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BusinessDay

Open banking: Opportunities seen for financial institutions, Nigeria

Nigeria’s recent adoption of open banking regulations could create opportunities for players in the financial sector and the economy as a whole, according to experts.

Last week, Nigeria became the first African country to adopt open banking regulations, a set of open banking application programming interfaces designed specifically for the Nigerian financial industry.

Open Banking itself is the process of enabling third-party payment services and financial service providers to access consumer banking information such as transactions and payment history.

“For the banks, they will charge anybody who wants to use their data, making them more money, and fintechs will now have access to more financial data and be able to make more innovative products because they will have a better view of the customers,” Babatunde Akin Moses, chief executive officer and co-founder at Sycamore, said.

He said if banks and fintechs make more money, they pay more taxes, which means more money for the government. “This also increases Gross Domestic Product for the country and will make it easier for the government to trace illicit financial transactions across all banks, in order to curtail actors who might be engaging in nefarious activities,” he added.

Ademola Adesalu, managing director at CRC Data & Analytics Limited, said open banking will support financial inclusion, especially when it is combined with the payment service banks, which targets rural people.

“Once you have any banking transaction, what opening banking will do is 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,” he said.

A report by Allied Market Research said the market size of open banking is predicted to reach $43 billion by 2026 at a growth rate of 24 percent.

On the benefits that come with embracing open banking, Adedeji Olowe, a trustee at Open Technology Foundation, said it would lead to wealth and value creation, which would improve the wellbeing of people.

“Over the years, we have focused on credit data. But with open 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 that will improve the wellbeing of people,’ he said.

In 2017, open banking regulation was initially proposed when industry experts formed Open Banking Nigeria. In 2021, the Central Bank of Nigeria (CBN) released a regulatory framework for open banking.

The following year, the CBN issued the regulatory framework guidelines for open banking. And on March 7, 2023, the apex issued operational guidelines for open banking in Africa’s largest economy.

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Musa Jimoh, director of the payment services management department of CBN, said in a statement that the adoption of Open Banking will foster customer permissioned data between banks and third-party firms to enable the building of customer-focused products and services.

“It is also aimed at enhancing efficiency, competition, and access to financial services in Nigeria,” he said.

The statement also revealed that the regulatory framework for Open Banking in Nigeria established principles for data sharing across the banking and payments systems to promote innovations and broaden the range of financial products and services available to bank customers.

“As a result, 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 for the purpose of accessing innovative financial products and services.

“Open Banking applicability includes agency banking, financial inclusion, Know Your Customer, and credit scoring and rating, among others,” it added.

A recent article by the Open Technology Foundation, said while waiting for open banking, a lot of smart fintechs, such as Mono, Okra, and Stitch (all members of the Open Banking Nigeria coalition), have gone ahead to create innovative hacks.

“But their days of pain are over—they would now be able to provide the industry with more enriched data than is currently available.”

It said open banking would usher in a new age of financial inclusion and financial innovation. “This will cement Nigeria’s lead as a global pioneer in payments and financial services.”

According to Enhancing Financial Innovation and Access, the county’s financial inclusion rate grew to 64.1 percent in 2020 from 63.2 percent in 2018.

The 2020 figure is below the 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.

The World Bank’s 2021 global findex report also showed that Nigeria’s banked population increased by 15.6 percentage points to 45.3 percent. This implies that almost 56 percent of Nigerians are unbanked.

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, according to Olowe of the Open Technology Foundation.

Africa’s most populous nation can take lessons from other countries like the United Kingdom (UK), Australia, and the European Union (EU), which are considered to be the pioneers and top three leaders of open banking.

They have 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, said that the UK had implemented its open banking standard in January 2018, as a response to a report by the Competition and Markets Authority that indicated a lack of competition amongst big banks in the country.

“However, by January 2020, customer use of Open Banking in the UK will have 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 two regulations, introduced increased competition and innovation into the financial services sector.

“Every EU country has a different open banking maturity rate; however, nimble fintechs are 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 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.