With the ever-evolving climate of the financial industry driven by rapid advances in technology, customer expectations, and new business models, there is a constant need to deliver services that push the envelope of traditional banking. The case made for financial inclusion by the Nigerian government has been a major factor that has encouraged innovation and has enabled financial service providers make huge strides in the sector. However, despite these efforts, innovative financial services technology firms (FinTechs) face increasingly difficult barriers in their bid to provide services to consumers.
It is against this background that the Central Bank of Nigeria (CBN), released a Request for Information (ROI) document on 14th of May, 2019 aimed at guiding the development of the Payment Systems Vision (PSV) 2030. Currently, the industry is working with the PSV 2020, which will expire at the end of 2019.
According to the apex bank, this is necessary because the importance of having a strategy that is relevant to the Nigerian market domestically and for regional and global markets is essential to the development of a healthy financial sector. In its ROI, CBN prioritised Open Banking in the development of PSV 2030 as it considers the concept as one of the top global trends and new practices in payments which should be considered in Nigeria.
Open Banking is a collaborative model in which banking/financial data is shared between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace. In simpler words, it means that no matter how many accounts and financial products a customer has and uses, he or she can view and manage them from a centralized location/mobile application. For this to exist, financial institutions will require an Application Programming Interface (API). An API is a simple and standardized means by which technology platforms from different vendors or locations communicate with each other. However, APIs become useful only when entities agree on common standards that govern the access being granted and the exchange of information. A typical example is the Simple Mail Transfer Protocol (SMTP) that allows the sharing of emails between different computers/phones and platforms regardless of the email or platform used.
The Impact of Open Banking.
The success anticipated with the advent of Open Banking can only be achieved when the challenges it brings up have been addressed. The major challenge that banks face is the risk of disintermediation by third parties. This will in particular affect the banks’ ability to retain their customers, since third parties have direct access to such customers.
In addition, banks face the risk of losing significant control of the system. This is mainly related to security-related challenges of an Open-API, such as potentially fraudulent third parties, digital intrusion, personification, illicit use of data and customer privacy concerns. A significant risk that also needs to be clearly monitored is that of cybersecurity. Providing security of funds and personal data are the core pre-requisites for the financial industry by means of transactional and custodial services. Banks therefore need to consider how to set up a risk-management governance model to ensure that participating third parties does not expose them to cyber risks and damage their reputations.
Another challenge relates to the revenue-related facets of Open APIs, which pose a range of technical challenges to banks. These consequences could include deterioration of the customer base to the point that banks may not be able to benefit from economies of scale anymore. As a result, banks whose business models rely on high-scalability will experience cost pressure due to decreased volumes.
On the surface, Open Banking threatens the monopoly that banks have over their customer’s financial and non-financial data but this is looking at the innovation from a narrow perspective. There are benefits that this service provides and it includes:
- Third Party Provider’s (TPP’s) will become interoperable with banks and this will enable technology companies to focus on providing services such as exciting user interfaces and functionalities which banks have not been able to do over the years while banks focus on the financial aspects rather than both parties having to undertake each other’s job.
- Cost-saving for TPPs/Fintech: TPP’s tend to spend more money, time and effort connecting with banks one after the other given the disparate interface specifications of individual banks. Open Banking enables a TPP to invest in the implementation of the approved industry API only, thereby saving finance and gaining first-to-market advantage.
A new revenue stream for banks who would charge TPPs for customer data access, per transaction.
Experts have envisioned that Open Banking will change the face of banking in Nigeria, the same way the standardization of Automated Teller Machines did. Reports state that after banks pushed aside their differences and came together to form Interswitch, the ATM scheme became a big success in Nigeria. The reasons for such a huge success includes an open standard protocol for the ATMs and cards. Similar efforts between banks have proved successful with the likes of point of sale machines (POS), interbank transfer etc. Open Banking will have a great impact in the transformation of the financial industry, beyond ATMs and interbank transfers. With access to more information and data, it is expected that banks and Financial Technology (FinTech) companies will be better equipped to expand their sphere of innovation.
For customers, Open Banking will offer more choices and enable greater control for customers across all their bank accounts. Some of which include having the opportunity to make direct payments online without the use of cards. As part of the protections in place by the regulatory bodies in Nigeria, NITDA mandates that customers who want to share information or make payments this way will need to give clear consent to the third parties whose services they want to use. This is to ensure that customers’ data are not breached or misused.
Financial Technology companies would also have an equal chance to compete with larger rivals as Open Banking APIs make it possible for them to develop innovative products, target niche or wide segments of the market and go into partnership with other financial institutions.
Although there is currently no comprehensive regulatory framework for FinTech services and operations in Nigeria, some Central Bank of Nigeria (CBN) and National Information Technology Development Agency (NITDA) regulations have effect on the industry, albeit very narrowly. With regard to Open Banking, the closest thing to a regulation is the Nigeria Inter-Bank Settlement System (NIBSS) position paper on Open Banking; however, this cannot be regarded as a regulation but can only be deemed the organisation’s point of view on the technology.
In considering other jurisdictions, the recently released Payment Service Directive II (PSD2) regulation by the European Union (EU) served as the springboard for Open Banking in Europe. With PSD2, banks are mandated to provide access for third parties to initiate payments (Payment Initiation Service, PIS) and retrieve account information (Account Information Service, AIS) on behalf of the banks’ customers. The PSD2 regulation in conjunction with the EU regulation on General Data Protection Regulation (GDPR), allows third parties to access a customer’s bank account, but under very strict rules.
It is evident that the success of Open Banking will create more liquidity, open up the digital financial services market to more opportunities and provide greater access to all participants.
Taking into consideration other jurisdictions, the most programmatic approach has been taken by the European Union through both Payment Services Directive (PSD2) and a broader effort to foster competition in retail banking by adopting the United Kingdom’s Open Banking Standard. A key provision of PSD2 aims to foster competition and innovation for payments service provision in the European Economic Area by opening account access to nonbanks.
Currently, a body called Open Banking Nigeria creates support systems for Open Banking within the Nigerian financial space, advertises its benefits and its abilities to bring about an increase in markets significantly, and to also ease the burden of adoption by banks. Open Banking Nigeria has developed an open, independent and free standard APIs for all to embrace and has also given FinTech companies the opportunity to develop.
Going forward, we encourage all key stakeholders to take advantage of the possibilities this service offers by developing APIs that will meet the necessary demands, both in leveraging mandated third-party access and potentially extending access beyond statutory requirements.
Nevertheless, knowing that development bears its own challenges, it is anticipated that the Open Banking system will raise legal questions, including those relating to cyber security, privacy and data protection, amongst others.