Nigeria is Africa’s open banking pioneer

One of the predictions for Nigeria’s banking sector in 2021 was that Open Banking would finally make some headway. It was an important prediction when you consider that for years, quite a lot of global industry players have said that open banking is the future. 

Open banking is the idea that established banks should share the transaction data of customers with other financial service providers (FSPs), challenger banks and other third-parties recipients. For such a simple idea, its implications for banking are huge. 

One way to look at it is that some of Nigeria’s biggest banks have been around for years and have millions of customers. Despite their market dominance, they have often been criticised for not providing retail banking or innovative products. 

Most of that innovation has been left to the newer fintech players who have unbundled traditional banking services. PiggyVest and Cowrywise help you save money, Eversend helps you with cross-border transactions and over 30 digital lenders provide unsecured loans. Challenger banks like Sparkle, Kuda and Rubies also tout new ways of banking. 

While these startups have made significant progress, they still get smashed by banks. For instance, last year, Fairmoney, a digital lender in Nigeria, disbursed a total loan value of $93 million, a 128% increase compared to 2019. While that figure makes it one of the biggest digital lenders in Nigeria, when compared to traditional banks, it falls all the way to seventh place. 

Central Bank’s regulation on Open banking

One of the most important issues with the regulation of open banking is data and how the data of customers will be handled. According to the CBN, the open exchange of data and services through APIs will be divided into four categories. 

Each category contains a specific set of information with a particular risk level. For instance, Market Insight Transactions (moderate risk level), include statistical data aggregated on the basis of products, services and segments used by customers. But it will not be associated with any individual customer or account.

Access to these categories of information will be open to four participants as well; on one end are participants that do not need to have a regulatory licence. Participants like this will not be able to access information that is high risk.

The participants in CBN’s regulatory sandbox will have access to some low and high-risk data like Personal Information and Financial data (PIF). Only players with regulatory licences will have access to the most sensitive information like personal information and financial transactions or data. 

The participants that will access this kind of information are mostly deposit money banks. It is a sign that the CBN is aware of what the attendant risks are as it also goes on to state the requirements for every participant level. 

APIs and Common Standard 

One of the key issues in open banking is also the creation of a common standard for APIs and most of the work in this area has been led by private organizations like Open Banking Nigeria (OBN), which I founded with other stakeholders in June 2017. 

I founded OBN to drive the advocacy for open APIs, define an open set of APIs needed for a common API standard, as well as provide a sandbox and other testing tools for certification.

In 2018, we published our first set of API standards, and today it has members like Paystack, Interswitch, Flutterwave, Teamapt, Wallet Africa, among others. While this initiative is great, regulation is necessary for a space like this, and CBN’s regulations are a step in the right direction. 

What’s likely to happen next? The ball has been set in motion and the guidelines say that a common standard as well as an open banking registry will be created in the next 12 months.

Using Open banking to drive financial inclusion

By sharing customer data, fintechs can create products and services that work for financially underserved and excluded individuals. One of the areas where there’s a lot of promise is access to credit, which I’m extremely passionate about.

Although digital lenders are getting even more popular in Nigeria, only a handful of people have real access to credit. One limitation digital lenders face is access to data points that help them score credit risk for individuals. 

Many lenders use workarounds like giving small amounts to customers and gradually increasing the loan amounts. This strategy discourages people who want to afford bigger loan sums, and customer transaction data can solve this problem. 

There’s also the issue of how the need for extensive documentation excludes low-income customers from banking access. If open banking is expanded to telecoms for instance that registers customers for SIM cards, they can share these registration details with fintechs and eliminate the need for more KYC forms. 

When KYC is sorted, it will help the millions of gig workers in Nigeria. In Lagos for instance, it isn’t uncommon to meet carpenters and mechanics without bank accounts. Open banking can help workers like this access more personalised services and eliminate the obstacles to accessing financial services. 

It will get a mind-boggling level of integration to make this happen and this is where Application Programming Interfaces (API) come in. 

What have APIs Got To Do With It? 

One of the easiest ways to understand APIs according to one writer is that “it helps let companies leverage years of other companies’ work in seconds.” APIs let programs talk to each other and most times, we see them used extensively for internal purposes. 

Internal APIs are used to do complex things within a company while public APIs open up datasets so that other people can build on top of them. Consider the amount of integration that will be required for all of Nigeria’s banks to share information and you’ll start to see why APIs are the easiest way to make it happen.