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.

Despite stringent regulations on crypto, the show will go on

This week, two Nigerian banks began blocking the accounts of individuals trading crypto and the accounts of cryptocurrency exchanges. It followed regulation from the Central Bank of Nigeria banning the activity of cryptocurrency exchanges in the country.

It sent crypto exchanges like BuyCoins, Luno, Quidax, etc., which have become immensely popular in Nigeria, into a frenzy; the task before them was to move their money from Nigerian banks before the freezes went into place. It was a curious move by CBN in a week where Bitcoin had hit record highs and coins like DOGE were gaining value.

Ironically, the CBN had some part to play in making crypto so popular. Whatever the intentions, the CBN’s persistence in maintaining an exchange rate for the Naira at N360 to the Dollar for years has led to confusing FX policies. There is a list of items for which importers cannot source FX, and in December, another policy on International Money Transfer Organisations (IMTO) sent Nigeria to the dark ages.

The Nigerian market and the numerous smart players in it are not strangers to the regulators’ heavy hand, and they have some experience working around it. For FX restrictions, importers simply turned to cryptocurrency to buy and pay for items.

The use of cryptos cut the CBN out of the process, and last year, Nigeria traded a little over 60,000 Bitcoins, the second-highest transaction volume globally. If there was any doubt about the veracity of those trades, exchanges like BuyCoins released their reports for 2020, showing massive trade volumes, up from a year before.

Yet, despite the rising popularity of crypto exchanges, the question of regulation remained the elephant in the room. To be fair, it is a conversation that is happening globally. A currency outside the government’s control and has shown such volatility will give regulators pause.

There are two initial questions around the regulation of crypto. The first is who should regulate cryptocurrencies? In Nigeria, the answer falls somewhere between the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN). The SEC has long been skeptical, warning investors off cryptocurrencies in 2017.

Remarkably, the Commission made a turnaround in 2019, stating that it now considers crypto as a legitimate investment class.  The CBN, for its part, has always taken a less enthusiastic view. In January 2017, it issued a circular warning to banks against any transactions in virtual currencies. In 2018, the CBN doubled down and reiterated its warning against digital currencies.

What are the real issues with crypto?

One of the most significant issues around crypto is its semi-anonymous nature. By their very creation, they are designed to operate without an overlord, sovereign, or whatnot. While this is interesting in theory, in practice, it can become a powerful tool in the hands of bad actors; this is the CBN’s argument.

Another issue that builds from the anonymity of digital assets is that it makes it a domain for bad actors to commit fraud. Through fake crypto exchanges, pump and dump scams, Ponzi schemes, and malware attacks, prospective investors can lose money trying to invest in crypto.

In countries where crypto regulations are in place, such as the United States, one workaround reduces some of the anonymity around digital assets. In December 2020, the U.S proposed new regulations requiring crypto exchanges to report anyone’s personal information with transaction values of above $10,000 daily.

This sort of Know Your Customer (KYC) requirement, which some may argue defeats some of the purposes of digital assets, may make crypto exchanges function a bit like banks, which is anathema to the proponents of digital currencies. This could have been one approach that the CBN could have taken, given that it has hinged its concerns on fraudulent transactions and the possibility of using these semi-anonymous assets to finance terrorism.

There are also proposals for crypto assets crossing borders to be reported by exchanges. In some of the regulatory conversations in the U.S, the most significant change would be more KYC requirements. Some may argue that exchanges in Nigeria, some of whom have berated regulators, should have engaged them instead. Others argue that despite the ban, there is still some sense in engaging the regulator now that public opinion is on the side of the exchanges. 

Of course, the ready answer to this would be that when ride-hailing operators in Lagos state engaged the government and relevant regulators for over a year, it yielded no results. It may not be a perfect analogy, but a healthy fear of regulation is a feature of African markets.

How are other African governments approaching regulation?

In at least six African countries, cryptocurrencies are banned. There are bans on all digital assets in Algeria and Morocco with fines that break the existing rules. On the flip side, South Africa, Senegal, and four other African countries have shown progressing thinking in regulating crypto.

