Explainer: Pros and cons of CBN’s open banking in Nigeria

To improve competition and innovation in the banking system, the Central Bank of Nigeria has recently established the Regulatory Framework for Open Banking in Nigeria.

The Nigerian Regulatory Framework for Open Banking created standards for data sharing across the banking and payment systems to encourage innovation and expand the range of financial products and services available to bank customers.

Financial institutions (FIs) have been hesitant to take action because the result of open banking is ultimately competition; thus forcing regulators to be the primary driver of open banking and its adoption across the country.

As a result of the CBN’s new regulation, open banking recognises the ownership and control of data by customers of financial and non-financial services, and their right to grant authorisations to service providers to access innovative financial products and services.

What is open banking?

Open banking is a banking practice in which third-party financial service providers are given open access to customer banking, transaction and other financial data from banks and non-bank financial institutions via application programming interfaces (APIs).

This includes being able to download and share information about account balances, payments, transactions and investments. Open banking can also refer to allowing a third party to initiate transactions from a customer’s account, such as sending payments or withdrawing money.

What is a banking API?

Application Programming Interface (API) is a set of instructions and protocols that determine how different software components should interact. This is the technology that underpins open banking, and the CBN has recognised its utility.

The apex bank said it recognised the existence of an ecosystem for Application Programming Interface (API) in the banking and payments system and is aware of various efforts in the industry to develop acceptable standards among stakeholders.

APIs have been used to connect developers to payment networks as well as display billing details on a bank’s website. Through open banking, APIs are now being used to issue commands to third party providers.

APIs are also necessary for the functionality of Banking-as-a-Service (BaaS) – a key component of open banking. BaaS is an end-to-end process that connects fintech and other third parties to banks’ systems directly through the use of APIs. It helps to build up banks’ offerings on top of financial providers’ regulated infrastructure.

Why would I want to share my financial data with a third party?

Consumers may wish to share their banking information with other companies to obtain better and less expensive services.

With a complete view of a consumer’s assets and liabilities, an online wealth management business like Cowrywise or Piggyvest could be able to provide superior financial advice.

Quickly moving information like direct debit instructions or frequent payees, are some of the burdens that prevent people from switching banks. Now, with CBN’s new Open banking policy customers should be able to switch providers more easily if they have easy access to data.

Benefits of Open Banking

Open banking can allow financial services, and clients, securely communicate their financial data with other financial organizations by relying on the API network.

Consumer transaction data is also analyzed by the API to determine the best financial products and services for them, such as new savings account with a greater interest rate than their current savings account or a different credit card with a lower interest rate.

Open banking could enable lenders to gain a more accurate picture of a consumer’s financial status and risk level by using networked accounts, allowing them to provide more profitable lending terms. It may also assist consumers in obtaining a more accurate picture of their finances before incurring debt.

Open banking would provide consumers with easier access to financial data and services while also reducing expenses for financial firms.

Cons of open banking

Security risks associated with open banking APIs include the possibility of hostile third-party software wiping away a customer’s account. This would be a very serious (and unlikely) threat.

Data breaches owing to poor security, hacking, or insider threats, which have become rather regular in the modern era, especially at financial institutions, and will likely remain prevalent as more data are interconnected in more ways, are much bigger concerns.

What is the International trend in open banking?

European and UK regulators have mandated that, with customers’ permission, banks must allow outside companies to access transaction history and take payments directly from an account.

BBVA launched its BaaS platform, Open Platform, in the United States in 2018. Open Platform makes use of APIs to enable third parties to sell financial products to customers without having to provide a full range of banking services.

In May 2018, HSBC introduced its Connected Money app in response to the UK’s open banking legislation, which aims to give people more control over their financial data. Customers may examine all of their bank accounts, as well as loans, mortgages, and credit cards, in one spot with Connected Money.

Bottom line

To give the finest services to new and existing clients, players in today’s digital space must constantly grow by remaining innovative and opening the door to collaborations.

Banks can work with fintechs to deliver digital services and flourish with the help of open banking. They can develop in terms of credit and assets, savings and liabilities, and a variety of additional prospects thanks to the CBN’s adoption of open banking via the regulatory framework.

It is now clear that online banking and payment methods are here to stay, and as such, the banking industry will have to quickly accelerate its payment innovations to keep up with this new normal. And Open Banking is the best way forward.

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