Open Technology Foundation, a non-profit organisation, has said open banking technology has the potential to greatly benefit the growth of fintechs in Nigeria.
In a recent report, the organisation said that by increasing reach and capabilities, driving innovation and competition, and improving financial inclusion, open banking can pave the way for more innovative and affordable financial products and services for customers.
“It reduces the need for manual processes and intermediaries. This way, processing financial transactions can become more efficient. Open banking can improve the customer experience by making it easier for customers to access and manage their financial information,” it said.
It added that it is important to note that open banking is not a threat to existing banks, but rather an opportunity for them to collaborate and innovate with fintechs.
“By embracing open banking, traditional banks can stay competitive and offer new and improved financial products and services to their customers,” it said.
According to the Open Technology Foundation, the implementation of open banking can encourage venture capital firms to fund and actively support fintechs that are utilizing open banking.
“By providing access to financial data, fintechs can better serve their customers and as a result, may become more attractive investment opportunities for venture capital firms.”
Open Banking is the process of enabling third-party payment services and financial service providers to access consumer banking information such as transactions and payment history.
In 2017, the 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. This made Nigeria to become the first African country to adopt the regulation.
“Despite the inherent benefits of operating an open banking system, there are concerns about the security and privacy of customers’ financial information within the system,” authors of the report said.
They said it is one of the main challenges with the adoption of open banking in Nigeria. “Consequently, it is important that regulations are in place to protect the data of customers and minimize the risk of fraud or unauthorized access.”
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.
Open banking will support financial inclusion, especially when it is combined with the payment service banks, which targets rural people, Ademola Adesalu, managing director at CRC Data & Analytics Limited, said.
“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.
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 Adedeji Olowe, a trustee at Open Technology Foundation.
Africa’s most populous nation can take lessons from other countries like the United Kingdom, Australia, and the European Union, 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.