Open banking has become a necessity due to the lack of a reliable data infrastructure in Fintech.
This is especially the case for customers that use one or more banks, meaning their data and bank statements are usually fragmented.
Open banking promotes the idea that banks and other financial institutions should be able to seamlessly communicate and share data among each other. Free access to this customer data otherwise held by banks can potentially allow Fintechs to offer broader products and services to customers.
So, what is Open Banking?
At its core, open banking enables access; Access to bank customers and customer data for Fintechs by removing barriers to entry. The value of this concept rests on certain key principles including
- the promotion of a strong banking experience
- financial services accelerators such as Application Programming Interface (API) gateways programmed in diverse ways to enhance banking needs
- the provision of connectors to the core banking platform
Each piece of software, product and service has one aim; to enhance banking solutions and remove the core competitive advantage of the banks.
While open banking is a new concept in Nigeria, it is quite mainstream in the United Kingdom and the European Union. In the UK, the Competition and Markets Authority published recommendations on the Common Standards in providing access to Customer Data, to ensure fairness and a level playing field for all actors in the Fintech ecosystem.
In the EU, the Payment Services Directive or PSD2 is a directive on electronic services payment, aimed at “making payments more secure in Europe, boost innovation and help banking services adapt to new technologies”.
The importance of Open Banking to African Fintech
Open banking has the potential to drive growth for personal account holders and accelerate go to market for small businesses. For example Ada, who has an online retail store on Flutterwave or Paystack, needs access to credit and financial tools to accelerate the growth of her business.
Open banking will allow her to use her financial information to get credit facilities to grow her business. Some of the most notable use cases of open banking to Fintech and Nigerian startups that are providing these services and solving problems include
- Financial tools and accounts management
Personal financial management tools help customers map out, plan and test their financial situation at any given time. This is very important, as traditional banks are not incentivized to provide these PFM tools, so open banking makes it easier for them to share their data with third party Fintech providers who are willing to enable them to do so. This allows financial providers to get an understanding of what the needs of the customers are, and how to tailor their services to those needs. A startup that notably provides this service is Inflow Finance.
- Accounts Integration
Accounts integration involves the use of API, to get a clear picture of the various accounts of customers for better financial insights. It is like a single portal, where all accounts are linked and managed when signing up for apps and services. You will be able to view and manage your card transactions, investment accounts, loan accounts, money apps and so much more in one place.
Examples of startups facilitating accounts integration in Nigeria include Okra and Mono
- Instant credit risk
Open banking can speed-up credit applications by allowing lenders to gain instantaneous overview of an applicant’s credit history. Normally , this would involve pulling together different documents from different banks and institutions. This not only slows down the delivery of credit services but leads to a negative customer experience.
- Bills management
This will allow the customer to see all his subscriptions, billings, upcoming expenses and much more in one place. It can be anything from DStv subscriptions, Netflix, to electricity bills and rent. The customer can then manage the recurrent expenses, cancel the ones not needed and get updates on upcoming ones.
Through APIs, open banking can make the customer onboarding process seamless, automatic and stress free. Traditional banks and Fintechs need to assess security risks as much as possible.
Open banking allows the flow of customer data so that information such as an address, occupation, income details, name and date of birth as well as credit history all match up. Because this is done in a few minutes, the experience of opening a new account becomes much smoother for customers. The most widely use KYC model in Nigeria is the Bank Verification Number or BVN. However, Nigerian startups are building on top of this KYC infrastructure and connecting Fintech directly with bank data.
What is the current situation in Nigeria?
The banking sector in Nigeria, infrastructure wise, is still very far behind its global peers. According to data from the NBS, Nigeria’s active bank account increased by 14.41% from 97.485 million active accounts to 111.54 million.
This has not translated to financial inclusion by the banks, as most account holders do not have access to financial services beyond deposits and withdrawals. The banks are neither incentivized nor willing to provide these services.
The banks are also notorious for their penchant for taking decisions without consulting stakeholders or considering customer interest. A recent example is when banks unilaterally decided to cut off telco giant MTN from their services, alienating the latter’s over 90 million subscribers and preventing them from using financial services and banking apps.
Over the past few years however, the Nigerian financial services space has seen lots of Fintech apps coming in. In a world of scale and billions of transactions, smaller companies understand how to provide well-designed mobile apps that are simple to run, with reach, and without the overhead that goes with running large banks.
Startups like Mono, Okra, Onepipe, Bfree and Abel are some of the companies incorporating open banking in their business models. These startups are flexible, can tailor their services to local requirements and they are very fast in responding to needs and changes. For instance, when the banks cut MTN off from its mobile banking services, the TELCO giant decided to partner up with Fintech startups like Opay, Jumia, Flutterwave, Kuda and Carbon to provide mobile banking and financial services to its over 90 million subscribers.
Nigerian regulators have been quite open to the possibilities of financial inclusion and open banking. The BVN was a giant step towards full open access to customer data. Even in its nascent form, it still provides veritable KYC models for providers to start the onboarding process for new customers. The Nigeria Inter-Bank Settlement System or NIBBS, is also a very important component allowing for open banking. This instant settlement system allows for seamless interbank transfers and deposits without the need for long wait times.
As far back as 2018, the CBN had already expressed interest in open banking initiatives.
In February 2021, the CBN issued the “Regulatory Framework for Open Banking in Nigeria”, which sets out the rules under which the sharing of financial data will happen. Although sharing banking data is quite important towards the growth of the ecosystem, it does come with attendant risks. The regulation mitigates these risks and provides hedges for every player involved. This is why the draft regulation creates four categories of data that can be exchanged using APIs. It also gives a risk category to each of the categories.
- Product Information and Service Touchpoints (“PIST”) is low risk information provided by participants to customers and information to access ATM locations, website addresses, charges, and rates, etc.
- Market Insight Transactions (“MIT”) is judged as moderate risk. This is information on products, services, and segments. MIT data is not associated with an individual customer and is shared on an aggregate basis.
- Personal Information and Financial Transaction (“PIFT”) is high-risk. This provides general information on the customer including personal data and transaction data.
- Profile, Analytics, and Scoring Transaction (“PAST”) is rated as a high and sensitive risk. This is personalized scoring customer data such as income ratings and credit score.
The future prospects of Open Banking in Nigeria
Open banking has vast prospects in propelling financial inclusion and banking for all in Nigeria. The Nigerian tech scene has already seen the rise of Fintechs that are solving the data and KYC gap through API integration. This will allow more seamless onboarding and access processes and broader financial solutions for customers. Commenting on the factors needed for widespread adoption of open banking in Nigeria, Ope Adeoye, CEO of Onepipe notes that regulatory enforcement is needed to make the banks put serious effort into it. This is in line with the regulatory efforts in the UK and the EU.
For now though, financial inclusion has not yet achieved the traction required. The truth is, the usefulness of any financial service is linked to its ability to connect to the existing legacy financial network. Banks will soon be forced to adopt open banking to stay relevant, as the world is moving away from the era of traditional gatekeepers. This will be good for the ecosystem, as every player, big or small will be tailoring all their services for the greater benefit of customers. That will be the future of open banking in Nigeria and Africa.