The Central Bank of Nigeria (CBN) announced the operational guidelines for open banking in a circular released earlier this month as it seeks to improve the nation’s financial ecosystem.
Death, taxes, and an ever-evolving financial landscape. As of 2021, the number of active bank accounts in Nigeria was 133.5 million. In 2022, the volume of financial transactions rose to a five-year high of 5.2 billion, a sharp contrast from the previous years.
So we can agree that Nigeria’s financial system is growing in volume. But it might not necessarily be the case with quality. There have been age-long instances of poor online operations, network issues, and ailing customer service. Considering the nature and complexity of these issues, it does not look like they will be going away soon.
Enter open banking
In its simplest form, open banking involves the establishment of publicly accessible application program interfaces (APIs) by financial institutions, e.g. banks. An API can serve as a portal between the financial institution’s services and other applications or platforms that third parties may want to build for the public to access these services.
For example, think of a third-party platform that helps users manage their savings – like PiggyVest. Let’s also think of a bank where these savings are kept – like Wema Bank. In an open banking setup, Wema would open its money-saving service to third-party platforms such as PiggyVest. These third-party platforms can then access some of Wema’s services through the bank’s API. Then the third parties would use the APIs to build and run a saving platform. In essence, the third-party platform serves as a channel for you to save your money better with the bank.
Read also: CBN’s new regulations on open banking; a game-changer for financial inclusion?
Open banking is already in play, and it’s safe to say the concept has recorded some progress. The example of Wema bank and PiggyVest is indicative of said progress.
Just last year, Somto Ifueze, the CEO and chief product engineer at Piggyvest, stated that the company had paid out N242 billion to its 3.5 million customers throughout the previous year, 2021. A review of the company’s financial reports indicates an increase from the previous calendar years. Since Wema bank was its sole operating bank within the highlighted period, most of these transactions were performed under it.
At the end of Q1 2021, when Ifueze had made that statement, Wema Bank’s financial reports showed an increase in customer deposits that amounted to 1.01 trillion Naira, a 26.89% increase from the same period of the previous year. Of course, it would be inaccurate to attribute this growth in deposits to its open banking exploits, especially since the bank did not specify income streams in its past three annual reports. But the scale of Piggyvest payouts has to have counted for something.
Read also: All you need to know about CBN’s open banking guideline for fintech and banks
Traditional banks, open banking and a lack of end users
Despite the mutual benefits, traditional banks have not entirely opened up to the idea of allowing open banking platforms. We contacted Ebovi Wali, the CEO of Kacha Labs and the former head of growth at Bitmama and Changera, all of which are open banking-based financial solution platforms.
Ebovi thinks that more banks are being immersed in the open banking practice, mostly for virtual accounts, data payments, and direct transfers. However, he highlights that this does not necessarily mean progress. According to him, open banking largely depends on data mining, and “data mining is difficult here (Nigeria)…because there are not a lot of end users”.
He’s right. Data mining is at the core of open banking because these third-party platforms prominently serve as a collection source for consumer data and financial activity. Hence, a scarcity of end users would mean a lack of consumer data and financial activity to be collected. From this perspective, an obstacle standing between traditional banks and open banking is the lack of end users.
Apparently, it’s not enough for open banking platforms to provide data and ease operations. They need to be able to draw in more users or cater for the already large user bases of these big traditional Nigerian banks, and the apparent lack of end users may result in a deficit.
So while Piggyvest may have disbursed N242 billion to 3.5 million customers to the benefit of Wema bank, what are the odds that other open banking platforms would be able to pull those kinds of numbers for big banks? These considerations need to be made before these banks give out their APIs.
Read also: “Nigeria is Not Ready to fully Embrace the Open Banking System” – Austin Okere
Security concerns and social preferences could be barriers
Data mining is an information-sensitive process, and money is an even more sensitive thing for the Nigerian populace. So it will take plenty of convincing to nudge the masses towards online financial solutions, especially since these solutions are not simplified for the “common man”.
A lot of banking solutions are trying to change the social status quo, when they should build around it”.
Ebovi highlights this problem by stating that “
To highlight platforms which are building around the status quo, he references OPAY and Palmpay, both payment solutions platforms inclined towards the “streets” because of less complexity and grassroots incentives.
On the other hand, traditional banking can also be complicated and information-sensitive. But the main banks are, however, a necessity and a mainstay. So unless open banking can win over end users by proving its value for them, social preference will always tilt away from it, and so will traditional banks.
Bottomline
As the Nigerian elections drew nearer in February, the Naira scarcity strained the country’s population in several ways. But it also exposed widespread incompetence in our financial systems, most of which can be solved by open banking.
So at this point, three things are clear: third-party platforms need banks, banks need third-party platforms, and the people need both.
We are just going to have to figure out how to make it work for everyone.
This article was written by Tezor Dedam, an independent journalist and social researcher. His interests are centred on information frameworks, finance tech, and people-centred narratives. You can reach him on all social media platforms @tezordedam
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