Nigeria has become the first African country to adopt open banking regulations. Banks and third-party financial institutions can now interact differently with customer data. The Nigerian financial industry has been working on transitioning to open banking for several years, and in 2022, the Central Bank of Nigeria (CBN) issued a framework to guide the process. On March 7th, 2023, the CBN approved the guidelines and regulations to support the transition to open banking.
Meaning of Open Banking
Open banking (OB) is a system that allows for convenient access to financial data authorized by customers, which can be easily accessed by third-party financial service providers. With open banking, banks operate such that customers' financial history, like account balance, statements etc. can be shared easily through Application Programming Interface (APIs).
This is similar to the way in which Gmail and Facebook allow users to log into third-party applications by granting necessary permissions for accessing their systems and data. These platforms operate on an open system known as OAuth2 that grants access to user data while ensuring its safety. Open banking mimics the same idea for financial data.
A series of technologies, regulations and services enable open banking to allow developers to create new banking services, and business models, and expand capabilities in commerce. One such technology is APIs. They are software that acts as a middleman between two applications that are not related. It helps them interact and carry out whatever it has been programmed to do.
The Position of Other Countries on Open Banking
About 108 countries including the United Kingdom (UK), India, Australia, Canada, Japan, and Korea, have been operating open banking systems for a couple of years. The UK has remained a model for various financial milestones, like computing in banks and credit cards. The CMA (Competition and Markets Authority), a financial authority in the UK, initiated open banking in 2017. In January 2023, they recorded 7 million consumers and SMEs using open banking-powered technology. Citizens are benefitting from innovative financial management and payment tools.
The United States of America (USA) is also on board with tapping into the possibilities that come with open banking. Although they are still in the early stages, the CFPB (Consumer Financial Protection Bureau) has paved the way and is finalizing the rule-making this year. Three leading financial providers in the USA– FIS, Fiserv, and JHA –had all adopted open bank strategies by 2021.
Open banking in Europe has been rolled out across the continent, up to 87% of countries on the continent offer open banking in one way or another. A trailblazer that has anchored the use of an open banking system in Europe and America, is Plaid.
Plaid floats APIs that allow financial service apps, banks, and card providers, among other stakeholders, to communicate. They have reliable open banking connectivity, with very high uptime and deep coverage. Plaid's network includes more than 10,000 financial institutions that are eligible to use its service.
Some Nigerian companies, Okra and Mono, are fast becoming the Plaid of Africa. They have created reliable APIs to aid businesses to access different industries. Their provision of high-quality financial data is powering businesses by aiding finance management for users, making payments easy, building financial products, etc. With the introduction of open banking to the Nigerian banking industry, Mono and Okra which already anchor several financial service providers will be a top pick as well as a good model for others.
South Korea officially launched the Open banking system in December 2019 under the management and control of the Financial Services Commission (FSC). The services have been enabled for saving banks and credit-card providers but are still pending for financial investment institutions and other digital financial service providers.
Many countries are exploring the benefits of open banking, using versions that work for their population and current financial system. Open banking will hasten the reality of transparent banking and finance in the world.
Benefits For The Nigerian Banking Industry
There are certain risks associated with open banking as with other digitally-driven services. There may be poor security, insider threat, or hacking among other disadvantages. However, the popular Blockchain technology that facilitates the trading of cryptocurrency ( bitcoin and stable coins) also faces similar disadvantages. Yet it remains a useful tool in the world of finance. Millions of people across the world still invest in cryptocurrency and make profits.
The CBN has put the right measures in place through the guidelines for open banking, dictating the responsibilities of API service providers and consumers alike. This will protect customer data and ensure the success of open banking in Nigeria. The downsides of Open banking can be tackled and the world at large will tap into the opportunities it has. Below are some of the benefits of Open banking:
Open banking recognizes that the consumer decides who has access to their data and for what purpose, not the banks. APIs only allow sharing of these data with customers’ consent. It removes the autonomy that has remained in the hands of traditional financial providers (commercial banks).
Products and services will be inspired by the database made available by APIs. Since third-party companies can easily verify and track customer financial history, current balances, and spending patterns, they can make more informed decisions and create bespoke products. Financial technology companies like Everyday Money that lets its users create personalised financial goals and budgets can capitalize on customer-permissioned data to enhances its services. Fund management companies can give financial advice like types of investment for their clients based on their spending patterns.
In the same vein, consumers will now have more financial services and products to choose from.
Faster and Secure Dealings
Gone are the days when lots of paperwork has to be done by the customer before they can access past financial data for other services. Open banking regulation allows the instant transfer of such information from a bank to a third-party, on behalf of the customer.
The use of APIs in Open banking keeps login info secure and encrypts protocols. Therefore payments go through a strong customer authentication before they are authorized.
Funds are now paid directly to merchants via instant bank transfers, eliminating the need for bank cards or charge-back fees, resulting in faster payments and time savings.
Accessing Funds is Easier
Opportunities for users to have their finances easily managed. There will be no need to log in to one app before being able to retrieve funds for a third-party service. The authorization from open banking allows direct transfers at the customers' call. Consumers and SMEs can initiate payments directly from their payment accounts to the bank account of their payee, without the use of cards.
The fintechs and banks can find common ground to work together for consumers. Traditional banks that choose to collaborate will gain a competitive advantage and increase the potential to keep up with new solutions that are much more attractive to the common user.
Financial inclusion will be Boosted
Nigeria has more unbanked citizens than banked. Lots of cash inflows remain undocumented in circulation because of a lack of faith in and accessibility to the traditional financial system.
A signed statement released on Monday by the payments System Management Department of the CBN stated that the adoption of Open Banking will strengthen the financial system in Nigeria and ensure stability. The guidelines are expected to enhance access to financial services in the country. Open banking regulation will encourage the unbanked to tap into various financial service providers because there will be more customer-centric products and services.
Also, open banking depicts more transparency and accessibility, hence, more trust in financial services. The traditional financial system will have to work extra hard to avoid being disrupted by new fintech solutions.
Automation for Businesses
Businesses can automate and streamline their financial processes, such as accounting and compliance. In the USA, APIs connect bank accounts to popular platforms like Cash app, Venmo, and Zelle, so receiving payments can be automated. Digital-only banks that are gaining momentum in Nigeria, like Palm Pay, Opay, Kuda, etc. have an advantage in such automation since they can get financial data with ease. They can use preset features to set up digital accounts for users.
Easy Loan Access
Accurate credit risk assessment can be done with the presence of Open banking. Credit reporting is easier and the more accurate the report is the more likely it is to aid individual and business access to loans. All financial information is in one place and can go directly to lenders for perusal. Third-party financial service providers can be certain that a customer has the financial capability they claim. The Okra API had helped loan apps like Fair money match with low default rate customers. Likewise, Mono helps customers access sustainable loans with evolved credit.
Open banking has benefits for Consumers, businesses, and traditional financial service providers. The regulators have to enforce the best use of it and encourage its adoption across the country. The Nigerian banking and finance industry can be strengthened and improved with Open banking.