Open banking is the name for the practice that offers third-party financial service providers open access to financial data via the use of application programming interfaces (APIs). It essentially makes it possible for the consumer to access information from disparate bank accounts in the same place through a third-party application. It is currently one of the hottest trends in fintech and, like it or not, it is here to stay. Two big initiatives in the Europe and the UK, the PSD2 and the UK Open Banking framework, have paved the way in the last few years. Banks in these regions are now mandated to give fintech companies the ability to look into client accounts and initiate payments. This has changed the landscape as it means that customers are no longer just the client of a bank for life. Small players can now provide value added services on top of banking. Open banking initiatives are now cropping up throughout the EMEA region, creating standards which banks must comply with. The future of banking is open.
There is still work to be done. Firstly, regulators need to ensure there is compliance with these new frameworks among the key players. All industry stakeholders need to be involved and provide data in the same way for open banking to progress. Financial standards and messaging are constantly changing, and all parties need to be in compliant with the most recent versions such as ISO 20022 for there to be a level playing field. The next main hurdle is technology. When picking their open banking providers, major payments institutions like HMRC make their choice based on the quality of the tech. All fintech players should be able to do effectively the same thing in terms of services offered, but the differentiators come down to factors like output, downtime and how the system performs when dealing with high throughput volumes of data. Security is also a major concern. Open banking providers need to ensure that stringent cybersecurity is constantly in place and under review so that it evolves over time. Applications need to be built from the ground up with security in mind. User education is also highly important. You can have the most advanced security system in the world, but if bad actors get hold of private keys, the whole system can be compromised. It is therefore essential that users are taught to recognise phishing and social engineering scams. Providers should be disseminating information on these risks regularly and widely.
Opportunity in Africa
The pandemic has caused a huge increase in digital channels across Africa, and open banking is a beneficiary of this. Both Mastercard and Visa announced during the pandemic that digital web transactions such as e-commerce have overtaken physical sales for the first time in history. Africa also leapfrogged the traditional landline telephone networks, instead going straight to mobile when building its telecoms infrastructure. This encouraged far more innovation in mobile out of necessity. This, coupled with poor physical infrastructure like roads and rail, resulted in a proliferation of mobile banking channels and means that the continent is at the forefront of global mobile banking innovation and the thirst for financial inclusion. Companies like Safaricom’s M-Pesa have benefitted greatly from this and control a large part of the economies in their respective markets. Open banking is a facilitator of this system as it allows you to open accounts and make transactions all from one app on your phone. Nigeria, one of Ceviant’s primary markets, has 22 money deposit banks and a potential bank population of around 150 million users and approximately 100 million mobile banking users. This represents massive market potential. In terms of regulation, Nigeria is far ahead of other African nations. In May 2022, the Central Bank of Nigeria (CBN) published a set of draft operational guidelines for open banking in the country, which has taken the best elements of the UK’s framework and tailored them to the needs of the Nigerian market. For example, it standardises and codifies the use of virtual accounts and is designed around API consumers and providers, both of which will be individually licensed. Both propositions will reduce compliance concerns for fintechs operating via the open banking model in Nigeria and open the door for world-leading innovation. To ensure consumer data is protected, CBN’s draft guidelines also prioritise consumer consent at the important stages of data exchanges, such as when sharing with non-Nigerian companies. The CBN is now in the process of taking feedback from industry stakeholders, use it to update and amend these guidelines, and eventually publish a final version. There is currently no timeline for this publication, but the current draft is a very encouraging step and bodes well for Nigeria’s banking industry, especially for the 38 million Nigerian adults who have no formal access to financial services.
At Ceviant, we are taking open banking to a new level by leveraging it to benefit corporates and SMEs. Previously, only large companies had the resources to build technology to easily access to their financial data. However, using open banking APIs, our platform lets smaller finance teams access multiple banking platforms and all necessary financial data at the click of a button. We also go beyond simple open banking by offering value added services like liquidity management and trade finance within one platform. Treasurers can now see all their different account balances in all different currencies all in one place, making it far simpler to plan and avoid financial hurdles.