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Photo credit: Tony Karumba via Communication for Development Ltd.

BLOG 10 MARCH 2024

Open Finance Can Reduce Financial Inclusion Gaps: Here’s How

By Maria Fernandez Vidal, Sophie Sirtaine
Blog Series: CGAP Leadership Essay Series
Data has the potential to be transformational for financial inclusion and open finance can be the
key to unlocking it.
Over the last decade, there has been rapid growth in the ‘breadth’ of financial services (i.e., the
number of people with access to accounts), largely fueled by the growth of mobile wallets and the
digitization of G2P systems. Some 76% of people globally now have access to an account. During
this period, the growth in the ‘depth’ of financial services (i.e., ensuring a wider range of relevant
services are available to all) has been more limited globally – only 31% of adults reported having
saved formally and 29% having borrowed formally. While the world has made good progress, there
is clearly more work to do.
CGAP has, in recent years, been demonstrating the potential for data not only to further expand
the breadth but also the depth and the utility (i.e., the practical benefits) of financial services for
low-income people. We see the ongoing development of open finance ecosystems – and, in the
future, open data with non-financial data sources being included – as a truly transformational
enabler that will unleash the power of data to increase financial inclusion.

Data-driven financial services can help close inclusion gaps

Data trails of individuals have been growing exponentially and will continue to grow. CGAP’s
research suggests that despite income and gender-based differences, more low-income people
(including women) are generating digital data trails than ever before. We estimate that roughly two
billion low-income individuals (earning under USD 5.50 per day) in low- and middle-income markets
are currently digitally included, and as a result, are generating a digital data trail. This number is
slated to grow thanks to advancements in digitization and digital inclusion, especially driven by
increased smartphone ownership and the fact that the richness and amount of data generated by
each individual are also expected to continue growing.
The growth of data trails presents an enormous opportunity to increase financial inclusion and
enhance the value of financial services for the poor. Data-driven financial services enable the
provision of more varied and better-tailored financial solutions, including to previously unbanked, or
poorly banked, customers, and to more effectively serve the needs of these customers.
CGAP’s research over the last three years suggests that effective use of data trails enables financial
service providers (FSPs) to cater to low-income and excluded individuals in a variety of ways:

The use of digital data trails could reduce financial exclusion by nearly 50%.
Globally, 67% of digitally included poor people have an account. Bringing the remaining 33% of
digitally included poor people (roughly 600 million individuals) into the financial system would
reduce financial exclusion by nearly 50% from the current 1.4 billion people to 800 million.
Furthermore, only 12% of the digitally-included poor have borrowed from a financial institution so
far, providing an even greater opportunity to deepen the depth of financial services they have
access to.

In credit, data trails – particularly transactional data trails – help facilitate

customer segmentation and risk assessment, which enables better
underwriting, reduced pricing, and tailoring of products to meet the needs of
individuals.
Transactional data can effectively be used to offer credit to those who don’t have a credit history.
CGAP’s analysis of transactional data of small retailers, banking agents, and platform workers
showed similar predictive power of credit losses when using transactional data or credit history
data, with an upside when combining both sources of data. This means that FSPs can effectively
lend to these MSEs and individuals, many of whom haven’t had access to formal credit before, by
using their transactional data (e.g., sales, purchases, restocking) without taking on additional risk.
Data-driven approaches can also be used to support women’s financial
inclusion.
Women typically face greater financial exclusion than men; there is indeed a six-percentage point
gender gap in financial inclusion globally. Under certain conditions, the use of gender-
disaggregated data in credit scoring can be used to increase credit for women without increasing
credit risk for providers. CGAP’s research using data from TymeBank and AB Bank Zambia shows
that analyzing data trails with a gender lens can help lenders better understand how men and
women differ in terms of credit risk, allowing lenders to carry out a more accurate risk assessment
of each gender group that can benefit both women and providers. Our research showed how a
gender-intentional approach can result in a larger total portfolio with a higher proportion of loans to
women for a given level of risk.

The promise of data is not limited to credit.

