Open Banking, Innovation and Financial Inclusion: Will the Dots Connect?

Picture Credit: The Plum Basket

The Central Bank of Nigeria (CBN) issued the Open Banking Regulatory Framework (“the Framework”) on 17 February 2021, having observed the emerging practice and integration between banks and innovators around open Application Programming Interfaces (APIs).

Open Banking is a collaborative model allowing banking data to be shared between two unrelated players thereby leveraging on their mutual capabilities and synergies in order to extend innovative product and services and enhance economic performance. The expectation is that the initiatives will stimulate innovation that will ultimately and more rapidly increase financial inclusion. Plaitakis et al, (2020) aptly cautions that open banking will not automatically translate to financial inclusion, although it may stimulate the types of innovation that serves the excluded and underserved.

The explicit objectives of the framework are as follows:

- provision of an enabling regulatory environment for customer centered innovation,

- defining risk based access levels and service categorizations, standards and management frameworks for data sharing within the financial services sector;

- and to“(v) … promote competition in banking and other financial services and enhance access to financial services.”

Paragraph (v)is about the promotion of financial inclusion, albeit termed: “enhance access”. This commendably puts Nigeria among the few emerging and developing countries (EMDE’s) with open banking frameworks that mandate financial inclusion as a core objective.

The types of data to be shared are: Product Information and Service Touchpoints (PIST), Market Insight Transactions (MIT), Personal Information and Financial Transaction (PIFT) and Profile, Analytics and Scoring Transaction (PAST). The last two, which contain the more intrusive and revealing customer data, thus open to greater anti-competitive, privacy and customer protection related abuse, are restricted to banks and other CBN regulated players. Non-bank, non CBN regulated players may access PIST and MIT information only if sponsored by CBN regulated players. Regulatory sandbox participants can access PIST, MIT and PIFT transactions.

The Central Bank of Nigeria shall regulate the development of a common Banking Industry API standard with the following principles: Openness, Reusability, Interoperability, Modularity, Robustness, User-Centric and Security. Hopefully, this will be accomplished through an evolutionary, phased, consultative and stakeholder led process that allows, experimentation, innovation and market led models, rather than by regulator dictation. This appears implicit going by the phraseology in the Framework and the specification of a 12-month window for evolving the industry API standard.

Parties shall ensure the establishment of data access and service level agreements, risk assessments and management, informed consent of consumers, cybersecurity, non-fault related responsibility and liability, anti-fraud, data privacy, consumer protection compliance monitoring and supervision, round-the-clock customer service/complaint desks, and so on. Adherence to CBN’s Consumer Protection Framework is imperative and Arbitration shall precede any judicial resolution of disputes.

The framework should promote collaboration, interoperability and stimulate innovation, given that players have been moving in that direction hitherto and the creation of a platform with minimum ground rules for participation, market regulation, market based incentives and sharing of costs and dispute resolution. Whilst the Regulator does not explicitly mandate compulsory participation by financial service providers and other players, it implicitly does so.

However, the framework has no explicit strategies for prioritizing or incentivizing financial inclusion or developing consumer safeguards for the larger market consumers, per se. Several studies indicate that “many fintechs in Nigeria seem to be more concerned with disrupting payment systems in the retail segments of the financial services value chain” and micro-lending, rather than a greater variety of inclusive products. Although, open banking works optimally with smart phones, a good number of inclusive services can still be provided via feature phones.

Clearly, there may be need for some further regulatory incentives or hand holding to promote innovation and activity in this less glamorous and apparently less financially rewarding space for the typical start-up or innovator. We, therefore, predict that CBN will need to be more intentional and creative to stimulate an inclusive open banking system. With 37% of the population yet to be onboarded, the rising trend of G2P payments, heightened poverty rates as a result of Covid-19 and so on, financial inclusion ought to be the major focus of Nigeria’s open banking framework, so as to ensure policy alignment with CBN’s five year policy thrust (PDF) and the financial inclusion strategy.


Professor Olawale Ajai is the Policy Lead at the Sustainable and Inclusive Digital Financial Services Initiative