Nigeria’s banking system has for many years been dominated by the brick and mortar system of banking, commonly called the traditional banks, which dictated customers’ banking information and related financial data.
This includes the record of how much we spend, save, and borrow – from bill and mortgage payments to essential goods and services.
By law, banks in Nigeria are under obligation to protect the customers against unauthorised disclosure and access to their data. To discharge this responsibility, banks and their staff typically isolate their customers’ data from others by withholding the same.
Fintech innovators can design customised, user-friendly products and solutions bringing speed, lower costs, and greater convenience to consumers
However, for about five years now that open banking has made it into the scene, with the potential to unlock a wave of digital financial innovation and even disruption, it has not been the same again.
Open banking denotes a system for sharing financial products and services. It allows non-banks to offer banking functionality by enabling them to exchange information and/or data, with traditional banks, efficiently and safely.
With open banking, trusted applications (apps) run by third-party providers, can access a banking customer’s information, with the customer’s permission.
This all happens within a secured and standardised framework, using a technology called open banking Application Programming Interface (API). Open banking has proven globally to be game-changing for stoking innovation and enhancing competitiveness in the financial services industry. Nigeria’s consumers of financial services are also now poised to become the beneficiaries of the budding competition in the financial technology (fintech) space.
With so much of people’s lives spent online during the Covid-19 pandemic, individual consumers, and small and medium-sized enterprises (SMEs) alike have become much more open to fintech apps and other non-traditional financial products and services.
It was reported that in the first six months of 2020, the number of users of open banking-enabled apps or products in the UK doubled from one million to two million and grew to over three million as of February 2021. In the US, almost one in two consumers now uses fintech solutions, primarily peer-to-peer payment solutions and non-bank money transfers.
The rate at which countries adopt open banking will obviously vary according to their peculiar circumstances. In Nigeria, open banking is growing with the Central Bank of Nigeria (CBN) leading the way in terms of regulation.
The CBN issued in February 2021 the Regulatory Framework for Open Banking in Nigeria to regulate the activities of participants in the ecosystem as well as specify the guidelines for the APIs. Sometime ago, the CBN further issued the Operational Guidelines for Open Banking in line with the provisions of the Regulatory Framework.
This structure was issued due to the growing integration of banks and other financial institutions with innovators in the financial services space and the increasing adoption of API-based integrations in the industry.
Open banking simultaneously underpins and propels an expanding ecosystem of both financial and non-financial institutions, to access consumer financial data within a regulated environment. This will enable the provision of new financial products and services, based on consumer preference and consent.
For fintech startups, it opens up opportunities to offer competitive banking products and solutions to a wider market. Fintech innovators can design customised, user-friendly products and solutions bringing speed, lower costs, and greater convenience to consumers.
It can also help financial service consumers access their multiple accounts from a single app and monitor their savings and spending. Allowing banks to offer regulated open access to their core banking services through third-party channels via APIs, would enable and encourage greater transparency, flexibility, and competition.
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Some years ago, Nigerians had to visit banking halls and spending precious time waiting for their turn in order to open an account. This is unlike what is obtainable since the introduction of open banking.
Today, with an open banking system, account owners can easily open an account and access other basic banking services. In addition, open banking provides customers with additional flexibility in the way financial products and services are provided and interact among themselves.
Within this more complex and competitive environment, Nigeria would do well to study the evolution of global trends in legislation and regulation to guard against the potential risks with open banking like data privacy breaches, fraud, and cybercrime – for instance in the European Union (EU), the UK, Australia, and India, where governments have by legislation and regulation mandated open banking with the aim of stimulating competition.
In the US and China, it is a market-led movement with companies establishing open-banking relationships among themselves. Singapore is adopting a blend of the two models.
Open banking has transformed the financial services market, the participants, and the customers in just a few years. Just like the internet began somewhat unusual, but then went on to revolutionise modern reality, open banking has the potential to reinvent modern financial services.
It will be exciting to see the several innovative banking products and solutions open banking will bring to the Nigerian financial services industry in the coming years.
Hence, we urge that to enable open banking to achieve its desired objective, the National Assembly should as a matter of urgency and global standard pass the Data Protection Bill into law.