While most novel data-driven products currently revolve around credit, there is an opportunity for
data to enable a more diverse set of financial services that further deepen inclusion. CGAP’s
research has identified several ways in which data can support the expansion of inclusive insurance,
including by better understanding customer behavior, designing and pricing more responsive
products, providing a smoother customer acquisition and onboarding, and building efficiency in
claims management and fraud detection. Personal financial management apps leverage the income
and spending data of customers to give them a full view of their finances and make
recommendations related to money management, supporting financial education, and facilitating
switching to products that better suit individual needs.

Data is most often inaccessible to the FSPs that can innovate with it
While our findings are promising, there are challenges that limit the access and use of data. Data is
often held in siloes, making it costly for innovators to access. Large incumbent players have a
competitive advantage and dominant position since they hold the largest pools of data, which
gives them limited incentives to go down market, and, as a result, they tend to cater to customers
who provide them higher margins. When data is shared through bilateral agreements with third
parties, as is often the case, customers have limited knowledge and control over how their data is
used. In addition, data analytics capabilities are not equally spread among providers, and smaller
fintechs, who may have higher digital capabilities, may not have access to sufficient data pools. As
per the World Retail Banking Report, 70% of banking executives are concerned they lack sufficient
data analysis capabilities, while 75% of customers are attracted to new, agile fintech competitors
who offer easy-to-use products and superior customer experiences while remaining low in cost.
However, fintechs that have advanced data analytics capabilities do not always have access to the
large data pools that are held by incumbents.
Open finance can lead to a pivotal shift in the trajectory of financial
markets, driving competition and innovation
Open finance can address some of the most fundamental obstacles that inhibit the access to and
use of data in financial services by reducing two types of information asymmetry that exist in many
markets: between FSPs and customers, and between different types of FSPs.  By empowering
customers to access their data, and by creating a level playing field among providers to access and
use customer data, open finance reduces these two types of information asymmetry, which in turn
creates a more competitive market that can drive innovation in the products and services offered.
There is an information asymmetry between FSPs and customers, as FSPs typically only see part of
a customer’s data, and this may inhibit the FSPs’ ability to serve a customer. Open finance opens up
the full transaction information of a customer (not just transactions with a given partner), including
payment transactions, making data trails richer. This is potentially transformational for informal
MSMEs because transactional data offers the most value for those without a traditional credit
history. This is already happening in markets like Brazil and India where FSPs participating in open
finance ecosystems can view the full transaction history of individuals and MSMEs and use this
data to expand credit to new borrowers or to improve loan terms. The potential to improve
inclusion can be further expanded by adding “alternative” data from non-financial providers such as
telcos and utility companies (a concept called “open data”).
There is also an information asymmetry between different types of FSPs as older, larger financial
institutions – especially banks – typically hold the largest pool of client data. Open finance
eliminates the need to set up bilateral partnerships between those who hold the data and those
who want to use it. While bilateral partnerships also make it possible for a fintech to gather data
from a bank (through bespoke APIs) and develop new financial products, such approaches limit
competition (fintechs are much smaller than banks and thus, at a disadvantage) and generate
higher fixed costs related to the cost of bespoke APIs and potentially lengthy negotiations
processes. By facilitating data sharing, open finance levels the playing field for collaboration among
all FPSs, including banks and non-banks, and lowers the cost of innovation.
Early evidence supports the promise that open finance helps FSPs to better serve customers in
emerging markets. Open finance is still in its early days, so the use cases that have been
implemented remain limited. However, the potential can be inferred from existing successes,
powered by similar (but more limited) data sets than a full-fledge open finance scheme would
allow. There is indeed evidence emerging from the implementation of open finance in Brazil and
India. Banco do Brasil, for example, has reported using open finance data to better score customers,
which enabled it to raise credit limits by more than BRL 700 million for their customers who were
early adopters. Similarly in India, the implementation of the Account Aggregator (AA) framework
(India’s version of open finance) points to positive results. For example, after the implementation of
the framework, a prominent private sector bank achieved a 25% reduction in credit application
process costs, an investment advisor observed a ~60% increase in user engagement as individuals
linked their financial accounts via AA, and lenders reported zero fraud rates on bank statements
shared.
In the United Kingdom, the Bank of England (BoE) reports that open banking (a more limited form
of open finance limited to banking data) has unambiguously increased competition and innovative
entry in the financial sector. They report that the number of fintechs backed by venture capital has
increased by a third, and the amount of money invested has doubled following the adoption of
open banking. Furthermore, fintech activity has increased across many financial products –
including financial advice applications, credit, payments, and regtech – confirming that open
banking data is useful for a wide range of financial products beyond credit underwriting. The BoE
also found evidence that open banking improves consumer outcomes, with new open banking
advice solutions being associated with greater financial knowledge and open banking-based credit
being associated with greater access to credit products. They also found benefits for SME finance,
as being eligible to share data has made SMEs more likely to form new lending relationships with
non-bank lenders, including new fintechs, and those SMEs that formed new lending relationships
with non-banks paid less interest.
The development of artificial intelligence (AI) tools will undoubtedly unlock open finance's potential
even further. Because open finance leads to an increase in the amount of data being shared, there
will be more value in the adoption of more sophisticated data analytics techniques, including those
using AI, which creates both opportunities and risks. Open finance enhances the volume and
quality of datasets that are available to FSPs for developing financial services targeted at excluded
individuals and MSEs.  AI can leverage the same datasets to further enhance opportunities for
FSPs to serve these customers. It could for instance automate and improve the accuracy of crucial
processes such as know-your-customer (KYC), client data analysis, fraud analysis, document
authentication, credit scoring, product personalization, and customer service. This in turn could
significantly decrease the cost and improve the efficiency of FSPs in acquiring clients and
managing small-value accounts.

