CBN’s new regulations on open banking; a game-changer for financial inclusion?

The need to transform how banking services are delivered in Africa to deepen financial inclusion spurred the desire to embrace the nascent idea of open banking. Despite the exponential growth in digital banking thanks to fintechs “banking the unbanked”, about 57 percent of Africans are still unbanked.

Open banking is sharing third-party access to financial data through application programming interfaces (APIs) within data privacy rules. The idea is that traditional banks are now allowed to share your data with fintechs and other digital banks — albeit with your consent — to provide innovative services tailored to your financial needs. The applicability of open banking includes agency banking, financial inclusion, know-your-customer (KYC) credit scoring/rating, etc.

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 decide who can access their account and transaction data. She added that by breaking current banking monopolies, open banking helps new entrants (without legacy customer data) become more competitive.

Open banking is gradually gaining prominence in Africa, with 11 countries already exploring the game-changing idea. Similarly, API fintech startups like Mono, Okra, and OnePipe have developed products to drive access to financial data in Nigeria and across Africa.

Introducing CBN’s guidelines on open banking

Earlier this week, Nigeria became the first African country with open banking regulations: the Central Bank of Nigeria (CBN) announced the operational guidelines for open banking [pdf] in a circular dated March 7, 2023. 

“The adoption of open Banking in Nigeria will foster the sharing of customer-permissioned data between banks and third-party firms to enable the building of customer-focused products and services. It is also aimed at enhancing efficiency, competition, and access to financial services in Nigeria,”

CBN

The 68-page operational guidelines contain rules for how banks and third-party financial institutions interact with customer data, responsibilities, and expectations for the various participants (the banks, third-party financial institutions, and customers) and ensure consistency and security across the open banking system.

Per the guidelines, any organization possessing customer data that could be used to provide financial services to individuals is eligible to participate in the open banking ecosystem. Entities in open banking include API Provider (AP), API Consumer (AC), and the customer.

The CBN shall also provide and maintain an Open Banking Registry (OBR) to provide regulatory oversight on participants, enhancing transparency in the operations of open banking, and ensuring that only registered institutions operate within the ecosystem. The OBR is expected to be a public repository for details of registered participants, which their CAC business registration numbers would identify.

How it started

This journey in Nigeria started six years ago.

In 2017, a group of industry veterans led by Adedeji Olowe saw the need to address the challenges in the country’s banking space. It formed an open banking working group, later known as Open Banking Nigeria. It has since engaged with banks, fintechs, CBN, and other international stakeholders.

In February 2021, the CBN released a regulatory framework to guide the expansion of the open banking model across the country, laying the groundwork for the draft of the operational guidelines in May 2022, which has now become law. Knowing that open banking will eliminate regulatory setbacks hindering banks from sharing data with third parties, ensuring data privacy becomes non-negotiable. Hence, the CBN’s new regulation will work alongside the Nigeria Data Protection Regulation (NDPR).

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

The much-desired game changer?

For industry watchers, the new regulation is a game-changer for the Nigerian banking space. Open Banking Nigeria believes the regulation “would usher in a transformation time for financial innovation and financial inclusion in Nigeria and Africa as a whole”.

Open banking comes with risks, especially with sharing financial data. However, Jesutooni Ajiboye, a finance lawyer, says the new regulation will address these risks.

“While in the previous regulatory framework, there were items like the categorization of people who could use data and who could access data, there weren’t really specifics on how the data is supposed to be handled which the new operational guidelines have sought to speak more on. I believe the new regulation will help mitigate the systemic risks that come with open banking platforms,” he told Technext.

He adds that one of the major issues that the operational guidelines addressed is the concern that traditional banks have about the uncertainties of open banking, adding that the new regulation has expanded on what each stakeholder is expected to do and its technical requirements.

On data protection and privacy issues, Ajiboye said: “The current guidelines create a data governance policy committee and also address data protection risks in terms of mandating that operators in the industry comply with the basic standards such as the NDPR and the CBN Consumer Protection Regulations [pdf].”

He, however, admits the primary concern about open banking and data protection is the possibility of large-scale fraud if the data falls into the wrong hands. The regulation has also addressed another relative challenge that borders on consent.

Olutimilehin Olushuyi, another lawyer, said though the regulation is well-detailed, there might be problems with its application in the nearest future due to the ever-changing nature of technology.

“If we stick with a certain kind of approach to technical specifications, what will happen is that at some point when the technology is no longer sufficient, participants will have to lobby and wait on the CBN to change the guidelines, which will take a long time. At some point, the technical minimum might need to become even higher and the provisions of the guidelines may become a little too low,” he said.

According to him, the guidelines stipulate some provisions that would have been better left to the parties, such as the stipulation of the terms that should guide intellectual property in the software of the participants in the open banking ecosystem and the role of the CBN as the arbitrator in the matters concerning the participants before the commencement of any judicial process.

Final thoughts

Though a nascent idea in Nigeria, open banking provides value-creation opportunities for innovation-friendly banks and will transform how financial institutions approach the creation of solutions for their customers.

With the new regulation that guides how third-party financial services providers access data, fintechs in particular — who are at the forefront of the drive for financial inclusion in the country — can better understand their target markets, gain more customers, and develop new customer-focused products and services or improve on existing ones.

The new products would also improve customers’ financial lives and help the financial inclusion goal while ensuring users’ data is safe and secure.

In the end, it’s a win-win for everyone.

Read also: CBN introduces USSD code, ‘recharge’ vouchers, ATM withdrawal for eNaira amid Naira scarcity