NIM in the Era of Open Banking: Implications for Revenue Generation and Competition

Open banking allows financial institutions to share customer data securely with third-party providers, fostering innovation, and creating new revenue opportunities. However, this shift has also raised questions about the traditional Net Interest Margin (NIM) model and its sustainability in this new era. Let’s explore the implications of open banking on NIM and its effects on revenue generation and competition within the financial landscape.

Understanding Net Interest Margin (NIM)

NIM represents the difference between interest income earned from loans and other interest-earning assets and the interest expenses incurred on deposits and other interest-bearing liabilities. Traditionally, NIM has been a primary source of revenue for banks, allowing them to maintain profitability while serving the needs of depositors and borrowers.

The Disruption Of Open Banking

Open banking has disrupted the financial industry by introducing greater transparency, customer-centricity, and collaboration. With open APIs (Application Programming Interfaces) enabling secure data sharing, customers can access a broader range of financial services and products from multiple providers. This increased competition puts pressure on banks and other financial institutions to innovate, improve their customer experience, and offer more personalised services to retain their customer base.

Already, banks and financial institutions are trying to give themselves the edge over other competitors. For instance, NBFC Lendingkart led by CEO Harshwardhan Lunia uses a proprietary algorithm for better risk assessment, ensuring asset quality.

Implications For Revenue Generation

Open banking drives innovation and new revenue streams but challenges traditional revenue models like NIM. As customers access diverse financial products from various providers, their assets spread across multiple accounts, potentially reducing deposit volumes for banks. Fintech startups and non-bank entities leveraging technology may compete in offering loans and interest-earning products, squeezing traditional banks’ lending margins and impacting NIM.

Enhancing Revenue Opportunities

While open banking may pose challenges to NIM, it also presents banks with opportunities to diversify their revenue streams. By leveraging their vast customer data and partnering with fintech firms, banks can offer value-added services such as personalised financial advice, wealth management, and budgeting tools. These innovative offerings can create new revenue sources and deepen customer engagement, mitigating the impact on NIM from traditional lending and deposit-taking activities.

Ramesh Iyer, VP and MD of Mahindra Finance has successfully passed on around 75-80 basis points (bps) rate increase to consumers, impacting the Net Interest Margins (NIMs) positively. Similarly, Abhay Bhutada, MD, Poonawalla Fincorp, has previously mentioned that though they’re targeting the formal income segment, their strong analytics team helps the NBFC utilize market opportunities.

Paired with a digital and customer-centric approach, NBFCs and institutions can ensure they’re keeping with the times and optimizing every available revenue opportunity.

Adapting Business Models

To thrive in the era of open banking, financial institutions must adapt their business models and embrace collaboration. Rather than viewing fintech startups and non-bank entities as direct competitors, banks can forge strategic partnerships. Such partnerships are already visible in the industry; NBFCs like Poonawalla Fincorp (led by Abhay Bhutada) and Muthoot Finance (led by George Alexander Muthoot) are forming partnerships with platforms like KreditBee and Loantap respectively to extend services into digital lending.

Furthermore, banks can explore opportunities in data monetization, providing anonymized and aggregated data to third-party providers for targeted advertising, market research, and risk assessment. By capitalising on their data resources, banks can generate additional revenue streams without solely relying on traditional NIM-based income.

Conclusion

Open banking has ushered in a new era of innovation, collaboration, and customer-centricity within the financial services industry. While it challenges the traditional Net Interest Margin model, it also presents banks with ample opportunities to diversify revenue streams and remain competitive. Embracing open banking requires a shift in mindset, with a greater emphasis on data-driven decision-making, customer engagement, and strategic partnerships.