The Need for Open Banking

Ugo Aliogo in this report writes on how open banking will drive innovations in the financial space for fintechs and banks
Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry. Open banking, banks allow access and control of customers personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then use the customer’s shared data (and data about the customer’s financial counterparties). Uses might include comparing the customer’s accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles, or making new transactions and account changes on the customer’s behalf.

It has been argued that open banking would be a driving force of innovation in the banking industry, therefore by relying on networks instead of centralization, open banking can help financial services customers to securely share their financial data with other financial institutions. For example, open banking APIs can facilitate the sometimes-onerous process of switching from using one bank’s checking account service to another banks.

The API can also look at consumers’ transaction data to identify the best financial products and services for them, such as a new savings account that would earn a higher interest rate than the current savings account or a different credit card with a lower interest rate.

Through the use of networked accounts, open banking could help lenders get a more accurate picture of a consumer’s financial situation and risk level in order to offer more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before taking on debt. An open banking app for customers who want to buy a home could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide. Another app might help visually impaired customers better understand their finances through voice commands. Open banking can also help small businesses save time through online accounting and help fraud detection companies better monitor customer accounts and identify problems sooner.

The United Kingdom has taken the lead in open banking initiatives, in producing an open banking framework that could enable the open banking standard in the UK. This has also prompted the CMA to draft the recommendations in its final report released in 2016. According to the report, large banks are to adopt and maintain a common standard for open APIs, to address the lack of innovative and competitive products in the financial market.

In Europe, the Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR), which have been designed to regulate financial innovation, are driving Europe towards an open banking standard.

Other markets such as the US, Latin America and Asia have been experimenting with open banking in pockets and have expressed strong interest in pursuing technological advancements in the financial services industry.
CBN and Open Banking

In furtherance of its mandate for the stability of the financial system and pursuant to its role in deepening the financial system, the Central Bank of Nigeria (CBN) developed the regulatory framework on open banking in Nigeria. Having observed the growing integration of banks and other financial institutions with innovators in the financial services space and the increasing adoption of Application Programming Interface (API) based integrations in the industry, it has become expedient for the Bank to provide appropriate framework to regulate the practice.

According to the CBN, the opportunities presented by open banking for enhancing financial inclusion, improving competition in the financial services space and promoting efficient services are compelling cases for the implementation of open banking in Nigeria. The Bank is committed to adopting beneficial international standard practice in the Nigerian Banking Industry with due cognisance given to risk management and applicability in the Nigerian environment.

The Apex bank issues the regulatory framework for open banking in Nigeria to foster the sharing and leveraging of customer-permissioned data by banks with third party firms to build solutions and services that provide efficiency, greater financial transparency and options for account holders and to enhance access to financial services in Nigeria.

Speaking on open banking regulatory framework, the Director, Payment System Management, Central Bank of Nigeria, Musa Jimoh, said the framework establishes the principles for data sharing across the banking and payment ecosystem, noting that it would also drive innovation, and broaden the range of financial products and services and deepen financial inclusion.

He also stated that the framework provides among other things data and Application Programme Interface (API), access requirements, principles for API, data, technical designs, and information security specifications.

He said the directive was in line with the apex bank’s five-year vision and open banking regime policy that would require more collaborative data sharing within the industry to bring more people into the financial system.

He described Fintechs as technology-enabled innovation in financial services that could result in new business models, applications, processes or products with material effect on the provision of financial services.

Jimoh said: “Eventually, when we embark on a full open banking regime, we will take care of the main concerns of customers. One of the main aspects of the open banking regime is the registry.

“The current framework has already indicated that the bank will be engaging the industry stakeholders to come up with defined guidelines on how a number of the positions of the framework will be translated into operations. The open banking registry which will ensure transparency and ensure that customers can look up and know who they are dealing with.”

The issue of open banking was once again brought to the front burner of discourse at the First Bank of Nigeria Limited, virtual meeting on the bank’s FinTech Summit 5.0 event with the theme: Open Banking and it’s derivatives Opportunities in the Financial Ecosystem.

Speaking at the event, the Managing Director First Bank Nigeria Dr. Adesola Adeduntan, has reiterated the commitment of the bank to continue supporting start-ups and innovators in the Fintech space by providing relevant data and infrastructure to enable them scale appropriately.

He said that the summit was organised to create a global platform for conversations around the future of innovation in the financial services sector and specifically in the financial technologies space.

Adeduntan said that the objective was to contribute to the rapid evolution in the banking and financial services delivery angle of the economy.

According to him, “The summit gives us a very good platform to hear from leading experts in the space; because open data, cloud technology, artificial intelligence and the way they operate together to create the right environment for innovation or evolution is becoming important.

“For us, Open Banking demonstrates the practical fusion of these variables presenting potentials that can redefine product development, customer experience and overall value creation within the financial services system.

“With significant multiplier effect, not just for players but also for consumers of financial services products. The regulatory framework for open banking in Nigeria, as issued by the Central Bank of Nigeria (CBN) on the rules and regulations which financial services can take place across the system.”

The First Bank Boss hinted that NITDA and the data protection regulations are indications of regulation around open banking.