In 2016, Senegal launched the eCFA, a digital currency built on blockchain that can be stored on mobile wallets, while Sierra Leone is vocal about its plan to be Africa’s first “smart country.” In South Africa, while crypto is not recognized as a legal tender, the South African Revenue Service (SARS) considers it an asset.

It means that SARS will be open to collecting taxes on crypto, as evidenced by some recent reports that the tax authority asks individuals to disclose crypto purchases in their tax filings. It is an exciting approach that signifies that there will be more regulation.

Regardless of what the regulators in Africa do, crypto has become attractive for regulation to kill it off effectively. What is more likely to happen is that companies and individuals will circumvent these regulations.

A missed opportunity for real control and revenue?

This week, BuyCoins announced that it is back to taking deposits from customers, two days after the CBN threw the exchange an unexpected blow. Early observers pointed out quickly that the CBN’s policy was unlikely to stop crypto trading; instead, it would introduce friction.

If anything, Nigerian founders and companies are familiar with working around infrastructure and policy challenges. In this specific instance, peer to peer trading, which is harder to regulate or control, will become popular.

In the end, it appears that the CBN may have shot itself in the foot, missing a significant opportunity to collect tax revenues or implement KYC measures to have some measure of control. One thing is clear. This is a pyrrhic victory for the regulator, but for the crypto exchanges, the show will go on.

Using Open APIs To Drive Financial Inclusion via Credit Scoring Built on Telecoms Data

Financial exclusion remains a significant challenge in developing economies. It has been shown that access to credit facilities is a strong predictor of financial inclusion. Credit reporting and scoring remain effective tools for both traditional and alternative lenders, however, access to credible credit data and scoring mechanisms is one of the biggest roadblocks that alternative lenders in developing economies face. While some lenders have developed systems that leverage social media analytics and data harvested from smartphones in order to create a scoring system, the poor and vulnerable are still excluded from such scoring systems. There have been significant advances in the use of telecoms data for credit scoring, making it a promising alternative to credit bureau data. However, readily available data is still an issue. With the increase in the development and use of open APIs, telecoms data could be made readily available for credit scoring, while addressing privacy and other issues. This paper is a conceptual paper that proposes a model for the use of Open APIs from telco data for credit scoring that will ultimately increase access to credit, and ultimately financial inclusion in Africa.

Read and download the full paper here.

10 Predictions for Digital Payments in 2021

Now for the fourth year, here are my predictions for digital payments in 2021 with the hope that it offers a better time for everyone than 2020. You probably have heard it a thousand times; 2020 was a shitty year for almost everyone except for technology and especially payments.

Those worst hit by 2020, apart from the folks who lost their lives (may their soul rest in peace even if I don’t believe in the afterlife), are pundits like me whose predictions were thoroughly trashed.

But despite this, we all still look forward to these fintech predictions for 2021; who am I not to serve you a hot dose of fiction wrapped as facts?

Let’s do it!

#1 Visa buys Interswitch for $800m

Earlier last year, before Covid spanked everyone, I laid out an argument that Visa could buy Interswitch. Despite the global pandemic and its attendant economic fallouts in Nigeria, the thought has only become stronger in my head. The reason is that Interswitch has a knack for announcing its massive valuation, just as Naira wants to go bananas. Unlike what everyone believes, Mitchell Elegbe doesn’t own Interswitch; the real owners, knowing that the Switch is hooked to a downward sliding Naira, would be hitching for a payday. Visa, forever married to Nigerian transactions, already owns 20% of the Switch; Naira is now so cheap (if you earn in USD). Plus, the fundamentals of Interswitch are still pretty strong, while not buy it on promo?

#2 Mastercard buys Etranzact

Only a fool would let its most significant competitor decide its fate. If Visa bought Interswitch, and Interswitch runs nearly 100% of Mastercard’s transactions in Nigeria. You can be sure the not-so-foolish humans of Mastercard would probably take their traffic somewhere else. Only Etranzact fits the profile of a replacement due to its basket of licenses.

Disclosure: I own a bunch of Etranzact shares. If this pans out, I’m gonna buy a Maserati.

