All you need to know about CBN’s open banking guideline for fintech and banks

Afeez Odunoye
The guidelines will aid innovation and competition in the country. | Regulatory environment supervised by the CBN must evolve progressively…
All you need to know about CBN's open banking guideline for fintech and banks
Open Banking

Recently, the Central Bank of Nigeria (CBN) issued a new set of guidelines to guide the expansion of the open banking model across the country. The country’s apex bank said that it developed the new guidelines in collaboration with stakeholders across the industry.

Industry watchers are optimistic that the new guideline holds promise for the development of the Nigerian banking space as well as guarantees faster and more efficient service offerings for customers.

To further help you understand why this guideline may be drawing this much optimism, we have decided to make a note of all that you need to know about the new CBN’s Open Banking guidelines for Nigeria shared on May 17.

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Central Bank of Nigeria Governor, Godwin Emefiele is one of the principal actors that enabled the new open banking guideline.

Open banking explained

First, the Central Bank believes that the new framework will engender healthy competition among players and spur innovation in the banking system. While the guidelines are relatively new, the concept of Open Banking isn’t.

Open Banking is a system that provides a user with a network of financial institutions’ data using Application Programming Interfaces (APIs). It is the process of enabling third-party payment service and financial service providers to access consumer banking information such as transactions and payment history. It promotes interoperability and networking between banking information and service providers, creating a smoother user experience.

An Open Banking Standard defines how financial data should be created, shared and accessed. By relying on networks instead of centralisation, open banking helps financial services customers securely share their financial data with other financial institutions.

All you need to know about CBN's open banking guideline for fintech and banks

Before the Open Banking guidelines came into effect, players in the banking and payments system made use of the Application Programming Interface (API) to develop and offer financial products and services. Mono, Okra and OnePipe are some of the API fintech startups that are driving access to financial data in Nigeria and across Africa.

With the data and infrastructure these startups provide, third-party financial service providers gain access to consumer banking, transactions, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open Banking makes all of these possible.

The CBN, in the new regulation, recognised the existence of the structure and the efforts of API fintech startups in the background of the new Open Banking guidelines.

The Bank 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.

CBN Open Banking guidelines, May 2022

Open banking: Why does it matter?

Open banking gives access to third-party providers, such as fintech platforms to make use of customers’ data for the creation of new and interesting financial products. Often, these come from traditional banks that sit on a trove of data.

With open banking, all of that will change. Yes, traditional banks will get to share the data they have with third parties.

Everything you need to know about CBN’s Open Banking guidelines for Nigeria: Traditional banks will get to share more data with third-party providers, Technext

Beyond sharing data, traditional banks can gain more from segmenting their customer data. This will make providing personalised loan offerings to customers easier and the possibility of providing customised banking services will heighten.

But for this to work, the traditional banks need to open up their system to revolution: a change to the way they offer products and services.

According to Prof. Yinka David-West of the Lagos Business School, the Open Banking concept lowers entry barriers for new entrants to the financial services ecosystem, enabling customers to easily decide who has access to their account and transaction data. By breaking current banking monopolies, open banking helps new entrants (without legacy customer data) become more competitive.

“As such, older banks will also need to be more innovative and provide more superior value propositions beyond facilitating transactions. The prevalence of open banking will provide a more holistic view of any customer irrespective of existing banking relationships,”

Prof.essor Yinka David-West

Insights and possibilities for Nigeria

In a December 2018 a position paper on Open Banking by the Nigeria Inter-Bank Settlement System (NIBSS) highlighted the stories of the concept’s adoption in other countries and regions.

The paper revealed that BBVA, a Banking as a Service (BaaS) platform launched in the US. The financial services company made the move in October 2018 via a Banking-as-a-Service platform in the country. With APIs, firms can offer financial products to customers without having to take on full banking themselves. Companies simply plug into a core digital platform and then access APIs including Move Money, Identity Verification, Account Origination, and Card Issuance services. 

In Australia, a new data sharing regime came into effect in July 2019. It aims to give consumers greater access to, and control over, their data, permitting accredited third parties to receive banking data when customers provide express consent for it to be used for a specific purpose.

Unveiled in 2017, the Hong Kong Monetary Authority’s Open Banking Framework enables Hong Kong’s biggest banks to pick Third-Party Providers (TPPs) to work with rather than the mandatory access dictated by PSD2 in some parts of Europe. Also the HKMA is being more prescriptive with the recommended API approach and standards, having published the first draft of its Open API Framework in July 2018.

Everything you need to know about CBN’s Open Banking guidelines for Nigeria: The country stands to gain so much, but there are legitimate concerns.

Going forward

Without doubt, open banking comes with risks. For instance, traditional banks have the responsibility to protect customer data entrusted into their hands, from theft, unauthorized access and unauthorised disclosure.

Similarly, the banks must put in indisputable authentication mechanisms that ensure that the data requester is indeed the customer. Non-Disclosure Agreement and Service Level Agreement with effective indemnity clauses can help to guide against possible liabilities arising from data disclosure and security breaches through TPPs. This may be some additional cost that may threatened its adoption.

But the end benefits of the open banking systen outweighs the cost and the key players are well aware of the returns on the investment.

In all, to get the best out of the new open banking guidelines, the Nigerian regulatory environment needs to evolve constantly. Having a strict yet dynamic system in place will guarantee seamless interoperability with its attendant cost-saving, ease-of-implementation and security benefits.

And, it helps that the NIBSS has offered to help the country’s banking industry evolve and come up with common API Standards to drive Open Banking in the country.

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