more control over their user data than incumbent traditional financial institutions have historically. Moreover, because some of these neobanks were early adopters of open banking infrastructure, they were able to differentiate by delivering more value to consumers by virtue of more seamless and direct integration with beloved consumer apps like Robinhood, Venmo, Acorns, etc sooner. This competitive differentiation advantage has forced traditional banks to forfeit at least part of their cornered resource advantage and join open banking networks in order to re-orient their relationship with customers and attract younger demographics.
The deconstruction of switching cost and cornered resource superpowers has given way to afford open banking players a meaningful B2B network effects advantage. Traditional financial institutions may not have been as incentivized to join this network if their switching cost and cornered resource moats weren’t gradually deconstructed by these broader industry trends.
Southeast Asian and emerging market fintech infrastructure is so interesting in part because the pace of change will likely be even faster as the starting business powers of incumbents are much weaker given the higher unbanked / under-banked population in the region.
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