Four innovations with CBN’s open banking regulations

Central Bank of Nigeria's logo is seen on the headquarters building in Abuja

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 for 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 unrivalled innovation. Hence, improving lives in developing countries such as Nigeria.

Nigeria’s open banking regulation has followed a unique hybrid approach which has 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, despite the fact that Nigeria is launching its open banking standards after the UK, which pioneered the initiative, it is not simply a replica of the UK standards, but rather an adoption of the standards to reflect the dynamics of the Nigerian market. 

The Nigerian open banking standards have taken the best approaches from the UK and then created very innovative options for what is being launched in order to meet the needs of Nigerians. Kudos to the CBN for this.

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1. Direct debit

Direct debit in Nigeria was formally introduced as a product into the Nigerian Clearing

System by the Nigeria InterBank Settlement System (NIBSS) in 2006. The use of direct debit for payments is ideally meant to offer a great deal of convenience. However, the implementation of direct debit in Nigeria is very difficult, slow and less than elegant, which has limited a seamless adoption. Direct debit is also not available at every bank which adversely affects its effective use. 

The difficulty in setting up a direct debit as a payment option (especially for smaller businesses) has limited the growth of the subscription economy. Providers who offer services that are renewable monthly, such as cable television service providers, gyms, internet service providers, e-papers, etc. are often forced to rely on manual payments from customers every month. 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. It is expected that following the full launch of open banking in Nigeria, the volume of direct debit transactions will rise significantly and the subscription economy is set to see notable expansion. 

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 payments 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 are able to make payments to virtual accounts across all channels; USSD, ATMs, mobile apps, web apps, POS agents and even over-the-counter at banks. Fintechs are able to make virtual accounts available to their customers through agreements with banks which enable customers to carry out in-app transactions and fund their electronic wallets.

Although the use and importance of virtual accounts have garnered significant traction over the last few years, they have never been standardized or codified by the CBN. Now that the CBN has placed the use of virtual accounts within the open banking standard, it is safe to conclude that this in fact 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. While the possibility of virtual accounts being hijacked for fraudulent activities might be of concern to the general public, each vNUBAN generated is unique and easily traceable to a customer. Additionally, this identification feature makes transaction reconciliation effortless.

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3. Card management

Cards are old technology and just like emails, have refused to give up and be replaced by newer technology. Prior to customers being able to carry out bank transfers, fintech payment solutions revolved around cards. The ease of processing payments online, inclusive of payments to parties abroad simply with card details quickly won the heart of customers.

Card management inclusion in the standard will be of significant benefit 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 available from the cards bound to customers’ profiles on these apps provide a more accurate picture of customers’ financial standing and spending habits to 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 that has data that anyone could get connected 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. For example, Access Bank can be an API consumer when it uses open banking standards to connect to Zenith Bank to read the bank balance of some of its customers that also have accounts with Zenith Bank. Alternatively, Access Bank can also be an API provider where data about its own customers is requested by a fintech, for example, Lendsqr. 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 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.

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