Advantages and Disadvantages of Open Banking in Nigeria

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What is Open Banking?

Open banking is term used to describe banking system where third-party financial transactions services providers are granted open access to customers banking, and other financial data. Such access are granted via application programming interfaces (APIs).

Such open but regulated access includes the ability to download and share information about account balances, payments, transactions and investments. Open banking  also include allowing a third party to initiate transactions from a customer’s account, such as sending payments or withdrawing money.

Have you purchased a product or service online before and you were made to pay for the good or service right there online on the payments gateway integrated on the website or mobile app? That’s open banking. Your bank opened up your banking data to third-party platform, financial (payment gateway) service provider to use and share.

What is API?

API stands for Application Programming Interface. APIs are software interfaces that enable two applications to interact with each other. These software interfaces are been adopted in banking integration data sharing platforms and payments gateways.

APIs are used to connect developers to payments networks and to show billing details on banks websites. Using open banking, APIs are integrated in business online platforms to issue command to third-party providers.

APIs are also enabling 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 via the use of APIs. It helps to build up banks’ offerings on top of financial providers’ regulated infrastructure.

Nigeria Regulatory Framework for Open Banking

In other to encourage competition and innovation in the Nigerian banking system, the Central Bank of Nigeria established the Regulatory Framework for Open Banking.

It is aimed at creating standards for data sharing across the banking and payment systems to improve innovation and create different means of services to bank customers.

The conventional banking operators are reluctant in adopting the  system as it poses threat to their dominance in financial sector. The open banking will certainly lead to competition, as FinTech startups with innovative ideas may take over the payments services of the financial institutions.

To ensure implementation of open banking in Nigeria, the apex bank regulation mandates that, with customers’ permission, banks must allow outside institutions to access customers data and take payments directly from customers accounts.

Read also: Impacts of Technology on Financial Inclusion in Nigeria

What Data Does Open Banking Open Up?

Open banking system helps open up three types of data

  • Account data
  • Product data
  • Payment initiation
Account data

Account data include personal information of the account holder and transactions on the account such as account holder’s name, account type, currency, opening data, transaction history.

Product data

This include the products and services a financial institution offers. Before now, to get information on the products and services a bank offers, you have to walk into a bank branch to get such information. But with open banking, you can dial some USSD codes, use the bank app or visit the bank's website to get such information.

Payment initiation

Payment initation means authorising payment from one bank account to another. With open banking the process of initiating payment can be done by other software solutions, apps, websites with the consent of the account holder. 

Open banking also helps to reconcile and reverse wrongly made payments or unsuccessful transactions.

Advantages and Disadvantages of Open Banking

Benefits of Open Banking in Nigeria

  • Automation
  • Convince
  • Financial inclusion
  • Innovative competition
  • More income opportunities
  • Better payments solutions for businesses
  • Better financial management
  • Account aggregation
  • Inhanced access to loans and better borrowing terms

Better payments solutions for businesses

Using payments gateways APIs businesses could receive payments from anywhere with lower costs, which will improve their cash flow.

Better financial management

By accessing your account data, open banking products providers could analyse inflow and out flow of moneys in and out of your account. You could get your bank statement by clicking of some buttons or by automation. With open banking, you can identify services with lower fees, and opportunities with better interest rates. For examples some savings and investment platforms such as PigyVest, Carbon that operate with open banking, offer better interest rates than the conventional banks

Account aggregation

With open banking, you can be able to see all your accounts in one place, instead of having to log into different accounts in your browser or navigating between multiple apps.

Enhanced access to loans and better borrowing terms

With open banking, you can get loans in minutes without paper works and collaterals — your account details and transactions history can serve as collaterals. In conventional banking, if you don’t have material collaterals and credit history, you may not be able to access loans or may not get favourable borrowing terms. But in open banking, your historical bank account data can be accessed by lenders to show your creditworthiness. For instance, you can get loans from microfinance lenders like Renmoney just with your BVN. Through your BVN they access your bank account data and transactions history to determine if you are qualified for the loans.

Disadvantages of Open Banking

Security risks

The major disadvantage of open banking is the possibility of malware third-party software compromising a customer's account.

Data safety issues

Data breaches as a result of poor security, cyber attacks, insider threats, which have become prevalent in recent times, especially at financial institutions

The rise in implementation of open banking APIs has given rise to cybercrime as well. Open banking exposes more people to the risk of stolen passwords, hacked accounts, internet banking frauds, etc. There will be a more innovative way for fraudsters to swindle and divert people’s money. The people at the rural areas are more at risk. 

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