The way we carry out financial transactions today is very different from what it used to be. At the moment, there are a lot of fintech companies and innovators constantly pushing the boundaries within the finance sector.
These advancements have created the importance of seamlessly sharing data through an open banking system. This would bridge the gap between banks and fintech companies using standardized API access and the banks sharing data and API taxonomy.
While there are a lot of advocates for open banking, there have been a lot of concerns that its introduction would mean a depreciation in market opportunities for banks. However, effects in other markets prove otherwise and have shown tremendous success over time.
A good example is the checkout solution between Lloyds, a popular bank in the United Kingdom and payments giant, Mastercard. This partnership between both companies will deliver an open banking payment solution to merchants who use Lloyds. This solution allows customers to make payments on a website directly from their bank account. In this case, they don’t have to enter their payment details.
One of the major use cases of open banking is delivering accurate products and services for the customers and this fits that accurately. With solutions like these, customers have better options to pick how they make payments and user experience is enhanced by providing a quick, secure and seamless payment option without the need to remember passwords or input data.
Open Banking – A Refresher
Open Banking is a blanket financial services term used to describe the use of open and uniform APIs by third-party providers (TPPs) to build services and applications around financial institutions. It guides these providers on ways to access and utilize customer bank data in a standard format to provide more open, transparent and competitive banking services.
Since its birth, open banking has led to massive innovation and competition within the financial industry. Its advent has led to various industries being digital and taking advantage of open banking technology.
Open Banking has seen various use cases including payments, personal finance, mortgage lending, gaming, insurance and a host of other platforms.
Taking a cue from other markets
Like Citadele Banka in Latvia, there are various cases of Open Banking creating ripples around the banking sector. There are banks all over the world utilizing solutions to do more. These include:
- Possible scaling of payments
- Growth in credit and assets
- Growth in savings and liabilities
Open Banking in the United Kingdom
The United Kingdom has been at the forefront of the open banking discourse right from the beginning. More than 2.5 million consumers and businesses currently use banking-enabled products to manage their finances amidst other things. More than three hundred fintechs and providers have also gotten on board with the program, getting open access to financial data through API-driven ecosystems.
One of the most common use cases of open banking in the United Kingdom is account aggregation. In this case, data from an individual’s or household’s financial accounts are collected in one place. This is made possible because the account information APIs were one of the first types of APIs to be mandated on the banks. The original centre was a debit account but banks realised that their customers needed to see various types of accounts to get the most out of the products. Now, they are starting to include credit and savings account aggregation. Lloyds has now introduced this feature to its app, as well as Barclays and Monzo
Likewise, various fintech apps use data from a financial service provider (a bank in this case) where a customer has an account. It could either be as part of the app sign-up process or some further validation of information. With the aid of REST APIs, aggregated data can be delivered irrespective of the platform.
Aggregation also created a market for new personal finance management (PFM) tools built for banks and fintechs, as well and used in most cases as part of customer acquisition tools. These tools support this by giving insights into the user’s spending habits and guiding them around budgeting.
UPI in India
In 2016, the National Payments Corporation of India (NPCI) introduced the Unified Payments Interface (UPI) which allowed banks and non-banks to operate with each other in the payment infrastructure. This new system was expected to facilitate inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions
The objective of the UPI was easy – broader interoperability within the financial industry and a simplified easy-to-use product. In this situation, APIs made it possible to provide instant authentication and authorization of the payment service provider and the identity holder.
How has this technology brought about growth for its stakeholders? As of December 2020, there were 207 banks available on UPI with a monthly volume of 2,334.16 million transactions and a value of ₹4,162 billion (US$55 billion). The platform has more than 100 million monthly active users in India (May 2021) and there are more plans to get to 500 million by 2025
According to Fortune India, Indian banks, particularly the smaller ones have experienced a jump in their number of transactions. Axis Bank and YES Bank have reported the fastest growth with Axis getting to 72.9 million transactions from 2 million a year ago and YES reaching 29.1 million transactions from 1.9 million a year ago. Large-sized banks have, however, reported slower growth. ICICI Bank, which reported 10.6 million transactions in April 2020, has shown 13.95 million in March 2021. India’s largest commercial bank, State Bank of India, reported 4.6 million transactions vis-à-vis 2.7 million reported a year ago.
