Enhancing Access to Credit

Nume Ekeghe writes on the recent guidelines by the Central Bank of Nigeria ‘open banking,’ which is set to foster financial inclusion and boost access to credit.

The Central Bank of Nigeria (CBN) last week released operational guidelines for Open banking in the country, making it the first African country to adopt open banking, which allows third-party institutions such as financial technology companies and mobile money operators to access customers data from other institutions.

The operational guideline released by the apex bank outlined the procedures that govern how banks and other financial institutions are permitted to access and manage customer data. McKinsey had in a report noted that by 2030, open data ecosystems could boost Gross Domestic Product (GDP) in Europe by one to 1.5 per cent and India by four to 5 per cent.

The CBN in a circular signed by the Director of Payment Services Management department at the CBN, Musa Jimoh, said the guidelines were in furtherance of its mandate to ensure stability in the nation’s financial system. It noted that the introduction of open banking in Nigeria is part of efforts to create an atmosphere that allows for innovative and customer-centric financial services through the safe utilisation and exchange data and services.

According to the guidelines, the CBN is required to establish and manage an Open Banking Registry that will serve as a regulatory oversight tool for participants in the open banking ecosystem. This registry is also designed to enhance transparency and provide a means for regulating operators within the system.

The guidelines also outline a Consent Management framework, which mandates that customers must provide explicit consent before their data can be accessed for open banking products and services, among other uses.

Jimoh in the circular noted, “The adoption of open banking in Nigeria will foster the sharing of customer-permissioned data between banks and third-party firms to enable the building of customer-focused products and services. It is also aimed at enhancing efficiency, competition, and access to financial services.”

What is open Banking?

Open banking which is also known as open bank data, is a banking practice that gives 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, according to experts, allows the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers and it is becoming a major source of innovation that is poised to reshape the banking industry.

“For bank customers, open banking means faster approvals on loan applications based on the customers’ credit or financial history. For startups building amazing savings, payments, or investment solutions, fewer resources are required to develop a personalised product for consumers. Aside these, banks can earn revenue as they charge third parties for access to data, “said a financial expert.

Customers’ data are however protected with CBN’s monitoring and the support of the 2019 Nigeria Data Protection Regulation (NOPR), as the guidelines released by the apex bank calls for strict adherence to established data privacy guidelines in keeping their data safe from bad actors.

The Guideline stated: “The Regulatory Framework for Open Banking in Nigeria established principles for data sharing across the banking and payments system to promote innovations and broaden the range of financial products and services available to bank customers. As a result, 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 for the purpose of accessing innovative financial products and services.

“Open Banking applicability includes Agency Banking, Financial Inclusion; know your customer (KYC), credit scoring/rating etc. These guidelines are anticipated to drive competition and improve accessibility to financial 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, operational, customer experience and risk management standards as prescribed by the bank.”

It added that the objectives of the guideline are to provide clear responsibilities and expectations for the various participant categories, ensure consistency and security across the open banking system, stipulate safeguards for financial system stability under an open banking regime, promote competition and enhance access to banking and other financial services and outline minimum requirements for participants.

Open Banking Benefits

PwC in a report highlighting the benefits of open banking said as regards data sharing, it allows for the removal of manual data entry with data sharing only undertaken with regulator-approved third parties, although there is the risk of an increased number of data breaches, fraud, and phishing.

As regards financial accessibility, PwC said there will be a wider choice of providers with improved financial planning and insight tools, although with the unintended consequence of increased exclusion as low credit quality customers are more easily identified and some customers are technically excluded.

Open banking, PWC added, is also expected to drive competitive pricing and value for money given a larger number of providers, although there is also the potential of reduced ability to price for bundle products and price wars due to commoditized products and providers.

“In terms of product innovation, open banking is expected to bring development of new propositions given the availability of customer data to approved FinTechs, but then, there is the risk of increased capital/funding issues due to deposits moving rapidly between different banks, “it stated.

PwC in the report notes that the Nigerian banking industry, under the regulation of the CBN has a history of collaboration to create impactful standards across several banking activities. Examples include the Nigeria Uniform Bank Account Number (NUBAN), Bank Verification Number (BVN) and NIBSS Instant Payment (NIP).

It added, “These standards have driven the expansion and security of the payment ecosystem, landing Nigeria a position in the top five attractive countries for foreign direct investment in Africa. As noble as these efforts have been, the integration standard between banks has not been addressed leading to a complex integration landscape across the industry. If banks adopt a uniform API standard, there                                             would be more seamless integration with the Fintechs leading to cheaper operating costs and enhanced customer experience.”

Emphasising the need to adhere strictly to the guidelines and other regulations, CBN said they are aimed at promoting innovation and expanding the range of financial products and services available to bank customers. He called on all stakeholders to prioritise compliance to ensure the success of the open banking system.

It noted further that the guidelines are specifically targeted towards banking and other related financial services, as determined and classified by the apex bank within the regulatory framework for open banking in Nigeria.