#3 CBN caves in as MTN gets a PSB license

I made this call last year and I will make it again as part of my predictions for digital payments in 2021. This is a carryover prediction from last year. With Karl Toriola running MTN from March 1, 2021, you can be sure as hell that he will do something as he has a track record of performance, and banking has a track record of minting cash. Marry performance to sashe, and you can be sure as hell that MTN won’t give up until they get this license.

#4 Agent locations surpass 1m

I made the right call last year that agency banking will explode. Despite the Covid pandemic, agency banking grew like wildfire. Opay, which ran into a brick wall with all the other tech services, finally hit paydirt with agency banking doing $1.4b worth of transactions a month. Teamapt is almost pivoting to this as well; fancy fintech be damned. Unofficial numbers of locations hit 530K last year;. At the same time, SANEF seems a bit quiet about a target; I’m sure the market will drag this over to 1m locations before the end of the year.

#5 Interbank transactions cross half a billion a month

I made the call for our Nigerian faster payments to hit 300m per month. I don’t yet know (as of this writing) the number for December, but sweet November saw the industry moving N17t worth of cash over 224m transactions. The pace will continue, and it will cross the 500m transactions per month around August 2021.

#6 Free interbank transfers go mainstream

Kuda made noise about this (and it seems to be working), and Sparkle is now leading the charge. But guess what, a major bank (think Access, GTBank, or Sterling but not UBA) will decide that, hey, let’s blow this sh*t out of the water and make interbank transfers below a certain amount, say N5K, free. Such a move has excellent optics, and most importantly, it’s the singularly free feature nobody can abuse. Think!

#7 Agency banking becomes the last mile for fintechs

Agency banking is messy as hell; you don’t even find them on Twitter or the ‘gram. But who cares? Once the boys of Opay, Capricorn Digital, Teamapt, and others found success, the next is for them to layer a patina of APIs on these connections, and it becomes the real last mile for digital payments. If agents are fully KYCed and have constant location-aware devices, then the physical can meet online for loans, KYC verification-as-a-service, e-commerce deliveries, transfers-to-cash from banks, etc.

#8 Virtual accounts come of age

Some people I know have been cooking virtual accounts for years, but Teamapt, ever the innovation and executioner, quickly brought Providus to the limelight. Now others like Rubies, Zenith, Sterling, Wema, and our Woven + Sparkle are now on the game. Virtual account (vNUBAN) is a little clunky but significantly superior and a more inclusive payment within the Nigerian context than cards. It’s the only payment method that works across all channels. I expect this to blow cards out of the water, although I said the same thing last year, and it didn’t happen.🙈

Disclosure: My company, Trium, owns Woven and a significant investor in Sparkle.

#9 Local investors step to the plate

With practically everyone I know beating themselves up for missing out on the Paystack investment train when it came calling years ago, those with some cash are now seeking out future Shola Akinlades to invests in. The percentage of investment by local investors will grow to be at least 30% this year. But please be warned, dear investor, angel investment is not for the impatient and the weak of heart. Dear founder, not every cash you see is good for your cap table.

Disclosure: I’m a director at Paystack, and nope, my call last year wasn’t a piece of insider information; and thanks, Shola, for making a good example of Nigerians

#10 WhatsApp makes a payment play in Nigeria

With Stripe leading the charge to dip a toe in Nigeria, and it counts Facebook as part of its customers, WhatsApp could expedite its move into payments in Nigeria. All it needs to do is slap a virtual account behind every WhatsApp profile, and the rest is history.

#11 The one prediction 100% to come true

I always say this, and I would say it again: All of these predictions for digital payments in 2021, are at best, educated guesses at what could happen, which isn’t better than a bunch of bananas trying to eat a monkey.

The futility of utility bills for address verifications

I was recently working with a traditional financial service provider to launch a product online. And they insisted on applicants providing utility bills. Then the trouble started! Even though argued strenuously against this, but they also brought valid arguments. So, I had to take a step back to ask; why the hell do we need utility bills to start with?

I’m sure you’ve all experienced this at different times – your bank tells you a sexy story about applying for something, and bam, they hit you with a request for a utility bill. To make it worse, the strident officer across the desk or on the phone doesn’t even know why a utility bill was required.

