Open Banking in Nigeria and Emerging Opportunities for Fintechs and Financial

Saturday February 27, 2021 / 11:50 AM / Davidson Oturu (Aelex) / Header Image Credit: Aelex

With the arrival of fintechs and other innovators on the banking scene, the way we bank and carry out financial transactions is constantly changing. Some of these developments led to considerations for the creation of a seamless system that would lead to the sharing of financial data through an open banking system.

These developments, facilitated by the European Union’s Payment Services Directive (PSD 2), led to the creation of open banking on the global scene.

What is open banking?

Open banking forms part of the emerging areas within the fintech ecosystem and is presently in use in Europe, the United Kingdom, China, Japan and Singapore. 

It grants third-party providers (TPPs) open access to consumer banking, transactions, and other financial data from banks and non-bank financial institutions (NBFIs) through the use of Application Programming Interface (API).

With open banking, customers can share their financial data with different financial institutions. In order for this to be effected, the institution require the express consent of the customers. Open banking represents a shift from a closed model, where financial institutions operated in silos, to one in which data is shared between different members of the banking ecosystem with authorisation from the customer.

Thus, with open banking, fintechs and banks can communicate seamlessly through the networking of accounts and data across institutions for use by consumers, financial institutions, and TPPs.

Open banking will lead to a situation where regardless of how many accounts and financial products a customer has with multiple institutions, he can manage them from a centralised location without having to check out from one system to another.

For example, a consumer could have a bank account with Zenith Bank PLC, have a mutual fund account with ARM Investments and operate an account with a fintech like Piggyvest. When the customer wants to check his inflows and outflows from his different accounts, he will have to log into the separate platforms.

However, with open banking, the customer can seamlessly operate his investments and track his transactions on the three platforms from a centralised location through the use of APIs. The APIs can also look at the transaction data of the customer and identify the best financial products he can invest in that would yield better interest rates.

Importance of APIs to Open Banking

API is a software intermediary that enables technology platforms or applications communicate with each other. Some popular platforms that use APIs to accelerate the delivery of their services to consumers include Facebook, Google, Twitter and PayPal.

A banking API is an interface through which a financial institution provides data about customers, accounts and transactions. With a banking API, users of payment services will not be solely dependent on the direct services offered by their own bank. They can make use of third-party financial services, which, in turn, access the data required by the original bank via the banking API.

Some of the stakeholders that APIs in open banking are beneficial to include the following:

1. Bank customers – APIs improve the customer experience, since customers can conveniently complete all transactions in the respective context and under one user interface. Also, the paperwork that would typically apply when running multiple transactions on different accounts would be minimised.
2. TPPs in the e-commerce sector – With APIs, online providers can offer customers better services that include product selection and real-time arrangement of consumer credits.
3. TPPs in the technology sector – technology providers whose solutions create interfaces to financial institutions and thereby create the technological infrastructure.
4. Financial institutions – fintechs and banks will be able to expand their payment…