With the many changes in the banking sector and the country as a whole, Open Banking seeks to bridge the gap between banks and fintechs with standardized API access; where all banks share the same data and API taxonomy.
It is essential to note that there is currently a power imbalance between banks and fintechs. Banks hold a ‘data and regulatory monopoly’ with the vast and detailed consumer data and relationships they have amassed over the years, while fintechs bring little to the table.
Since open banking requires banks to share data, what do the banks gain from sharing this data? Will they simply be giving one of their more considerable advantages to the competition?
Open banking provides significant opportunities for value creation for all banks; arguably even much more than the fintechs.
Here are some of the clear ways these benefits can be realised:
1. Revenue opportunity
Open banking doesn’t mean fintechs would connect for free or customers would not be charged for transactions. Essentially, banks would probably charge fintechs access fees to the APIs and transaction fees for access to data, transfers, and other underlying financial transactions.
These transaction fees are not to be trivialized, all you need to do is check the financials for top banks and it is apparent that transactions from digital activities can be quite significant.
2. Financial inclusion
There is also the opportunity to move the needle on financial inclusion. According to a report by Enhancing Financial Innovation and Access (EFInA); In 2020, only 45% of the Nigerian population are banked. This is a 5% improvement from 2018, and plodding progress for such a crucial national goal.
With the standardized API access that Open Banking provides, all banking service providers will share the same data. This provides an opportunity for banks to partner with third parties willing to reach rural areas where banking services are most needed.
There are tremendous benefits to be gained by Nigerian banks if they can innovate ways to reach this large unbanked population and cater to their banking needs effectively without running at a loss.
Bringing in the over 40million adults currently without access to financial services and over 100 million underage Nigerians that will come of age in the next decade, shows the magnitude of customer base expansion to be realized with open banking.
3. Product availability and development
Borrowing from the playbook of fintechs such as Cowrywise and Wallet Africa, which can compete effectively in the financial services sector by accessing funding and broader distribution networks, banks can employ a similar tactic to tailor better consumer experiences.
Banks can unbundle their products and make them more available to different consumers through different channels as a sort of mini-offering. These tailored offerings can be used to reach rural areas through third parties already active in those areas.
4. Data-driven innovation
Tech companies like Amazon, Apple, Facebook, Google and Microsoft, commonly called the pioneers of big data, have shown the effectiveness of big data methodologies and techniques and have since become some of the most valuable companies in the world.
Customer Experience (CX) is now a decisive competitive differentiator between banks, it has become more than just the breadth and depth of banking products and services portfolio. Advancements in digital technology now offer even more channels for customer interaction. Channels like online and mobile banking are already significantly changing how customers engage banks.
Open banking’s standardized API access will allow Nigerian banks to employ these strategies used by these companies to tailor products and experiences to consumer preferences.
They can combine their data with artificial intelligence, machine learning, and other technologies to carve out a competitive advantage in the new banking landscape.
An example of this data-driven innovation would be how banks can learn a customer’s behavioural patterns and offer them payday loans when they run low on funds a week or two before payday. This kind of offering can drive retail banking.
5. Competition driven innovation
Adopting an Open Banking standardized API access levels the playing field between fintechs and banks, specifically data. Reducing the already existing competitive advantage possessed by banks will spur innovative breakthroughs by the banks to stay ahead of the competition.
Currently, fintechs, through the use of algorithms and data manipulation, have begun competing by streamlining the usual loan approval processes by traditional institutions from weeks or longer to days at most.
Innovation is precious to banks as it offers new and compelling ways to capture new business and grow loyalty from consumers. Additionally, rather than build their technology, as they might have in the past, they can lease it from developers or partner with other third parties.
6. Cross-platform data acquisition
Open banking provides a database for networked data that will make it easier for banks to import existing consumer data for new consumers looking to switch from another bank to theirs. By relying on this networked data, banks can reduce the staffing and financial expenditure required to register a new consumer.
A hypothetical example would be how banks would increase their reach to offer financial services to those in more rural areas without necessarily having to register them in their database if they have already existing accounts anywhere else.
In the end, while Open Banking asks banks to share their competitive advantage with other players, that is only a small part as it presents a significant opportunity for banks to make revenue, innovate and move the needle on financial inclusion.