Fintechs are not left out of the conversation. Bharat Interface for Money (BHIM) and Cred, two Indian fintechs have also experienced massive growth in transactions. The apps which reported around 14 million transactions (at a value of ₹4,504 ) and 0.94 million transactions ( ₹672 in 2020 respectively have gone all the way up to 24.4 million (₹7,653) and 4.96 million (₹5,390) as of March 2021.
In a country like India where 179 bank accounts are opened every minute, open banking is and will continue to play an important role in boosting the economy and growth through financial inclusion and innovation at the population scale.
PSD2 in Europe
Like many other case studies for Open Banking, the emergence of the Payment Services Directive 2 (PSD2) laid the much-needed groundwork in Europe. It also brought about change and innovation within the payments industry.
The purpose of this directive was to increase pan-European competition and participation in the payments industry also from non-banks. It also provided a level playing field by harmonizing consumer protection and the rights and obligations for payment providers and users. The PSD2 directive seeks to create a more integrated European payments market, making payments more secure and protecting consumers.
According to data from Capgemini’s Open Banking Market Observatory in 2020, 345 PSD2-licensed third-party providers (TPPs) from 26 EU countries are operating in the open banking landscape, almost tripling since this same time in 2019. With around 10–15 new PSD2-licensed TPPs every month and over one million consumers already using open banking, the market shows no sign of slowing down.
September 2021 marked three years since Open Banking became a regulatory requirement in the UK. Within this time, the API call volume has increased from 66.8 million in 2018 to 5.8 billion in 2020. Almost 4 million UK consumers and businesses now use open banking-enabled products, which has caused the number of total payments to grow by over 1000 per cent since 2018.
What use cases will open banking enable in Nigeria?
The Nigerian banking industry, under the direction of the Central Bank of Nigeria (CBN), has been involved in various collaborative efforts to create standards within the community. These include initiatives such as the Nigeria Uniform Bank Account Number (NUBAN), Bank Verification Number (BVN) and NIBSS Instant Payment (NIP). These standards have driven the expansion and security of the payment ecosystem, landing Nigeria a position in the top five attractive countries for foreign direct investment in Africa.
However, these banks function in a closed ecosystem where their customers make use of the digital channel offerings that their providers have to offer. They communicate with one another over trusted payments networks and bureaus, and innovators are locked out.
Despite all of the signs of progress, the integration standard between banks is still to be addressed making it a more complex integration landscape across the industry. If banks adopt a uniform API standard, there would be more seamless integration with fintechs leading to cheaper operating costs and enhanced customer experience.
However, with the progression of open banking, there will be a drastic change in the ecosystem as innovators will be a part of the big table. By making data and systems available to third parties, banks can expand their addressable market, achieve product diversity and commercialize core systems.
Open Banking will enable some major cases for banks in Nigeria. These include:
- Possible scaling of payments
- Growth in credit and assets
- Growth in savings and liabilities
Possible Scaling of Payments
The current COVID-19 pandemic has made it more urgent for online payments methods to be adopted in Nigeria. According to the NIBSS, 2020 Annual statistics, smartphones were the most preferred channel with a whopping 43% of total transactions. Then, there was USSD with 35% closely following behind. In addition to the report, there was a 10% increase in internet banking transactions due to the closure on their borders and all.
Open Banking will provide the proper grounds for hosts of innovative services and applications to develop APIs around existing banking infrastructure to improve customer experience. These include more contactless and digital transactions which will reduce hidden costs and other inadequacies associated with cash-free methods.
It will also offer an advantage, allowing banks to partner with fintechs and create revenue more efficiently. As a result of this, banks can grow their deposits while adding revenue share from the fintechs as a source of income.
With open banking, banks can implement better ways to enhance the functionality and experiences they offer. This could be through proper use of analytics and personalization with the data they have and that gathered from other financial institutions.
