Understanding Open Banking

Obinna Chima

The Central Bank of Nigeria recently issued regulatory framework for Open Banking in Nigeria as part of its efforts to enhance data sharing across the banking and payments system.

The move is expected to promote innovations and broaden the range of financial products and services available to bank customers.

The central bank disclosed this in a circular titled: ‘Operational guidelines for open banking in Nigeria,’ posted on its website.

The CBN stated: “Open banking recognises the ownership and control of data by customers of financial and non-financial services, and their right to grant authorisations to service providers to access innovative financial products and services. This is anticipated to drive competition and improve access to banking and payments services.

“Participants in open banking shall adhere strictly to security standards when accessing and storing data, and shall be subject to minimum privacy standards, operational standards, risk management standards and customer experience standards as prescribed by the Bank.”

Open Banking is a system that provides a user with a network of financial institutions’ data using Application Programming Interfaces (APIs). It is the process of enabling third-party payment service and financial service providers to access consumer banking information such as transactions and payment history. It promotes interoperability and networking between banking information and service providers, creating a smoother user experience.

The Open Banking Standard defines how financial data should be created, shared and accessed. By relying on networks instead of centralisation, open banking helps financial services customers to securely share their financial data with other financial institutions.

Its benefits include more easily transferring funds and comparing product offerings to create a banking experience that best meets each user’s needs in the most cost-effective way.

To Prof. Yinka David-West of the Lagos Business School, open banking is really about providing access to financial services data through the APIs.

According to her, the concept lowers entry barriers for new entrants to the financial services ecosystem, enabling customers to easily decide who has access to their account and transaction data. By breaking current banking monopolies, open banking helps new entrants (without legacy customer data) become more competitive.

“As such, older banks will also need to be more innovative and provide more superior value propositions beyond facilitating transactions.

“The prevalence of open banking will provide a more holistic view of any customer irrespective of existing banking relationships,” she had said.

Also, one of the promoters of the Open Banking initiative in Nigeria, Mr. Adedeji Olowe, described it as a concept which believes that banks should be open to customers.

According to Olowe, bank customers should be able to connect on the centralised platform and transact business with anyone, irrespective of the bank such person is operating.

“And a good example I will give you is that when you have an e-mail on Gmail, if you are using i-phone, you can easily connect it to your iphone and you will be seeing your e-mail. In fact, if you may not need a Gmail app at all.

“So, irrespective of the platform you want to use, there is a standard way you can connect and then you are fine. It is the same thing that Open Banking is all about.

“The idea is that irrespective of the bank you use, when you see a financial app or you want to pay on a website, you should be able to just put in your details and then you are able to connect to your bank and do the transaction you want,” Olowe had explained.

He stressed that the initiative would help accelerate financial inclusion in the country.

According to him, in financial inclusion, the idea is to allow people that are less fortunate come into the financial system and carry out transactions at a reduced cost.

“Now, the challenge is that when we connect those services to the existing platforms, the platforms try to charge money because they are commercial entities, which makes the cost of financial inclusion expensive.

“Open Banking allows operators to connect to the banks directly without passing through any intermediary and the cost of connection to the bank would be free. So, the cost of financial inclusion will reduce.

“Nigeria has always taken the lead when it comes to electronic banking. We have that history of always running ahead of everybody,” he added.

Thus, to ensure the country harnesses the benefits of this platform, the regulatory environment needs to evolve, which the central bank has done by issuing the guidelines.