On Tuesday, March 7, 2023, the Central Bank of Nigeria issued operational guidelines for open banking. In doing so, it became the first African country to approve open banking, paving the way for what many hope is a catalyst for improved financial services.
Open banking in Nigeria has a fairly recent history. In 2017, a group of financial industry professionals formed the Open Technology Foundation, a not-for-profit organisation with a mission to facilitate the adoption of open banking in Nigeria. Their efforts resulted in the CBN releasing the regulatory framework for open banking, culminating in its approval in March.
Very little is known about open banking beyond financial circles, but businesses and individuals outside financial circles would feel its impact. Techpoint Africa caught up with Yvonne-Faith Elaigwu, a Trustee at Open Banking Nigeria, and she shared her thoughts on the potential impact of open banking in the country. However, not all ideas expressed in this article are hers.
What is Open Banking?
Open banking lets customers grant third-party providers access to their financial data and transactions. Imagine that you have bank accounts with more than one bank, like many Nigerians, but need a loan from a lending startup. Under open banking guidelines, you can allow these five banks to share your financial data with the lending startup so they can make a decision.
The banks grant this access through standardised application programming interfaces (APIs) in a secure manner, having KYCed the providers and signed a service level agreement (SLA) with them. Standardising the APIs removes any friction that third-party providers could face when trying to access this data.
What type of data will be shared in open banking?
Almost every data type held by participating institutions can be shared with third parties. This includes your credit history, transaction history, and any other financial data an organisation has about its customers.
Is my consent required to share my data?
The short answer to this is yes. No institution can share your data with a third party without your consent. According to the CBN's open banking guidelines, "consent shall be required from customers whose data are required to avail them open banking products and services."
How does open banking benefit me?
To understand the benefits of open banking for you as a customer, you first need to know why it is such a big deal. Data is gold in the 21st century, and any organisation or individual with access to the right data can do much with it.
Consider all the data you submit when opening an account with a financial institution. Now imagine all the data they have collected over the years. Your bank knows when your salary hits your account; they know whether you're broke by the end of the first week of the month and that a huge portion of your salary is spent on ride-hailing.
With this data, a third party could offer you salary-on-demand or ride now, pay later. They could offer a savings product where you save a certain amount of money every time you take a ride. The possibilities are endless. In simple terms, they could offer you personalised financial services.
But that's not all. Because third parties offering similar services can access your data and know that others can, there would be increased competition to provide excellent financial services to you. In other words, na them go dey rush you.
Elaigwu puts it this way: "One of the biggest advantages in my mind is that the financial landscape becomes more competitive and innovative. Customers now have a plethora of ways to access financial services, and that means there would be more competition and service providers would try to be more attractive to the customer."
How can I leverage open banking for my business?
It's easy to think that only individuals can benefit from open banking, but businesses can too. For example, a lending startup does not need to give you small amounts of money to determine your creditworthiness. Now they can access your transaction history across all financial institutions where you have accounts and build a profile for you.
On the other hand, businesses also need personalised financial services. This means that a lending startup can build a loan product that finances inventory where the inventory serves as collateral. Furthermore, where they would have previously interacted with different APIs to get information, now they can get all they want with a standardised API. That saves a lot of time and resources.
How does open banking affect my bank?
Although open banking will impact numerous businesses, one sector that would be heavily affected is the banking industry, simply because they have more data on customers than almost any other sector. Sharing that data opens them up to more competition, but Elaigwu argues that only banks that rethink partnerships and competition will survive.
"There are two ways that a bank can react to this. I think that the better way, the more sustainable way to react, is to rethink partnership. If banks decide to treat these third-party providers as partners and not competitors, then this is an opportunity for them to grow and scale. It means that on the back of these third-party providers, they're able to reach even more people. If they decide to take a posture of blocking the competition, there's a chance that they will suffer customer attrition."
Is open banking safe?
Nothing is completely safe, and open banking is no different. As you can imagine, a substantial amount of customer data flows around the open banking ecosystem, and there's the danger of this data being compromised. However, you can be assured that the CBN, which acts as the regulator, is taking the necessary precautions to protect customer data.
How will open banking be regulated?
The CBN is in charge of regulating the practice of open banking. Earlier, TechCabal reported that the apex bank had considered putting the Nigeria Inter-Bank Settlement System (NIBSS) in charge of the open banking registry but decided against the move.
Side note: The open banking registry has been designed to be a bank of sorts housing the details and APIs of participants in the open banking ecosystem.
What type of businesses can participate in open banking in Nigeria?
Financial institutions are not the only group that can participate in the open banking ecosystem. According to the CBN, "any organisation that has data of customers which may be exchanged with other entities for the purpose of providing innovative financial services within Nigeria, shall be eligible to participate in the Open Banking ecosystem." This includes mobile network providers, retailers, eCommerce businesses, travel agencies, and government agencies.