The journey to open finance has many steps

Despite the positive evidence that is emerging, if the correct enabling environment is not in place,
the impact of open finance on financial inclusion will be limited. Open finance’s contribution to
increasing financial inclusion relies on a multifaceted effort where other enablers are put in place
too. CGAP has developed a self-assessment tool to help regulators and policymakers identify
and address areas of the enabling environment that they should strengthen before or during the
early stages of implementing an open finance roadmap.
The full potential of open finance depends indeed on some key enabling elements in the financial
ecosystem. As things currently stand, the first step for a customer to participate actively in open
finance is to have an account. The full impact of open finance cannot be materialized without
widespread account ownership. That said, as open finance ecosystems mature and expand to open
data, financial institutions will be able to leverage alternative data such as telco data or utility bill
payment data to develop new use cases and bring on more people, including previously unbanked
people. Secondly, the data shared from those accounts is most valuable if it contains rich
transactional data trails. As a result, open finance builds on payment system reforms – i.e., it works
better if there is a robust payment system that is digital, interoperable, offers instant settlement,
and allows for third-party payments initiation. Such a robust digital payments infrastructure creates
an environment that attracts fintechs and other innovators, which are essential to driving better
use cases for inclusive finance. Finally, the adoption of open finance depends on customer trust
that, at a minimum, gets promoted through and is underpinned by a strong data protection
framework.
Brazil and India, both early adopters of open finance, had widespread adoption of instant payments
systems, as well as thriving fintech ecosystems before they implemented open finance. This has
created a clear opportunity to improve financial inclusion by incorporating rich transaction data
trails. Further progress could be achieved by expanding the range of datasets available on those
who are currently excluded or underserved in these countries, such as utility payments information
(i.e., by moving beyond open finance to open data).
The figure below depicts the building blocks that support open finance. It is important to note,
however, that the steps depicted in the figure are not necessarily sequential and that different
layers can be implemented in parallel.

It is also essential to build in consumer protection at every step. As the use of digital data and
digital processes increases, so can consumer risks and cyberattacks. Clearly, regulators will have a
major role to play in this regard, but all players involved need to incorporate consumer protection
into their approach in order to build a responsible open finance system that establishes and
maintains trust – and is therefore both good for consumers and sustainable over the long term.