Growth in Credits and Assets
Another use case for open banking is growth in credits and assets in Nigeria. According to the CEIC, the bank lending rate in Nigeria was reported at 11.620 % p.a. in Aug 2021. This is an increase from the previous number of 11.570 % p.a. a month before. Between January 2006 and August 2021, this rate has averaged 16.655 % p.a.
With the introduction of Open Banking solutions, which provide automated and secure access to banking data through APIs, banks now have the right credit checking infrastructure to verify the inflow, outflow and total exposure of their customers. Credit assessment and modelling relies on the data that the financial services provider can get at their beck and call.
Through the data made available by API integrations, the underwriting process for loans, credit risk assessments procedures, fraud management, etc., can become more tranquil and cost-effective for financial institutions. According to a loan officer at Sterling Bank, there are three Cs of credit – capacity, collateral and character and the availability of these APIs helps take care of two.
The presence of data-driven insights through an API-powered process builds the confidence required for decision making, fast tracks the processing turnaround time and ultimately leads to more productive use of resources by financial institutions. This way, banks can get an immediate picture of the financial stability of their customer and greatly improve financial inclusion.
Growth in Savings and Liabilities
In addition, open banking will necessitate a massive increase in savings and liabilities. This will be a result of the availability of information for the banks. In this case, the banks can use this new technology to further extend customer relationships and retention by helping them regulate their finances as opposed to just facilitating transactions.
When banks can access customers’ financial data held by other third parties, they can create savings products better suited to their customers and access new untapped demographics. This helps them access new audiences and serve the existing database better.
Open Banking will enable products that can support low-income customers and their saving habits. Its existence will create a financial cushion to mitigate income and develop the flexibility to shocks. These could include savings trackers (for example, Meerkat in South Africa) and automatic savings sweepers which calculate what a customer can save and when based on their history.
Another good example of banks taking advantage of Open Banking to drive savings is Connected Money by HSBC. Connected Money was launched in 2018 and was an attempt to simplify expense tracking and budgeting for bank customers in the UK. It shows a user their bank accounts from HSBC as well as rivals including Barclays and Lloyds. Within a year, the app racked more than three hundred thousand users.
Where are we on Open Banking acceptance in Nigeria?
Open Banking uses secure application programming interface (API) integration with banking systems and mutually agreed on API taxonomy to let consumers share their banking data with third-party fintech providers for new and innovative financial products and services.
In Nigeria, the journey to acceptance is very much ongoing, with a lot of drive-by Open Banking Nigeria. In 2020, several developments pushed the boundaries of the Open Banking course in Nigeria. These include the Central Bank’s collaboration with Open Banking Nigeria to the increase in API-based startups. Asides this, the identification of open banking as a critical element of the Payments System Vision 2020 and the increasing membership of the Open Banking directory are proof of the constant advancement.
At the moment, we have legacy banks like First and Union Bank, modern banks like Sterling, FCMB and even neo-banks such as Kuda and Sparkle on board with Open Banking Nigeria. They join the diverse group of providers and partners helping to transform the digital experience in Nigeria.
Other banks include Fidelity Bank, Heritage Bank, VFD Bank and Rubies.
Players in today’s digital age need to constantly evolve by staying innovative and opening the door to collaborations to provide the best services to new and existing customers. Already, Open Banking is growing exponentially and will continue to do so in the next couple of years. According to a report by Allied Market Research, the market size is predicted to reach $43 billion by 2026 at a growth rate of 24%.
Banks have the opportunity to collaborate with fintechs to provide digital services and excel in that space. With the adoption of open banking, they’re able to grow with regards to credit and assets, savings and liabilities and a host of other opportunities accessible to them. For banks that want to keep up with the ever-changing needs of the market and surpass competitors, open banking will most definitely be instrumental to their success.
You can visit the Open Banking website for more related content on how this practice will change and is changing the face of banking.
Yan Carrière-Swallow, Vikram Haksar and Manasa Patnam (2021) – India’s Approach to Open Banking: Some Implications for Financial Inclusion, IMF Working Paper.
Yusuf, D and Olowe, A – The Case of Open Banking in Nigeria, PWC Financial Services Update.