The Central Bank of Nigeria has been on a roll. Over the last three years, the regulator has released a slew of guidelines in a bid to improve financial inclusion — the PSB guidelines and license in 2018, the regulatory sandbox framework in 2020, and most recently, the open banking framework (an exposure draft has been circulated among operators and stakeholders).
This article is focused on the proposed Open Banking regime and its potential impact on financial inclusion.
So what is open banking and what’s the fuss about?
Open banking is the authorised provision of consumer banking data to third parties through application programming interfaces. It has become one of banking’s transformation levers whereby third party providers can access customer data and use that to develop innovative financial products and services that are transparent and competitive. Such a system has several potential benefits including reduced costs of financial services for consumers and improved customer-centricity.
It therefore holds significant promise for Nigeria’s financial inclusion drive.
Potential benefits of open banking for financial inclusion in Nigeria
Open banking opens up exciting possibilities for financially excluded citizens.
- Open banking supports FSP innovation and collaboration and can lead to better value propositions for low-income citizens e.g. responsible extension of credit to viable customers who hitherto have been excluded.
- It opens up underserved customer segments, particularly SMEs and women, to a larger pool of providers who are willing to provide them bespoke financial services.
- It reduces the complexity and duration of onboarding new customers.With access to relevant data pools about new customers, providers are able to skip laborious documentation procedures and even figure out faster and creative ways to onboard new consumers especially at the bottom of the pyramid.
There is more but the point is, open banking benefits consumers and providers in the long run and there’s a lot to be excited about.
Requirements for a successful open banking regime that drives inclusion
“When banks and other financial institutions responsibly exchange customer data with other providers, the result is better products for low-income customers,” Stefan Staschen, Senior Financial Sector Specialist, CGAP.
For open banking to benefit the financially excluded, majority of whom are low-income women, traders and rural dwellers, the Consultative Group for the Poor (CGAP) highlights three requisite pillars:
1. Wide and diverse data pools drawing information not just from banks but from other operators already interacting with the poor (fintechs, MMOs, PSBs, telcos etc).
2. Data aggregation centers that enable consumers and data users to easily manage data permissioning.
3. Third parties able to initiate payment requests directly from a bank on behalf of their customers.
Interestingly, two of the three listed pillars are data related (data is king as, they say). Unfortunately, this is also the Achilles heel of Nigeria’s financial inclusion efforts.
In 2017, our research work at the SIDFS identified the dearth of insights and understanding of the intended consumers of digital financial services, particularly at the bottom of the pyramid, as a major obstacle to financial inclusion.
Providers just don’t understand the low-income customer segment well enough.
This lack of consumer insights has led to poor product-market fit which continues to plague financial services adoption to this day.
Open banking resolves one dimension of this problem by enabling providers to access more relevant data about old and new customers. Open technologies (APIs) permitting access to larger data pools can improve the quality of financial products and lead to better product-market fit at the bottom of the pyramid.
However, these data pools must be diverse to deliver better insights. Diverse data pools are cross sectional, drawing not only from the financial service industry but also ecommerce, telecoms, and even federal agencies like the National Identity Management Commission etc. This requires a higher level of coordination between operators and regulators from the various industries, to ensure open access to relevant data.
Major challenges and risks that accompany open banking
Open banking may be exciting but it’s not a slamdunk.
Reaping the benefits of an open banking regime requires increased skill and capacity among operators particularly in data analysis and research-based innovation. Providers will require capacity for crunching data to generate insights and develop products that win with consumers.
Analysing such data and extracting necessary insights require a specific set of skills that seem lacking across the ecosystem and capacity building interventions are required. This is one of the reasons we launched the SIDFS Product Development Lab to address the capacity gap in the ecosystem and equip providers with design thinking tools and techniques to understand their customers and build better products from end to end.
The open banking regime could also increase the risks of loss or theft of personal data, data protection violations, data privacy violations etc. One major challenge for operators is threading the fine line between openness and security. We envision that there will be growing pains in the early years, on both the supply and regulatory sides, but this will eventually lead to better data privacy and sharing protocols and regulations..
Open banking relies on operators to play nice with one another. This collaboration may not necessarily be immediate since there’s a general belief that open banking tends to benefit fintechs and other smaller players more than incumbent /traditional banks (despite there being regulatory arrangements that to balance this out in the long run).
Finally, consumer education is necessary as open banking will thrive when customers can grant informed consent to sharing their data with third providers.
Open banking could introduce a new era of innovation and collaboration across the Nigerian financial service space, leading us into better products and services that are affordable and relevant to the financially excluded. But, like all innovations, vision and execution will be the determinants to achieving significant traction in openness and attaining our financial inclusion goals.