Everything You Need to Know About Open Banking

Winner Ajibola

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One of the bedrock of the banking industry is information. This is evident in account opening, loan applications, withdrawals, and deposit forms. Countries have started adopting the open banking system to facilitate speed in banking operations and payment processing. 

Recently, the Central Bank of Nigeria announced the regulations that will guide the implementation of open banking in Nigeria. This article will explain what it means, the involved parties, and the advantages or disadvantages of open banking.

What is Open Banking?

Open banking means being able to transfer customer information (with consent) in a bid to offer more personalized services and experiences.

It is a system where third-party financial institutions make consumer banking, transactions, and other financial data accessible via APIs (application programming interfaces). These APIs are simply software programs that send and request customer information online.

Traditional banks can collect and share customer data with third-party service providers like startups in this scenario. For context, the data usually means financials and biodata.

Although before sharing, you’d have to give permission as a customer. This often falls under the banking institution’s terms and service or privacy policy. In Nigeria, the CBN guidelines regulates open banking.

Possible Use Cases of Open Banking API & Examples

Some of the popular use cases for financial institutions might be;

  • Where institutions need to compare customer accounts before approving a loan.
  • It could also be reviewing transaction history to provide personalized financial service options
  • Startups can use this customer information to create user personas and marketing profiles for acquisition
  • Virtual banks can collect customer data to make account changes or authorize certain transactions on behalf of the customers

Who are the Stakeholders Involved in Open Banking?

For open banking in Nigeria to be successful, there are specific stakeholders or parties involved to ensure its smooth operations;

The Central Bank

These are the regulators that review and grant open banking licenses. They set the standard and ensure that both API providers and API consumers adhere to these established guidelines.

Since they can revoke licenses and instill sanctions, they are the major players in open banking in the Nigerian system. This is because their primary role is to ensure law and compliance on all ends.

API Providers

These are usually financial institutions that share customer data with third-party services. They could be traditional banks, insurance providers, investment banks, and so much more.

Since people rely on them to make solid financial decisions and the central bank regulates them, they can provide this information while respecting privacy laws and policies.

API Consumers

These are the third-party services that request data. So whether they use it to improve their services or simply have access to it, they are referred to as the consumers in this chain. Examples of this could be fintech companies like your loan app, savings app, or currency exchange app.

Customers

These are the users whose information is being shared by the API providers. They are the ones who give consent before any data can be transferred or used by the API consumers. These customers are also the target for improved services and user experience.

The Advantages of Open Banking

Open banking is beneficial for every party involved in the process. Here are some of the benefits they can hope to enjoy;

  1. Perhaps the most important benefit is that customers can get improved services tailored specifically to their needs at competitive rates.
  2. Loan startups can get a clearer picture of a customer’s financial status and risk appetite. This way, they can offer loans that’ll be profitable for them and easy to recover.
  3. Customers will have a reduced distrust for traditional banks because they’ll know how regulated they are
  4. API consumers can easily connect to the providers without the need for any intermediaries. This will heavily reduce the cost incurred and the manual work involved in data sharing.
  5. Customers can now decide who has access to their data and transaction insights.
  6. Traditional banks and API providers have to step up to offer more valuable services that go beyond transactions.

The Potential Risks of Open Banking

While we’ve seen the benefits of open banking, it also poses risks to all involved parties. This includes;

  1. Data breaches - since the entire banking deals with customer data, there’s the possibility of a data breach from an insider threat. 
  2. Misuse of customer data - recently, people don’t like seeing too many ads during their user experience. So misuse in this context could be how tech giants use this data for their personal gain through advertising. 
  3. It can increase the cost of customer acquisition - if there’s more competition amongst API consumers, it only means that businesses have to double down in convincing and acquiring users.

Although the biggest risk is data breaches and data misuse, participants in open banking usually have to agree to strict security policies for handling customer data. This includes privacy, customer experience, risk management, and other operational standards. 

Open banking is a policy that’ll boost innovation in the financial tech sector. With the guidelines in place and strict adherence to them, we’ll enjoy many of the benefits of open banking.

You can start by enjoying seamless international transactions in Africa with a Grey foreign account.

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