“If a tree falls in the forest and no one is around to hear it, does it make a sound?” This common philosophical thought experiment raises questions about observation and perception.
It was the first thing that popped into my mind when I recently discussed open banking and its impact on the banking and financial services ecosystem in Nigeria.
Open banking in Nigeria has been talked about for quite a while and quite a few fintechs have tried to somewhat hack their way into open banking by providing tools and Application Programming Interfaces (APIs) to aid the development of innovative financial services and applications, with some limited success.
From API rails that would allow access to bank statements to clever OCR tools to convert those statements into data that can be manipulated and turned into useful information, they have helped some fintechs offer services to customers they would normally be unable to serve.
Thankfully the Central Bank of Nigeria (CBN) stepped in and released a regulatory framework for open banking in February 2021 and has followed this up with operational guidelines in March 2023, interestingly, as this CBN regime prepares to leave office.
No matter, open banking is very much needed for the financial ecosystem, especially on the retail side and there is finally regulatory recognition of the important work organisations like openbanking.ng have been doing. There is still a key step the regulator needs to make to make the promise of open banking a reality.
What is and why open banking though? Is it really that important?
Open banking refers to the practice of sharing financial information electronically, securely, and in real-time, between financial institutions and third-party providers. Some of the main benefits of open banking to the financial ecosystem include:
Increased competition: Open banking allows for the creation of new financial products and services by third-party providers, increasing competition in the financial ecosystem. This results in more options for consumers and businesses, as well as better prices and quality of services.
Improved customer experience: Open banking enables customers to access all of their financial information in one place, making it easier to manage their finances. This also allows for personalised financial advice and tailored products, improving the overall customer experience.
Enhanced security: Open banking promotes the use of secure data-sharing protocols, such as APIs, that ensure the safe transfer of financial data between institutions and third-party providers. This reduces the risk of fraud and improves data privacy for customers.
The first benefit to the ecosystem, which ultimately is a benefit to the consumer, highlights the key step the CBN needs to make to accelerate the progress that open banking promises to make. While the CBN has taken cues from other more developed financial ecosystems such as the United Kingdom in developing the operational guidelines for open banking, it has stopped short of legislating the adoption of open banking by the top banks in the country.
This on the surface may not seem like a big deal but when you accept that the top banks in Nigeria – Access Bank, GTB, Zenith Bank, First Bank, UBA, etc. – hold the bulk of the deposits and customer data in the entire banking sector, then it becomes imperative they are a part of the open banking ecosystem.
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Big banks have traditionally dominated the financial market, making it difficult for new players to enter the market. By getting big banks to participate in open banking, it levels the playing field for smaller players and fintech startups, promoting fair competition.
The large banks also hold a significant amount of customer data that can be utilised by third-party providers to create new financial products and services. Mandating big banks to participate in open banking ensures that customers have access to their own financial data and can choose to share it with other providers to receive better services and products.
Finally, getting big banks to participate in open banking fosters a culture of innovation and collaboration, resulting in better products and services for customers.
Clive Humby, a British mathematician, coined the phrase “data is the new oil”, and there are few who will argue with the value of the ease of access to data to making decisions and advancing innovation. The ease of access to financial data is a surefire way to accelerate the development of innovative solutions in the financial ecosystem.
The regulator must take the final bold step of decreeing the opt-in of the key participants in the financial ecosystem to open banking, else we may be left asking if that was indeed the sound of change we heard over the last couple of years.
•Mordi is a former chief operating officer of Carbon (a lending fintech) and immediate past head of digital lending at Access Bank, Twitter: @epmordi