The Central Bank of Nigeria’s (CBN) recently released the Regulatory Framework for Open Banking in Nigeria, a document which the apex bank believes will provide an enabling regulatory environment that will eventually trigger the provision of innovative and customer-centric financial services in Nigeria, define risk-based data access levels and services through the safe utilisation and exchange of data and services, outline baseline and standards for data exchange among financial services sector participants while guiding operators in the handling of attendant risks and also promote healthy competition in banking.
The CBN’s positioning in the past three years especially with regards to how easy they have endorsed disruption in the market makes this inevitable.
Super Agents, Payments Service Banks and the recent Sandbox tells the story of an Apex bank that understands what it must do and how it must begin to position in a dynamic world where technology and interoperability has become the chief driver of financial services.
What Open Banking Is
The recent framework regulating Open Banking continues the innovative drive from The Central Bank. This is not to say that it is a new, unexplored concept within the Nigeria’s financial services sector, by its definition as a collaborative model through which customers’ financial services data and information are shared between partners who might not be in the same group or affiliated so as to enable customers have more access to their transaction data and offer customers more tailored services to the customer; we can appreciate that this level of business has been existing in some form in Nigeria already via Application Programming Interfaces (APIs).
Super Agents who are unaffiliated to banks can aggregate several banking products and services from different commercial banks and sometimes microfinance banks and offer them to customers through their own platform giving customers a more flexible access to their funds and its management.
This is also a form of open banking since through the Super-Agent, Digital Banks and Mobile Money Operators, bank customers can query their banks for their balances, process deposit and withdrawal transactions, pay bills and so on. In some use cases, FinTech companies have leveraged NIBSS technology to tailor credit products and offer to customers while leveraging their credit history usually through APIs.
However, the challenge with this so far is that through lack of standards, integrating some of these services takes time. I have once managed an API integration that took months because there was a lack of agreement on the standards while the partnering players were developing their interfaces.
Another challenge is that customers did not actively consent to the information sharing and that is a very touchy subject. When did I exactly say that it was okay for the banks to share my credit history with the lendtech platform? If customers did not grant access to the Bank to share data, then sharing it is both unethical and illegal in line with Nigeria Data Protection Regulation (NDPR).
There is also no standardised risk management procedures across organisations therefore making it difficult to scale. Risk Management standardisation facilitates growth by ensuring that decision making is faster.
What the central bank has done with this regulation is to level the playing field in the financial services sector, deepen customer advantage, standardise and scale teething open banking initiatives, introduce and categorise service levels that will be obtainable and also tier different levels of parties to this open banking operation by their levels of risks.
Possible Barriers to Adoption of Open Banking
It goes without saying that Open Banking is inherently disruptive especially for legacy financial services players that are not prepared for it. It can upset their business models, introduce new competition, diminish customer touch-points and increase risks for the legacy financial services organisations.
The inherent disruption in Open Banking can also affect customer trust and make them slow adopters of the innovation but most of the risks are in the supply side who have to internally answer questions around the business case of open banking.
Do customers really care about this or are they good with the current product offerings. Such massive investment into new technology needs to be justified. It would not make sense to invest in just hype like most banks did with Mobile Money only to eventually realize that the use case that made business sense was readily resolved through Agent Banking.
Furthermore, the Commercial Banks, delineated by the CBN Framework as Tier 3 participants (Started from the lowest Tier 0 to the highest Tier 3) and thus sponsors are playing pivotal roles within the framework. They have to set the KYC mechanisms and standards, conduct the risk analysis and submit the report and provide the platform for the different tiers of the participants.
It can easily be deduced that without their contribution, the ship of Open Banking in Nigeria will not sail. I am certain that at some point, some of the commercial banks will ask if they are digging their own graves. This is because Open Banking further empowers the Fintechs and Techfins who since the turn of the last decade had started to eat into the Bank’s core business through progressive disintermediation. Payments services (OPAY, PAGA), Lending (Carbon, RenMoney) and even Savings (Piggyvest, Cowrywise) which used to be the core of the Commercial Banks have been disrupted by Fintech and Open Banking seems to have finally standardised their disruption. Why would the banks dig their own graves?
The risk of data leaks through these open banking integrations will also be a concern to both banks and the consumers is palpable and players would be racking their heads on how best to manage data leaks and allay customer apprehension.
There is also a possibility that some of the banks are not fully prepared for open banking especially as it concerns their technology. Some Commercial Banks might have invested heavily in recent past in a technology that does not provide answers to the questions being asked by Open Banking.
One could see why such banks might not be very keen on the implementation of open banking.
Despite the barriers, open banking is here and regardless of whatever the institutional leaning is, there are really only two options, sink or swim.
Business Cases within Open Banking
The million dollar question then is, how can institutions drive and capture value from Open Banking? What exactly is in the future use cases of open banking that makes it better than the safe present? The truth is that the question is difficult to answer for the Commercial Banks but for the FinTechs and TechFins, products and use cases would be flying. However, tackling the important question of how commercial banks can capture value from Open Banking would require the repositioning of the business and reinventing their business models. Commercial banks have to break the confines of their traditional business model so as to exploit the opportunities presented by Open Banking.
I have mulled over five possible use cases.
1. Provision of Digital Platforms: Commercial Banks have invested heavily in digital platforms which they used to service their customers. With open banking, they have to consider negotiating with these APIs with the FinTechs and TechFins who might not have the funds or the patience to develop these. Banks can choose to charge subscriptions to their platforms or take a share per transaction consummated over their APIs. Some of their customers are Super Agents, Payments Solutions Service Providers and even Tier 0 FinTech as provisioned by the framework. As against selling their products themselves, Banks can position as wholesalers distributing their services through FinTechs and other players via APIs for value.
2. Leveraging Data: In this regard banks can also leverage transaction data that other businesses might need so as to build tailored products for the market. I believe that this is what the Central Bank referred to as Market Insight Transactions (MIT). There is a tightrope here though because of Data Protection standards especially as you cannot share an individual’s data without a customer’s consent. Commercial Banks can easily partner with manufacturers, retail segments, telecommunication and other sectors to unlock superior value.
3. Establishing a Marketplace: Banks can scale the adoption of marketplace products, third party products can be offered on the platform to increase their product range and deepen customer options. Banks who already hold customer data can readily mine and utilize Artificial Intelligence to advise customers on their grocery shopping or bill payments. GTBank’s Hub or their Shop Online product.
4. Anything As Service Model: Commercial Banks are probably the strongest KYC collectors in Nigeria. Over the years, they have built a stringent KYC/AML system culminating in the Biometric Verification Number. Banks can offer this service to FinTechs interested in doing business with a particular customer for a fee. Exploring this use case, Banks that have spent years handling payroll for their staff can offer Payroll as a service for their corporate clients. Some other industry players have mentioned ‘Treasury As A Service’ as a key use case especially for FinTechs or TechFins that needs to leverage Commercial Bank’s expertise in this regard.
Therefore, as submitted by International Data Corporation, Anything as a Service refers to a new proposition where the bank uses its own software and operational capabilities to act as a service provider to manage entire functional processes for the customer.
Disruption favors the prepared. As always, it will introduce new strong players and will hasten the waning of the less prepared. FinTechs and Banks needs to review the regulation, research possible use cases and begin to explore ways to future-proof their business. However, financial services sector should not see Open Banking as a disruption that heralds the demise of the banks, I do not see it this way, within the Nigerian configuration, it is my view that the banks are already familiar with this, are prepared for it and currently hold all the aces.