Before you start cursing at them or berating their bosses, let’s ask – why does anyone need utility bills? Forget about the fact that the officers that ask for these may not know their left hands from their right nostrils; the truth is, there are legal requirements for, not for utility bills, a verifiable address of every customer within the financial services industry.

Thou shalt know your customers

There is an arcane financial rule called Know Your Customer (KYC), which is the same thing your mum does when your sister drags in that funny looking boyfriend of hers. She goes, “Who is your dad? Where’s your family from?”. After taking loans sending her to school, she ain’t gonna risk that for some supposed slimeball.

OK, that’s a little bit over the top.

The rules of financial services require that banks, insurers, brokers, etc., should know their customers well enough. I have previously written a playbook for digital KYC here, so if you like to bore yourself to death, you can read more.

A critical element of KYC is verifying that the customer lives where they say they do. And how do you go about that? Require that they produce a utility bill, issue in their name against the address where they purportedly live.

Like everything Nigerian, we have forgotten the spirit and just tack ourselves to the letter. KYC never require that utility bill must be produced; the utility bill is a means to an end. If you get on the CBN rules for KYC and the SEC rules for the same, there is a gazillion way for a customer to prove the veracity of their address.

What the hell are utility bills?

And what are utility bills to start with? These are receipts from the likes of PHCN, water corporation, etc., that show they deliver some modicum of services to you.

And that’s where all the problems start.

Using utility bills to prove the veracity of addresses in Nigeria is just plain dumb. And there are a gazillion reasons for that:

Most people don’t have utility bills because they don’t even get served any services to start with. Only a few Nigerians have services from recognized billers: Over 100m Nigerians don’t have water delivered to them; 43% of those who have electricity don’t have meters which means no proper bills, And nobody has landlines anymore. After all, NITEL has gone to be with the lord. So, what then do they use?

Many people live in places they don’t have access to the PHCN bills. At best, they know the meter number and use that to buy electricity tokens. As long as the tokens power the meters, who cares if it’s the name of a dog that’s on the utility bill?

Worse still, utility bills can’t be validated, and nobody validates them. Any idiot can just clone a bill, and that’s it. That part is what pains me; why go through the hassles of asking for a utility bill, creating a donnybrook in the process, and you can’t even confirm if that important utility bill is legit or not?

But but but, dearest fintech, before you join me on a foolish quest to bash utility bills, watch your back; you could find out the expensive way when fraud happens on your platform, and the Government asks for your KYC. Kirikiri doesn’t have Gucci uniforms!

How then can one solve the problems of address verifications to meet the requirements of verifiable addresses for customers?

KYC as a service

Over the last few years, a flurry of digital KYC companies, such as VerifyMe and YouVerify, has cropped up in Nigeria. They have pretty solved a few of the problems, but gaps and challenges exist.

First, they are not cheap to start with; the cost ranges from N750 per check and above. Scale that on thousands of customers, and your cost of customer acquisition starts to look like a nightmare. Attempts by a few brave fintechs to have customers to pay for this haven’t gone well. Customers don’t find that cost funny at all!

Secondly, these guys have also not put in the best of names to do the verification for them. I’ve personally seen these guys not able to verify clear addresses that Google, far away in the US, can find with a single click. Addresses that the likes of DHL and UPS can deliver to become impossible unless someone adds “Nearest bus stop or landmark.” Obviously, they use poorly trained officers who can’t find their own names on large billboards.

Thirdly, verifying addresses within gated estates is a challenge. They require that your customers are around or call the gates ahead. And if they can’t get them on the phone (most people don’t pick unknown numbers), then they mark the addresses as unverified, and there goes the N750 verification cost. That’s it!

Lastly, they also save previous addresses, which means even when the addresses ain’t valid anymore, they still validate it, giving those who rely on this feedback a false sense of hope.

Paper OTP as an alternative

Interestingly, while I haven’t tried this directly, I find the methods that Google for Business use for address verification ingenious. They simply post a paper OTP to you, and then if, and a big if, you receive it, you come to enter the code into your app, and we can all rest assured that someone got to your house.

While this sounds nice and interesting, the jury is out on first, the cost-effectiveness of this and the ability to scale it out.