Communication around finance in any shape or form is always some of the most complex. Easily misconstrued and easily misunderstood. Yet, they are often some of the most necessary. In financial messaging, language isn’t just a tool. It’s the backbone of communication. When banks, third-party providers (TPPs), and other financial entities “speak” the same language through standards like ISO 20022, collaboration becomes more effective, misunderstandings are minimized, and efficiency improves. However, when the language is overly complex or not well-suited to local contexts, it can create barriers instead of bridges.
For Nigeria, where open banking is still in its formative stages, the decision to adopt ISO 20022 is not straightforward. Should the country align with this global standard or prioritize a system tailored to its unique financial realities? The Central Bank of Nigeria (CBN) has already mandated ISO 20022 for banks, but its role in open banking remains undecided, leaving the industry in anticipation.
This article examines the benefits and challenges of adopting ISO 20022 for open banking in Nigeria. It weighs the potential of this standard to transform financial services against the practical hurdles it presents.
Understanding the concept of ISO 20022
ISO 20022 is a global messaging standard developed by the International Organization for Standardization (ISO). It enhances financial communication by providing a structured and consistent format for data exchange between institutions. This standard improves data richness, ensures system compatibility, and reduces friction in domestic and cross-border financial operations.
Unlike older standards, ISO 20022 stands out for its use of rich, structured data formats based on XML and the ability to encode detailed, meaningful information within a single message. This makes it particularly useful in today’s digital banking era, where financial institutions, fintech companies, and regulators need consistent and detailed data for efficient operations, compliance, and innovation.
However, its complexity has sparked debates about its suitability for countries like Nigeria, where financial systems are still evolving. While ISO 20022 offers immense potential, its success in Nigeria hinges on how well it is implemented. The transition requires significant investment in infrastructure, staff training, and system upgrades. Without these, the benefits of the standard may remain theoretical. Moreover, it must be adapted to Nigeria’s unique financial realities, such as low internet penetration in rural areas and the heavy reliance on mobile-first solutions.
Pros of ISO 20022 in Open Banking Nigeria
Let’s look at some of the possible pros of Open Banking Nigeria adopting ISO 20022
Fostering standardized Open Banking products: ISO 20022 provides a common format that makes it easier for third-party providers (TPPs) to work with banks, especially when building open banking solutions. In Nigeria, this would ensure that APIs and services from different banks work well together, making it simpler for developers to integrate them into new products.
Enhancing real-time payment solutions for Open Banking: For open banking, real-time payments are a critical feature. ISO 20022 helps make transactions faster and more reliable. This is key for services like payment initiation and account aggregation, which need to process quickly to meet the expectations of consumers who want speed and efficiency.
Supporting cross-border Open Banking transactions: As open banking grows, international payments will become more common. ISO 20022’s global standard ensures that Nigerian banks can participate in cross-border transactions without having to make major adjustments to their systems.
Harmonizing financial systems: One of ISO 20022’s core benefits is its ability to harmonize disparate systems. This eliminates exceptions and delays caused by incompatible data formats. For Nigeria, where financial inclusion initiatives depend on smooth communication between various providers, interoperability is key.
Boosting security with AI integration: ISO 20022’s structured data formats are highly compatible with artificial intelligence. By enabling better transaction analysis, this standard can help financial institutions detect fraudulent activities and improve security. This is critical in Nigeria, where fraud remains a significant challenge in the financial sector.
Cons of ISO 20022 in Open Banking Nigeria
Let’s look at some of the possible cons of Open Banking Nigeria adopting ISO 20022
The complexity of implementation: The intricate message structures of ISO 20022 can overwhelm Nigerian financial institutions, especially smaller players with limited technical expertise. The steep learning curve for developing and maintaining API connections can slow adoption, making seamless data sharing harder to achieve in open banking initiatives.
Challenges with legacy systems: Legacy banking systems dominate Nigeria’s financial landscape. Transitioning to ISO 20022 would require extensive system upgrades or middleware solutions to integrate APIs effectively, which may disrupt services and increase operational risks during the migration process.
Cost implications for compliance: ISO 20022 adoption involves significant financial outlays for infrastructure upgrades, workforce training, and third-party partnerships for API integration. These costs can disproportionately affect smaller financial institutions and fintech startups, limiting their ability to participate fully in open banking ecosystems.
Suitability for local financial realities: Nigeria’s financial sector has unique characteristics, including low credit card penetration and a high reliance on a mobile-first approach. There is a valid argument for designing a system tailored to these specific needs rather than adopting a global standard that might not fully address local challenges.
Data overload: While ISO 20022 provides rich, structured data that offers valuable insights for financial institutions and third-party providers, the sheer volume and complexity of data it produces can overwhelm systems and processes if not managed properly. This could lead to slower processing times, especially for smaller institutions that may not have the infrastructure to handle and analyze large amounts of data efficiently. If data management systems aren’t up to the task, it could result in inefficiencies or delays, negating some of the benefits of real-time processing and smooth transactions.
The Nigerian perspective
The Central Bank of Nigeria (CBN) has taken a cautious approach, advocating for a system that balances global best practices with local realities. While banks are mandated to adopt ISO 20022, its role in open banking remains undecided.
Open banking in Nigeria is designed to simplify access to financial services by securely sharing customer data with third-party providers, but the question arises: What standards should be used? The UK’s experience with ISO 20022 highlights a key concern: While the standard offers structured data, it also comes with complexity that can hinder usability. In the UK, for instance, complex authentication methods became a barrier to adopting open banking as a payment method. This led to difficulties for both businesses and consumers in fully embracing the system.
In Nigeria, the goal is to simplify the process, not complicate it. Overly complex standards could risk undermining open banking’s potential to make financial services more accessible. The CBN is advocating for a solution that’s tailored to local needs and realities rather than simply adopting a global standard without considering how it might fit into Nigeria’s existing infrastructure.
While Nigeria is undoubtedly capable of handling complex systems, the question remains: Why introduce complexity just for its sake? Simplified standards would make the process smoother, encouraging broader participation and ultimately leading to a more successful open banking ecosystem.
The issue is still being debated in Nigeria. The decision to adopt ISO 20022 for open banking is not final, and there is ongoing discussion about whether it’s the right choice. If it’s used, great; if not, the focus will remain on creating a system that best meets Nigeria’s needs. Ultimately, the priority is ensuring that the open banking framework is easy to implement, fosters innovation, and meets the needs of the Nigerian market.