He added: “We believe there is enough space for continuous innovation and for us as an economy to rapidly embrace this in the view to materially upgrading the quality of financial services in Nigeria. As an institution that is over 127 years old, our bank has series of industry transformation and would continue to play a leading role in forging the conversations on refining regulatory frameworks and shaping the industry not just for open banking but for all contemporary issues to back our industry.

“We will also continue to demonstrate our support for start-ups and innovators in the Fintech space by providing them with relevant data, support and infrastructure to enable them scale appropriately, through our SMEConnect platform.”

Lead, Tekedia Institute, Prof. Ndubisi Ekekwe, said the key to innovations in the financial industry is for banks to build better data system to help us understand the numbers, adding that across market ordinances and segments companies fix frictions which exists between customers.

He also noted that the knowledge systems that can be acquired through open banking ordinance would only affect the financial services, it would have capability to improve the mortgage system and real estate business, “in order to drive this effort, we need to have people who would be ready to build the APIs of the future.”

Ekekwe revealed that the agriculture sector needs an element of open banking, adding that there is a need to know the customers because it is only the customers are known that they can be offered credit services.

According to him, “Our API system remains extremely primitive because we don’t understand the people we serve. The banking system has innovated for decades. The banking system pioneered the Banking Verification Number (BVN) system, which enables us to know the real details of individuals, and government depends on the BVN to run the system. Without the investments of the bank into the education, healthcare and other sector, we will not have the Financial Technology (FINTECH) sector.

“So, it is very critical for us to find out how to use new technology ordinances. Through open banking, we can unify the major sectors in our economy, and bring them into the constructs of the banking system, so that the innovators of the sectors can have access to that data. Open banking makes it possible to share customer data as a bank with trusted third party through APIs. APIs are technology systems that you can share someone’s data without any form of violation of privacy or risk. So, for retail customers, APIs gives you the opportunity that your data can be aggregated, and with analytics systems, you can have a better insight of what is happening within your banking experience.

“There is never going to be a catalyst evolution in the economy without a credit system. A credit system is urgent needed for us to have the opportunity to expand our economy. I believe open banking through data aggregation and analytic system can also bring a national credit architecture, which will make it possible to drive growth. We need the Nigeria banking ordinance to have a credit architecture, which will be tied to people’s BVN so that you don’t need to make efforts, so it becomes natural way of doing things. If we are able to do that within five years, we will see people have credit systems that enable them to rise in the economic system. Moreover, the Small Medium Scale Enterprises (SMEs) would benefit from the credit system. There would be available of integrated tax and accounting systems, because you can have more visibility about what is happening your business, and you can have a better understanding of your cash flow and deposit.”

On his part, the Chief Executive Officer, Dochase, a fintech company, Chibuike Goodnews, said open banking enables technology companies to leverage API of banks to offer a number of banking services, adding that it has made it possible for fintech to provide last mile financial services, “to unbanked and underbanked consumers who are small for traditional banks.”

He also stated that open banking is a positive development in the country as many fintechs are just using APIs to build specialist services that were never in existence before now.

He hinted that the Fintechs automate the process, scale quickly, and retail oriented from day one. It’s the biggest milestone in Nigerian banking system as of today.

According to him, “The recent fintechs are very effective in driving investment and innovation in open banking. We have seen very smart innovations that leverage the BVN, global standing order, data to create fantastic offerings including lending, wealth management, credit and payments. We have also seen the fastest growth among fintechs where young companies raise millions of dollars in just a few years of existing. In a nutshell, smart new comers have attracted huge investments and innovation in finance leveraging open banking. They were not at preparation stage; the industry is fully prepared and taking advantage.

“The innovations in open banking could not have been possible without collaboration of the banks, CBN and others financial institutions including switching companies.

“However, while some banks take leadership positions in the collaboration, we still see some banks to be less collaborative. As a result of collaboration with fintech, a third-tier bank has lead innovations in digital banking and a big leap. I see most banks in Nigeria willing to actually collaborate with startups, but the challenges have always been on the execution. Some banks are not technically advanced like others, that’s a major determinant in any cooperation with fintech. API banking is just collaboration of many players, of course those banks who have made life easier have more fintech collaboration than others.”
Risk of Open Banking

Deloitte in a report on open banking said banks are devoting greater resources to managing their financial crime risks. Increased regulatory scrutiny combined with a number of high-profile enforcement actions have prompted banks to undertake large scale remedial programmes to establish a more robust financial crime control environment.

They argued despite the enhancement of risk management, the underlying mechanisms of risk mitigation have remained the same.

Customers are still required to provide information at ‘on boarding’ (the point at which financial service providers take on new customers), while transaction monitoring continues to score the flows of transactions in and out of the bank against a number of pre described scenarios.

The report explained that banks have also undertaken comprehensive risk assessments including the screening of customers to identify high risk factors, and applying enhanced monitoring of transactions for suspicious activities. Moreover, stronger governance is encouraging executives to oversee and manage financial crime risks better.

Speaking on the risks facing open banking, Goodnews said the associated risks in open banking which include fraud, data breaches and privacy concerns, noting that there are also possible high cost to consumers, “however the risk can be mitigated with better security and regulations.”