Open banking is an evolving concept in Nigeria which is yet to be operational for African countries as of Q1 2023. However, it has the potential to greatly benefit the country’s economy. Open banking allows financial institutions to share certain data with authorized third parties, such as fintechs, in order to access new products and services on behalf of their customers. This can greatly increase the reach and capabilities of fintechs, leading to better and more affordable financial products and services for customers.
However, despite the inherent benefits of operating an open banking system, there are concerns about the security and privacy of customers’ financial information within the system. This is one of the main challenges with the adoption of open banking in Nigeria. Consequently, it is important that regulations are in place to protect the data of customers and minimize the risk of fraud or unauthorized access. This can be achieved through the use of secure authentication and authorization protocols like oAuth2 and FAPI. Fortunately, these measures are already being applied to ensure that only authorized third parties have access to customers’ financial data.
The fintech sector in Africa is currently growing at a rapid pace with many of them betting their growth and impact on open banking. Similarly, open banking can greatly benefit the growth of fintechs in Nigeria in a number of ways. Here are five examples:
Increased reach and capabilities
Open banking allows fintechs to access financial data and perform transactions through financial institutions; which can greatly increase their reach and capabilities. This can allow fintechs to offer new and improved financial products and services, such as loans and savings accounts.
Increased competition and innovation
Open banking can enable fintechs to compete more effectively with traditional banks; as they will have access to the same data and capabilities. This can drive innovation and competition in the financial sector, leading to better and more affordable financial products and services for customers.
Improved financial inclusion
Through open banking, underbanked populations and small businesses, who may have previously been excluded due to a lack of credit history or collateral, can have increased access to financial services.
Open banking reduces the need for manual processes and intermediaries.This way, processing financial transactions can become more efficient.
Improved customer experience
Open banking can improve the customer experience by making it easier for customers to access and manage their financial information.
Additionally, having open standards in place for open banking is a positive development. For example, the ISO 8583 standard for financial transaction messaging made it possible for cards to be used globally. Similarly, the GSM standard, being common globally, greatly contributed to the growth and success of GSM technology. Likewise, Implementing open standards for open banking can lead to widespread adoption and interoperability among different financial institutions and fintechs.
Open banking is an enabler and not a threat
It is important to note that open banking is not a threat to existing banks, but rather an opportunity for them to collaborate and innovate with fintechs. By embracing open banking, traditional banks can stay competitive and offer new and improved financial products and services to their customers.
Furthermore, the implementation of open banking can encourage venture capital firms to fund and actively support fintechs that are utilizing open banking. By providing access to financial data, fintechs can better serve their customers and as a result, may become more attractive investment opportunities for venture capital firms.
In conclusion, open banking has the potential to greatly benefit the growth of fintechs in Nigeria. By increasing reach and capabilities, driving innovation and competition, and improving financial inclusion, open banking can pave the way for more innovative and affordable financial products and services for customers.
It is imperative that the regulations in place are urgently finalized to ensure the security and privacy of customers’ financial information, but overall, the implementation of open banking should be strongly supported by all stakeholders in the financial sector.