By Olumide Durotoluwa
There are so many waves and billows of innovation, sweeping across the globe. From social and demographic changes to shifts in global economic power. However, one noticeable wave – namely, technological breakthroughs – is having a disruptive effect on financial services.
Financial service providers in Nigeria have made tremendous achievements in building digital infrastructure and leading digital transformation in recent years. Many companies have invested heavily in new technologies to improve efficiency and catalyse game-changing innovation, while at the same time, reducing operational costs. They are adopting technologies that will advance the capacity to collect and analyse data, while paying attention to risk management, cybersecurity and governance practices.
This has ushered in a great level of convenience and consumer experience, thereby increasing customers’ expectations from other sectors. Customers are now demanding improved services, smooth experiences, independent of the channel or interface. They want to experience the same flexibility, simplicity and convenience that come with digital services, while banking.
One technology supporting this digital transformation is the use of APIs by financial service providers, as they drive speed and cost effectiveness, compared to traditional processes. API is the dominant technology used by Fintechs in Nigeria. It is used by over 98 Fintechs in Nigeria, and have cumulatively raised about $56million in investment. Top use cases include aggregation of financial functionalities, banking platforms and trading infrastructure.
An API, which stands for Application Programming Interface, is a set of pre-packaged instructions and protocols that support developers to seamlessly exchange data and requests for data in real time back and forth between their own platform and another. While the short-term vision for APIs is to make existing technology, flexible to use and more efficient to access, the ultimate value of APIs will be the engine for the next wave of financial innovation.
Nevertheless, for APIs to reach that ultimate destination, there is a need for an open banking system, supported by common API standard. Open banking has attracted a lot of attention in Nigeria in the last few years. According to NIBSS,
Open Banking involves the use of open APIs (Application Programming Interface) which were earlier on seen as propriety, intellectual properties of financial institutions (Deposit Money Banks), to power digital financial transactions processed by other banks and licensed non-bank financial services providers.
It is simply unbundling the customer data and the financial services that solely belong to the banks, and making them available via APIs to a broader ecosystem of financial services providers. It is similar to standards like SMTP which drives email, making it easy to swiftly deliver emails irrespective of the email service provider. The same can be said of debit cards. It is issued by a Nigerian bank, but it is globally accepted at any ATM/POS terminals around the world. Other examples include the successful implementation of the Nigeria Uniform Bank Account Number (NUBAN), Bank Verification Number (BVN) and NIBSS Instant Payment (NIP).
With Open Banking, financial data will be shared collaboratively through secure open APIs such that customers, be it individuals or businesses, can effectively manage their accounts from a centralized location. Open APIs would further allow third party developers to build services and applications around financial institutions.
Take for instance, many small and medium-sized enterprises use commercial software for financial records. In most cases, these businesses have to add their transaction data manually. With Open APIs, it would give both customers and businesses the ability to access all bank data in real-time, eventually giving them more accurate and up to date information on finances. Additionally, customers will have increased access to better loan terms from third-party lenders, who can now have access to historic transactional data to determine a borrower’s credit risk profile.
This is already happening in the United States of America (USA), where, Wells Fargo Bank partnered with Xero (Financial Software Provider) to allow the accounting software to access all transactions performed in the bank account. Another example is Mint, a Fintech company in the US. It pioneered the system of independent financial apps that aggregate various bank accounts and credit cards to provide consumers with a 360-degree financial view and the ability to compare various banking products. 18 months after launching, there were adding 4,000 to 7,000 new users every day. Other potential benefits of open banking include: broader choice of providers, increased competition, financial inclusion and development of new value propositions.
Open Banking, however, comes with risks. The reaction to this, always borders around data protection, cybercrime, private breaches and fraud. Open banking has the possibility to amplify the breach and cybersecurity risks when they occur. On the other hand, both the Payment Services Directive 2 (PSD2) and the recently introduced General Data Protection Regulation (GDPR), posit that customers should have control of their data.
The financial services sector would need to give huge security considerations to data security, authentication, and compliance ownership. Likewise, the bank must implement the required Non-Disclosure Agreement, Service Level Agreement with operative insurance clauses that safeguard the bank from unintended consequences arising from security breaches through third parties.
This new landscape will require financial institutions to develop digital infrastructures to securely share data with accredited and pre-authorized third parties with the customer’s consent. The key components needed are an API management platform and a robust identity and access management (IAM) platform. While ensuring secured access to data, the bank must also pay attention to providing a great customer experience. To meet these demands, banks need a real-time data analytics platform which can easily collect, correlate, and analyse the data, and provide notifications and outputs in real time.
Open Banking Nigeria (OBN), an advocacy group is playing an important role in bringing together critical stakeholders in the financial ecosystem, to support this drive. Their activities are targeted at unlocking growth potentials, to build the next generation of API standards for the Nigerian banking and financial sector. Currently, they have successfully on-boarded 65 APIs, 22 banks and 14 Fintechs in Nigeria. A roadmap was developed by OBN, to lay out plans on how to keep up with the momentum.
Open Banking strengthens the role of technology in finance, and it’s a big step for both banks and consumers. There is a strong global acceleration towards open banking. It has the capacity to open up the digital financial market to exciting moments. In 2019, Nigeria successfully moved up by 24 places to the 146th position out of 190 countries in the annual Ease of Doing Business Ranking by the World Bank. There is still a long way to go, and studies have also shown that a 10 per cent increase in the efficiency of the National Payments System will grow the GDP by at least one per cent, ceteris paribus. Open banking will accelerate that efficiency in the payment system. It will play a critical role in improving the ease of doing business and the influx of foreign investment in the country.