Open Banking in the Nigerian Financial Sector
Introduction
A few years ago, we were not able able to withdraw with our ATM-cards from other banks. This flexibility and ease that we probably have taken for granted as a result of open banking. With open banking, authorized third-party providers can help you save your money and you can borrow as well as pay easily. At the moment, Open Banking is already gaining ground in several countries like Singapore, US, Iran, Australia and Nigeria to mention a few.
Perhaps, you may wonder how this concerns us. The truth is, we are the goal of the subject-matter here which is ensuring digital convenience and ease and thus it is important for us to be fully aware of latest developments and perhaps to know more about this area of FinTech called Open Banking.
According to Wikipedia, open banking is a part of FinTech that utilizes open-source information in making (Application Programming Interface) APIs enable third-party developers to build applications and services around financial institutions as well as displaying greater transparency to account holders. Investopedia also explains it as, “Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).”
From this, in plain terms, Open Banking is a system in which banking data is shared between unaffiliated parties for an optimal degree of customer experience and banking services.
How it Operates
Following the adoption of PSD2 (Payment Services Directive 2) in the UK which facilitates and encouraged the use of online and mobile payment through open banking, to a large extent it can be said to have largely catalyzed Open Banking to the world. The imbibing of GDPR (General Data Protection Regulation) in the EU is also a milestone in data protection and privacy.
Initially, banks a bid to relate with customers did so manually, and that has over time, proven to be very stressful coupled with a low rate of ease and customer satisfaction. This present age is blessed with digital advancement and one of the many derivatives of this is which a lot of banks have openly embraced. Initially, FinTech was not a hit with the banking system as there was some scepticism by banks towards on its reliability of it and a few other factors. However, the need to generate Electronic Invoices as well as other banking documents, securing customer data, the need to provide banking services to a largely unbanked population and many more are some of the reasons several banks are partnering with FinTech companies.
Open Banking Ecosystem refers to all the elements that facilitate the operation of Open Banking. This includes the API Standards, the governance, systems, processes, security and procedures used to support participants. API is the protocol and system through which software and applications are built and how such interact. However, to maximally extrude the beauty of Open Banking, a common API standard is needed so as leverage to facilitate digital payment and financial inclusion in Nigeria. Application Programming Interface (APIs) helps in data sharing and is the system through which data is shared in a controlled and at the same time seamless manner. In an interview with The Lead Programmer of Adisotech Hub (a start-up web developing company in Nigeria) on the practicality of API to a common man, he says- “it is API that allows users to get their details from their bank’s database”.
Challenges
The basic challenge, from which all others stem out, is a standard and unified body of regulations. Banks are sometimes taken aback by sharing their customer’s data to third-parties like FinTech companies, labelling it as a risk. And that is quite understandable because they also owe their customers a duty of data privacy and protection. But nonetheless, this calls for collaboration between banks and certified FinTechs about data privacy and the legal/regulatory framework. On this note, a deep interaction is to be made with programmers and cyber-security experts to protect against fraud and hacking.
Following the discovered scandal of Facebook– how individuals’ data is being utilized without their consent, this further stresses the need for Open Banking to come to the fore. With Open Banking, there is the effective management of data as customers’ to a large extent determine by themselves what they want their data to be used for and what not to.
Commendably, in 2018, the monetary authority in Hong-Kong instituted an industry consultation on its Open API Framework- this was a bid to define standards and set the benzene ring of cordiality and unity among banks. Nigeria is not behind too as the CBN has implemented the Bank Verification Number (BVN) system, Nigeria Uniform Bank Account Number (NUBAN) and others
Innovations
According to a survey carried out by Oracle, 68% of consumers want to have their financial cycle on a digital platform. To this effect, Open Banking has brought about a lot of innovations to ease the financial institution and the users. Now Customers have more access and control over their data. In clear terms, customers can now clearly and see their transaction history through open records and Electronic Bank-statements, they can make inter-bank transfers without stress another or interruption. Customers can also access all of their Bank accounts through a centralized digital platform; they can secure their account against frauds through fingerprints and passwords. Thus there is the need for cooperation between banks and FinTech companies to ensure seamless and innovative user experience.
With the way WordPress has saved an average blogger of writing code, such a system should be built to enable regulators and financial institution workers work more with simplifying APIs. Financial institutions like Standard Chartered Bank, have an internal training day called ‘API day’. Here, staffers and stakeholders ask questions and get more insight into how these things work. Other Nigerian banks are encouraged to follow the trend. The Advent of FinTech start-ups like Swipe, Branch, Wallet is a pointer to the metamorphosis of the Nigerian financial community into digitalization.
Conclusion
The buoyant survival of banks in near distant future heavily depends on their diversification dexterity in keeping up the institutions with traditional financial strategy/management as well as huge investment and embracing of digitalization. Therefore, traditional financial institutions should adopt a business model that is in sync with the digital age.
It is interesting to note that Open Banking is an index in the determination of a country’s rank in Ease of Doing Business and so, the more we engage it in Nigeria, the higher we are internationally ranked. Also, to realize the Financial Inclusion Goal of CBN, the financially excluded 40 million Nigerians could only be brought into the ecosystem with open banking!
In conclusion, all hands need to be on deck, ranging from the government to financial institutions, FinTechs, programmers and even users. Together, Nigeria will enter the niche of high-ranking countries with business convenience, ease and best user experience!
John Fawole is a legal content writer and a Law undergraduate with interests in FinTech, IP and Corporate Law. He loves to research and read current developments in technology and the necessary areas of law. He is currently interning at Ashurst LLP. You can reach him via Gmail- johnfawole18@gmail.com
This quite educative.
This is quite educative.
Brilliant write up, John.
I believe FinTech startups are putting the traditional banking system on its toes. Not to lose customers, banks are now putting more resources in the hands of customers. Though this is still limited and more should be done.
But the fact that these startups operate at international standards force our banks out of their shells.