How Open Banking initiative can advance Nigeria’s financial inclusion

Experts in the financial industry have urged Nigerians to leverage on the opportunities of open banking initiatives to boost financial inclusion in the country.

Open banking is the process of enabling Third-Party Payment (TPP) services and financial service providers to access consumer banking information such as transactions and payment history.

According to a document by PWC, it provides guidance on how TPPs can access and utilise customer bank data in a standard format to provide more open, transparent and competitive banking services.

“To put it in straightforward terms, it means that no matter how many accounts and financial products a customer has, he/she can view and manage them from a centralised location,” it stated.

Ademola Adesalu, the managing director at CRC Data & Analytics Limited in a TV interview monitored by BusinessDay said open banking will support financial inclusion especially when it is combined with the payment service banks which targets the rural areas.

“Once you have any banking transaction, what opening banking will do is to liberalise the data in that particular area, where organisations will now build systems that will allow data to be captured and analysed, so that you can profile somebody that is unknown and now prefer which financial product or service that is good for that person,” Adesalu further explained.

Similarly, a recent article by Open Technology Foundation noted that the presence of data-driven insights through an Application Programming Interface (API) powered process, builds the confidence required for decision making, fast tracks the processing turnaround time and ultimately leads to more productive use of resources by financial institutions.

“This way, banks can get an immediate picture of the financial stability of their customers and greatly improve financial inclusion.

Data from Enhancing Financial Innovation and Access (EFInA) shows that Nigeria’s financial inclusion rate grew to 64.1 percent in 2020 from 63.2 percent in 2018.

The 2020 figure is below the Central Bank of Nigeria (CBN)’s 80 percent financial inclusion target for the year 2020.

Although the inclusion rate dropped marginally from 36.8 percent in 2018 to 35.9 percent in 2020, the excluded adult population of 38.1 million reported in 2020 was higher than the 36.6 million recorded in 2018, meaning 1.5 million adults fell into the exclusion circle in the last two years to 2020.

As the world continues to evolve and payments become increasingly digital and mobile, consumer yearns for the flexibility, convenience, and simplicity that they have come to see as usual, for their banking services, says Adedeji Olowe, a trustee at Open Technology Foundation

“While a number of fintechs continue to innovate, it is apparent that without a common API standard, the barrier to innovation, especially in developing regions of the world like Nigeria, would continue to hinder the expansion of digital payments and by extension, financial inclusion,” Olowe said.

In May 2022, the CBN issued the regulatory framework guidelines for open banking in Nigeria. According to the Apex bank, it will promote innovations and broaden the range of financial products and services available to bank customers.

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“Open banking recognises the ownership and control of data by customers of financial and non-financial services, and their right to grant authorisations to service providers to access innovative financial products and services. This is anticipated to drive competition and improve access to banking and payments services,” CBN stated in a press statement.

A report by Allied Market Research, predicts that the market size will reach $43 billion by 2026 at a growth rate of 24 percent.

Africa’s biggest economy can take a clue or lessons from other countries like the United Kingdom (UK), Australia, and the European Union (EU). Considered to be the pioneers and top three leaders of open banking, they introduced a series of reforms and worked with their regulators to create optional conditions to accelerate migration towards open banking.

For example, Tarabut Gateway, a regulated open banking platform stated that the UK had implemented their open banking standard in January 2018, as a response to a report by the Competition and Markets Authority (CMA) that indicated a lack of competition amongst big banks in the country.

“However, by January 2020, customer use of Open Banking in the UK has surpassed the one million customer mark. The country is ranked first in EY’s Open Banking Opportunity Index, which assessed the readiness of 10 different markets around the globe to foster a vigorous open banking environment.”

Secondly, the EU, where open banking emerged from the Payment Services Directive 2 (PSD2) regulation, introduced increased competition and innovation into the financial services sector.

“Every EU country has a different open banking maturity rate, however, nimble FinTechsare quickly disrupting the financial services sector overall. We have seen innovative third-party developers gravitate towards the European markets due to the clear standards and regulatory certainty for open banking.”

Lastly, Australia also opted for a regulatory-driven approach which has proven to be critical in getting consumers comfortable with open banking.

“The Customer Data Right (CDR) legislation aims to provide a legal framework for the country’s open banking regime. It requires banks to make a range of consumer-permitted financial data available to competitors,” Tarabut Gateway added.

As countries latch on to this need to develop and advocate for open API standards, usually by regulators, some of us in Nigeria have come together to work with stakeholders to do the same, Olowe says.

“The need for open banking in Nigeria is even more critical than just convenience; it is the only hope for over 40 million Nigerians who are financially excluded but who can be included within the formal financial ecosystem by services that are developed by fintechs and powered by open banking,” He further said.

On the benefits that come with embracing open banking, Adesalu said it would lead to wealth and value creation which will improve the wellbeing of people.

“Over the years, we have focused on credit data. But with opening banking and the associated framework and guidelines, we will now be able to move to other types of data to be able to advance lending and create new financial products and services which will improve the wellbeing of people.”

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