Two decades ago, if you wanted to deposit money, pay bills or access a range of financial services, the bank would have been the only place to turn to. But that has since changed with fintechs unbundling banking and offering many of these services as stand-alone offerings.
Fintechs like PiggyVest, offer their customers the ability to save money at rates better than banks, while more than 30 digital lenders across the country offer instant loans. Many digital lenders now allow you to get loans at the touch of a button.
Unbundling financial services has overall been positive because it has allowed healthy competition between banks and fintechs, fostered innovation in recent times than at any other period in the financial services industry.
Yet, there’s still an obstacle that prevents fair competition and it is the fact that banks hold a lot of data belonging to millions of customers, data that are useful to companies that want to create customised products for customers.
But that data remains difficult to access because a data-sharing framework doesn’t exist and there’s no incentive for the banks to share the data they sit on. According to the CEO of Mono, Abdulhamid Hassan, ‘at the moment no bank has public APIs yet for developers and businesses to have access to customer financial data.’
It is important to balance this view by mentioning that under the current setup, the banks hold all the risk. Without any clear framework for data sharing, the banks will be held responsible by the CBN as well as its customers if anything goes wrong.
This is why Open banking and the conversations around it are important. Open banking allows for standardized API access with banks and others within the same jurisdiction sharing the same data and API taxonomy. It allows customers to have increased control over their data while supporting innovation in the financial sector everyone yearns to see more of.
Open banking signals the coming of age for banking in the 21st century, there is a conversation to be had about its implications on the non-banking finance industry and how it affects their position. The non-banking finance industry refers to financial service providers without a banking license, this means they don’t accept cash deposits. Some of these companies include insurance companies, alternative lenders, and hedge funds.
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Cross-Platform Data Acquisition
By relying on the use of networked data as opposed to centralized data, open banking can help customers securely share their financial data with non-banking financial companies that require it for their service.
A good example would be how the open banking API can help lenders look at a customer’s transaction data to identify the best financial products and services for them, such as a different personal loan with a lower interest rate.
Through the use of this networked data, open banking could help lenders get an accurate profile of a customer’s financial portfolio and risk level in order to offer more profitable loan terms. It could also help financial consultation services get a more accurate picture of a customer’s finances to properly advise them before taking on debt.
Ease of Access
Similar to fintechs, open banking can also provide access to necessary customer information essential for customer profiling and decision making to non-banking finance companies.
This means a customer seeking a loan can provide his account statement for previous years to a loan servicing company at the click of a button, or another customer looking to buy insurance would be able to provide all his banking information without any physical runaround.
Beyond this, arguably the biggest ease of access Open banking provides could be around card payments and direct debits. Direct debits, an instruction from you to your bank to make payments when they are due is a cornerstone of modern financial systems.
At the moment, direct debits come with their own headaches and in Nigeria, when a direct debit doesn’t go through, customers are charged a penalty. Open banking can create a more efficient method that works for customers and the banks.
A Request to Pay (RTP) which collects payments in real-time and is based on a feedback loop could reduce the reliance on card payments. It could also make collections a lot easier. Using APIs, it is possible for the third parties who want to collect direct debits from customer accounts to only execute those transactions if the account has the required balance. This would reduce the high failure rates associated with direct debits and may eliminate the need for penalties.
In a nutshell, Open banking will bring about disintermediation by enhancing real-time payments, going head to head with the card scheme to enable instant transactions between retailers and consumers.
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Security Risks
With all the benefits Open banking APIs bring to the non-banking financial industry, like every new innovation, they are not without risks such as data breaches, insider threats and hacking.
An extreme example of the potential risks would be a malicious third party gaining access to a customer’s account through a non-banking finance company’s API and cleaning it out. These sorts of threats will likely become more widespread with the employment of Open banking by various banking and non-banking financial industries, and will likely remain commonplace as more data become interconnected in more ways.
With such potential risks, non-banking financial companies will have to invest in actively improving their data security to better protect their systems and in turn their customers from data attacks.
Innovative products guided by data
One of the biggest arguments for Open banking is that it will lead to the creation of new and innovative products that are customised to the needs of customers.
Today, data drives every decision and can provide an interesting look into the specific needs of customers. What this means for fintechs and third-party providers is that they simply do not need to create new products in the dark anymore.
As one report puts it, ‘with real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.’
As Open banking moves forward, expect to see innovations such as Inflow finance which helps to link all your bank accounts or Mono, which helps you access customer financial data using APIs.