Implementing open finance comes with important risks and challenges

Despite the myriad benefits that open finance can offer, there are risks and challenges that need to
be appropriately considered. We've included some examples below.

Customer participation, awareness, and trust

One of the most important enablers of an effective open finance system and the responsible use of
data is a strong data privacy foundation. CGAP research has shown that low-income customers
care deeply about their privacy and are willing to pay a premium for data protection, including
paying higher interest rates or fees. CGAP’s recent research in Brazil has shown that awareness of
and trust in open finance are lower among traditionally underserved groups like women and lower-
income segments. While it can be expected for these groups to be underrepresented among the
early adopters in view of their more limited prior access to the financial system and often more
limited digital and financial capabilities, it is critical that, as the scheme matures, underserved
groups are willing and able to participate.

Underdeveloped business models and misalignment of incentives for

providers
Global experience shows that the incentives for FSPs to participate differ greatly by their size,
market share, and capabilities. Large incumbent banks that hold large quantities of data and have
more complex IT systems can be more reluctant to participate in the open finance ecosystem than
smaller more nimble players, such as fintechs. While the evidence is still nascent, we believe that
there can be significant benefits for players of all sizes to participate in open finance. In an open
finance regime, the existing market share is not split among more actors, but rather, the whole
market grows to include more clients and more products with reduced costs and new revenue
streams.

Capacity to implement
The successful implementation of an open finance regime requires investing in technology and
strengthening technical capabilities – both by regulators and providers. Initial investments in
developing the API architecture, as well as the associated IT developments to comply, are
fundamental building blocks for successful open finance regimes. For FSPs and regulators, these
ICT investments can benefit the entire business beyond the open finance application. Beyond ICT,
it is also critical for regulators to develop an oversight mechanism for open finance regimes and to
ramp up their supervision and enforcement capabilities.

The journey to open finance must be taken together

We believe there is potential for data-sharing regimes like open finance to lead to significant
progress in the breadth, depth, and utility of financial inclusion. Open finance can serve as the next
wave of financial inclusion if we are intentional about designing ecosystems and services that
consider low-income and vulnerable customers’ needs. Overall, stakeholders need to recognize
the new paradigm and embrace the concept of inclusive data ecosystems. They can facilitate this
in a variety of ways:
Policymakers and regulators: by building the foundations of an inclusive payment and data
ecosystem, including by putting in place an effective open finance legal and regulatory
 framework, and strengthening their data protection regimes. Governments can also actively
participate by sharing relevant public datasets. We acknowledge, however, that open
finance is a complex framework for regulators that requires not only regulating data sharing
but also regulating a much larger and complex financial sector.
Financial service providers: by sharing and using data to expand their reach down market
and develop products to deliver value to unserved or underserved segments.
Non-financial service providers (e.g., bigtech): by embedding financial services in their value
proposition and, in time, participating in wider open data regimes.
Customers and those representing their interests: by demanding more control over their
data and more benefits from the data they share with others (including financial service
providers, telcos, and governments).
International standard setters: by helping with the harmonization of data sharing standards.
As the development and adoption of open finance as a central element in modern and digital
financial ecosystems are just beginning to take off, we have the unique opportunity to shape open
finance regimes in a way that works for everyone. Taking corrective measures to make systems
inclusive ex-post can be more challenging and costly. This underscores the need to act now to
design open finance regimes that are inclusive.
We are very optimistic about the potential. Open finance could lead to the development of a
financial sector in which the modularization of the supply chain of financial services becomes a
reality and where fintechs, mobile money operators, banks, and other players work together to
leverage each other’s strengths and offer an efficient combination of services that are more
inclusive and best suited for clients. In other words, successful implementation of open finance
should lead to a financial sector in which a range of FSPs can serve any individual or enterprise,
regardless of size, income, location, or gender, with affordable, responsible, and effective financial
services tailored to their needs.

Topic: Digital Innovation

Sub-topics: Data-Driven Services, Open Finance & Data
 Authors

Maria Fernandez
Vidal
Senior Financial Sector
Specialist

Sophie Sirtaine
Chief Executive Officer

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