Nigeria is undoubtedly in the lead with its open banking initiatives among African countries and other developing countries. Following the release of the operational guidelines and regulations surrounding open banking in Nigeria, the journey to fully launched open banking standards is within months at the most.
Open banking holds the potential to promote financial inclusion and transform the Nigerian payments ecosystem with unrivaled innovation. Hence, improving lives in developing countries such as Nigeria.
Nigeria’s open banking regulation has followed a unique hybrid approach: a collaboration between the Central Bank of Nigeria (CBN) and the industry. This is quite unlike the regulator-driven approaches in the UK and the EU, or the complete market-driven approach that New Zealand has taken.
However, even though Nigeria is launching its open banking standards after the UK, who pioneered the initiative, it is not simply a replica of the UK standards, but rather an adoption to reflect the dynamics of the Nigerian market.
The Nigerian regulations surrounding open banking have adopted the best practices from the UK’s open banking framework and innovated upon them to create tailored solutions for Nigerians. Kudos to the CBN for this.
1. Direct debit
The Nigeria InterBank Settlement System (NIBSS) formally introduced direct debit as a product into the Nigerian Clearing System in 2006.
Ideally meant to offer greater convenience, implementing direct debit in Nigeria is difficult, slow, and less than elegant, limiting seamless adoption. It is also not available at every bank which adversely affects its usefulness.
The difficulty in setting up a direct debit as a payment option (especially for smaller businesses) has limited the growth of the subscription economy. Cable television service providers, gyms, internet service providers, e-papers, and other businesses offering monthly renewable services often rely on manual customer payments.
These problems dampen their potential for earning recurrent revenue and threaten the sustainability of businesses if they are heavily dependent on offline payments in a growing digital economy.
Fortunately, by baking direct debit into the open banking standard, the Central Bank of Nigeria (CBN), has proffered an effective solution to address the problems around using direct debit. Following the full launch of open banking in Nigeria, the volume of direct debit transactions will rise significantly, and the subscription economy will expand notably.
The use of direct debit offers benefits which include easier methods of loan repayments, subscriptions to services; automated airtime and bill payments, etc. These benefits allow businesses to monetize their services and content online effectively.
Additionally, the data collected from these transactions can help build a digital financial footprint for those in underserved and unbanked communities. This has the potential to help financial service providers offer financial products or services better tailored to the low earners and promote better spending and saving habits that can alleviate their financial pain points.
2. Virtual accounts
Virtual accounts (vNUBAN) have been the engine of payment growth over the last four years. The average Nigerian has a good understanding of how bank transfers work for making payments and the high level of familiarity makes it an intuitive payment solution.
The versatility of virtual accounts has propelled its wide adoption and rapid growth. Customers can make payments to virtual accounts across all channels; USSD, ATMs, mobile apps, web apps, POS agents, and even over-the-counter at banks.
Fintechs can make virtual accounts available to their customers through agreements with banks enabling customers to carry out in-app transactions and fund their electronic wallets.
The CBN has not standardized or codified virtual accounts, despite their increasing use and importance over the past few years. Now that the CBN has placed virtual accounts within the open banking standard, it is safe to conclude that this signals regulatory acceptance.
The benefits of virtual accounts contained in the open banking standard include the broader reach of virtual accounts and easier ways for customers to manage them. Customers can monitor the activities on the virtual accounts quite easily on the digital platforms.
Each unique vNUBAN generated is easily traceable to a customer, mitigating concerns about virtual accounts being hijacked for fraudulent activities. Additionally, this identification feature makes transaction reconciliation effortless.
3. Card management
Cards are old technology and just like emails, have refused to give up and be replaced by newer technology. Before customers could carry out bank transfers, fintech payment solutions revolved around cards. The ease of processing payments online, including payments to parties abroad simply with card details quickly won customers over.
Card management inclusion in the standard will be useful to all participants, as account holders can now manage their cards from apps and other places. Customers can complete transactions without having their physical card present and fintechs can now bind to banks to pre-authorize and charge debit cards.
Furthermore, the data from the cards bound to customers’ profiles on these apps provide a more accurate picture of customers’ financial standing and spending habits. These allow financial service providers to tailor their offerings to the customers’ needs.
4. Dynamic participation of API providers and consumers
Unlike open banking standards in other countries, the CBN has designed the Nigerian standard around API Consumers and API Providers. The customers are the third but most important class of participants and they are the data owners and end users the services are targeted at.
It will not strictly be banks and third-party providers (TPPs) because the CBN recognizes the evolving roles that stakeholders play in an open banking economy.
An API provider (AP) is any CBN-licensed entity with data anyone could connect to. They are usually banks but could be a switch or a mobile money operator (MMO). On the other hand, an API consumer(AC) is any entity that wants to connect to another licensed entity to read data or perform operations.
This is where it gets interesting. Any licensed entity can be an AP or an AC. Access Bank can use open banking standards to access customer data from another bank (e.g., Zenith Bank) to verify account information. Conversely, it can share its customer data with third-party fintechs (e.g., Lendsqr) through its API.
However, while licensed entities can switch roles to reflect the demands of the situation, APs and ACs must conform to the data privacy and protection rules stipulated by the open banking guidelines and ensure the customers’ consent was explicitly granted in both use cases.
Gain more clarity about regulations surrounding Open Banking in Nigeria
The open banking standard was created to unleash innovation and reduce financial exclusion within the Nigerian banking sector with Open Banking Nigeria at the centre of the initiative.
We are working with banks, fintechs, regulators, and other stakeholders to ensure a successful launch and adoption. You can contact Open Banking Nigeria at [email protected] for further insights.
