For decades, traditional banks in Nigeria have had a monopoly over their 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.
In turn, banks are mandated by law to protect against unauthorised disclosure and access to their customers’ data or information. To discharge this responsibility, they have typically isolated their customers’ data from others by withholding the same. However, half a decade in the making, open banking has made it onto the scene, with the potential to unlock a wave of digital financial innovation and even disruption.
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 standardized 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 more of our lives spent online during the 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. CBN has recently issued in February 2021 the Regulatory Framework for Open Banking in Nigeria to regulate the activities of the participants in the ecosystem as well as specify the guidelines for the APIs.
Just last week, the CBN further issued the Operational Guidelines for Open Banking in Nigeria in line with the provisions of the Regulatory Framework. This Framework 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 will simultaneously underpin and propel 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.
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For fintech startups, it opens up opportunities to offer competitive banking products and solutions to a wider market. Fintech innovators can design customized, 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.
To appreciate the possibilities of open banking, one need only recall that only about a decade ago, of necessity, banking customers had to visit a brick-and-mortar bank location to open an account and access other basic banking services.
Open banking will provide additional flexibility in the way financial products and services are provided and interact amongst 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 United Kingdom, Australia, and India, where governments have by legislation and regulation mandated open banking with the aim of stimulating competition.
In the United States 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 unspectacularly, but then went on to revolutionize 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.
However, 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.
Obi, a partner in the banking and fintech department of Perchstone & Graeys, writes from Lagos
