“Open banking will deepen financial inclusion in Nigeria." – Uzoma Dozie, Sparkle CEO 

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October 16, 2024
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4 min read

Access to information is one of the most significant developments in human history, driving new business models and accelerating innovation.

However, the banking sector has traditionally lagged behind, often operating in silos that restrict information flow between institutions and customers. This is rapidly changing, as regulators and innovators advocate for open banking worldwide.

By allowing third parties to access essential financial data, open banking compels traditional banks to enhance their services, according to Uzoma Dozie, CEO of the Nigerian fintech company Sparkle.

“Open banking will force the big banks that have capital to actually upgrade and revolutionise their services to keep their customers, which is good for the system. Because if they don’t do that, most of their customers, especially the new generation ones, will leave them and go to others,” he notes.

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Thanks to their long-standing relationships with customers, traditional banks hold a wealth of information that can be costly for new entrants in the financial services sector, such as fintechs, to acquire.

The difficulty associated with collecting that data has acted as a protective barrier for traditional financial institutions, but the widespread adoption of open banking will force banks into one of two positions: enhance their value proposition or risk being left behind.

A win for customers   

The biggest winners in the open banking revolution are customers, who will no longer be tied to a single financial institution. Instead, they can choose service providers that best meet their needs. This shift will also lower the cost of financial services as institutions compete to attract customers.

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Open banking also creates new business opportunities, as data collected by other digital businesses can now be leveraged to improve service offerings. Data from government agencies, for example, can now be accessed, enabling more efficient customer onboarding and potentially derisking services such as lending.

Open banking presents significant opportunities for increasing access to credit. It reduces the cost of lending as all data points that lenders need to make lending decisions can now be accessed faster and without individual institutions embarking on personalised data gathering. This will in turn unlock increased financial activity in the economy.

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“The reason nobody lends to small businesses, which are the engine of growth, is because I don’t have enough information on them, or all their business is with a bank that does not know how to lend to small businesses, or their credit policy does not allow them to lend to small businesses because of their risk assessment criteria.”

“If there’s a small business customer that has been banking with one of these institutions for the last five to ten years and has been loyal in terms of doing all their business with them, all I have to say is okay, give them instructions to allow me to pull your data so I can take it into my credit engine, and then I will start lending to them today instead of in six months.”

Deepening financial inclusion in Nigeria has been a major policy drive over the past decade. While progress has been made on that front, the high cost of providing financial services to underserved individuals remains. According to Dozie, many of these costs can be mitigated by adopting open banking, as financial institutions don’t necessarily have to start from scratch to provide financial services.

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In March 2023, the Central Bank of Nigeria issued operational guidelines for the use of open banking in the country. They covered eligible organisations, responsibilities of participants in data security, and the use of intellectual property.

However, since the release of these guidelines, there has been little communication from the regulator regarding the next steps. Dozie argues that for open banking to realise its full potential in Nigeria, there needs to be effective customer education about its meaning. He further suggests that the lack of such education could be contributing to the current delays.

“I believe it is a question of just dotting the i’s and crossing the t's. There’s no point launching anything if the people to benefit from it most do not understand it and have not asked questions. That’s what I think, but from a technical point of view, that has been done.”

Open banking will ease business among financial institutions   

Open banking will lower the barriers to entry for new financial institutions by providing them with the same data sets as larger financial institutions. While there are concerns that this could affect partnerships between banks and fintechs, Dozie contends that it would accelerate partnership conversations.

“The beautiful thing about open banking is that it is like we have agreed on the type of plugs that we are all going to use to talk to each other. All players are responsible for coming up with APIs for certain services that conform to a certain standard.”

Another key benefit of open banking is the reduction of multiple points of failure. With each financial institution operating its own set of procedures and security measures, the complexity of transferring data between banks and service providers increases the likelihood of errors, delays, and breaches.

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However, with open banking, uniform standards ensure that everyone follows the same secure processes, reducing the risk of data loss or corruption during transactions. Beyond reducing points of failure, open banking will also ensure that customer's data is protected, as all participating institutions will be required to conform to a specific standard. “It removes that subjectivity and makes it objective. You don’t decide how much data you want to collect. No, this is the standard that has been agreed based on the policies of data privacy in Nigeria.”

Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
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Accidental writer, covering Africa's startup landscape and its heroes. Find me on Twitter @chigo_nwokoma.
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