SINGAPORE (Nov 11): Two years ago, Sopnendu Mohanty had coffee with a senior official of a multilateral agency. It was a casual meet-up, but the coffee session turned into a serious discussion about financial inclusion. While Mohanty enjoyed the exchange of ideas over sips of coffee, it inspired him to create the API Exchange (APIX). “That was the genesis of APIX,” says Mohanty, who is chief fintech officer of the Monetary Authority of Singapore.

APIX is the world’s first cross-border, open-architecture platform that facilitates collaborations between financial institutions — such as banks — and fintech start-ups. It was launched at last year’s Singapore FinTech Festival (SFF).

The platform allows banks and fintech start-ups to conduct experiments in a sandbox. In particular, banks are able to access fintech solutions through application programming interfaces (APIs) to drive digital transformation and financial inclusion across Asia-Pacific. APIs are a set of functions and procedures that allow for the creation of applications that access the data and features of other applications, ­services or operating systems. So far, APIX has signed up 70 banks and 150 fintech start-ups across 19 countries — mostly from Asean but also from other parts of Asia, ­Europe and North America.

Mohanty says many people talk about financial inclusion in terms of how to get the unbanked segment to open a bank account and obtain credit. However, financial inclusion goes deeper than that, according to him. “There is a structural problem to that. My question to the gentleman with whom I had coffee was: Are we solving the issue fundamentally?” he tells The Edge Singapore in a recent interview.

Infrastructure gap

The way Mohanty sees it, the current infrastructure that enables banks to reach the unbanked segment needs a “massive upgrade”. Most banks in emerging markets (EMs), especially in rural areas, face problems in onboarding new customers. The solution is to employ new methods by leveraging technology.

However, many of these banks are small and do not have the financial capability to invest in the relevant technology and infrastructure. One way to solve this is for them to tie up with fintech start-ups that have already figured out how to onboard new customers. That way, the banks do not have to reinvent the wheel and make a massive investment outlay. Yet, there are challenges to getting both parties to work together.

Based on anecdotal feedback received by MAS, Mohanty notes that the majority of banks had difficulty finding the right fintech start-up that could solve their problems. A significant number of banks also found it difficult to evaluate fintech start-ups as potential partners. Other hurdles included obtaining internal approvals to run a proof of concept project and scaling of the solution provided by the fintech start-up. Furthermore, banks faced challenges in working together with the fintech start-ups on the POC projects.

From the fintech start-ups’ perspective, Mohanty notes that a large number of them found it difficult to meet banks for the first time to pursue potential tie-ups. Even if they did, fintech start-ups faced challenges in getting to the POC stage, because the banks had to get internal clearances from the procurement/vendor management, legal and IT departments. As a result, a majority of fintech start-ups took six to 12 months to secure a POC project, leading to few implementations of POC projects. This, in turn, translated into fewer production orders.

Adding insult to injury, a majority of fintech start-ups did not get paid after conducting the POC projects, as the banks expected them to be implemented for free. “They are not compensated enough for doing so much and they end up running into cash-flow problems so that they eventually wind up,” he says.

APIX plays matchmaker

How can APIX solve these problems? Mohanty says the platform expedites the process for banks and fintech start-ups to mutually find the right partner. Banks can perform their due diligence faster. Upon finding the right partner, the banks can conduct experiments using the APIs provided on APIX. All of this is conducted on the cloud.

To illustrate, Mohanty uses the example of a rural bank in Indonesia that is looking for an image processing solution to make its know-your-customer procedures more efficient. However, such a solution is only provided by a fintech start-up based in Norway. Under normal circumstances, the rural bank may not engage with the Norwegian fintech start-up because it is unlikely to be aware of the latter’s existence. And even if it is, it is difficult for both parties to meet to explore a potential collaboration, he says. Who will bear the costs of the trip? Language may also be a barrier.

With APIX, however, the rural bank in Indonesia can engage with the Norwegian fintech start-up solely on the cloud, says Mohanty. Neither party needs to physically meet the other, thus saving on flight, accommodation and meal costs. Any language barriers can be minimised, as the only language that is really required is software. If the experiment on APIX produces a positive result, both parties can arrange for a physical meet-up to ink a formal agreement. This avoids unnecessary sunk costs.

Essentially, APIX replaces the need for banks to establish an innovation lab. According to Mohanty, innovation labs are an expensive method for banks to discover fintech start-ups to potentially work together. “The innovation process of discover, design and deploy is now entirely on the cloud, not in physical premises. That dramatically reduces costs and makes it affordable for banks in Asean and other EMs,” he says. “Rural banks can now employ fintech solutions to better serve their customers. This enables financial inclusion.”

But if the aim is to build better infrastructure to enable financial inclusion, why not allow the fintech start-ups to provide their solutions without the involvement of banks? After all, fintech start-ups are meant to disrupt the status quo.

According to Mohanty, only 20% of fintech start-ups are in direct competition with banks, while the remainder 80% are complementary to the latter. Hence, it would make better sense to collaborate than to compete, he says. After all, the banks are already well-established and may have better insight into customers, he adds.

“The answer to [the financial inclusion problem] is not to find a new fintech start-up to solve it. The answer can be found in the banks, which have been in operation for many years. Why can’t we just help the banks to rapidly digitise? The bank manager understands the people; banks just lack the right tools to deliver financial services in a cheaper, faster and better way,” he says. “You can always argue about market forces, but it need not be all about competition. The Asian story is about collaboration; and we [are bringing] banks and fintech start-ups [together].”

New iteration

Although APIX has been operating for about a year now, Mohanty declines to a call it a “success” yet. This is because the platform is still new and will have to undergo upgrades to better meet the needs of banks and fintech start-ups, he says. These upgrades are in response to feedback received from stakeholders after MAS embarked on a roadshow in Myanmar and Cambodia to explain and showcase APIX to potential users. In fact, a new iteration of APIX will be launched at this year’s SFF, after which the “real activity” will occur, says Mohanty.

For now, he declines to reveal how much “activity” has occurred on APIX except to say that it is “not significant”. Still, he notes that five prototypes resulting from the collaborations between five banks and five fintech start-ups will be announced and showcased at this year’s SFF.

If all goes according to plan, a new feature will be introduced on APIX early next year. It will allow investors, who may want to invest in these fintech start-ups, access to activity data. Mohanty says this feature aims to solve the pain point of investors, who do not fully understand the unique selling proposition of a fintech start-up. This is especially so for B2B fintech start-ups, as their value may not be easily measured.

By allowing investors access to APIX, they can find out the value provided by the fintech start-up through its involvement with the banks on the platform. Investors may rely on quantifiable criteria, such as the number of prototypes completed, to assist in the investment evaluation process. “It’s like a pitchbook with real live data,” Mohanty says.