By Ebenezer YALLEY
Imagine a situation where your bank does not just hold your funds but acts as a portal to a connected set of seamless transactions. Open banking, a novel development under the banner of open finance facilitates the sharing of financial data through secure APIs, connecting banks on one hand as API providers and fintechs on the other hand as API consumers.
Under open banking, banks allow access and control of customers personal and financial data to third-party service providers, which are typically fintechs.
Open Banking usually operates with the principle of safeguarding customer data, where openness and consent guide data sharing through the utilization of advanced encryption. Risk assessments and continuous monitoring is also utilized against any forms of threats to ensure secure data sharing.
According to Statista, global Open Banking transactions reached US$57 billion in 2023, with a projected increase in the coming years. The number of open banking API calls is expected to surge to 580 billion by 2027, reflecting the rapid expansion of services and their integration into diverse financial ecosystems, fostering innovation in products and services for customers.
In the domain of open banking there are various stakeholders each playing a pivotal role in reshaping the financial landscape. Among these, Third Party Service Providers (TPPs) emerge as key players, catalyzing innovation and redefining traditional banking paradigm.
TPPs encompass a number of entities but two predominant operating models stand out: Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs).
AISPs, the vanguards of data driven innovation specialize in gathering and aggregating financial data from multiple sources. By harnessing this wealth of information, AISPs offer users a comprehensive overview of their financial landscape empowering them to make informed decisions.
From tracking expenses to analyzing spending, AISPs provide valuable insights that enhance financial literacy and management.
On the other hand, PISPs revolutionize the payment landscape by enabling secure and seamless transactions. Leveraging open banking frameworks, PISPs facilitate direct payments from a user’s bank account to a merchant, bypassing traditional payment methods. This streamlined approach not only enhances transaction efficiency but also provides greater convenience and security for users and businesses alike.
According to a report released by KPMG based on Nigeria’s Open Banking framework, the following are some of the use cases of open banking:
Payment Initiation Services: Open banking allows third-party providers to initiate payments directly from a customer’s bank account. This could be utilized for various purposes, such as e-commerce transactions, bill payments, and fund transfers.
Account Information Services: Third-party applications can access and aggregate a user’s financial data from multiple banks, providing a comprehensive view of their financial status. This can aid in budgeting, financial planning, and personalized financial advice for the customer.
Credit Scoring and Loan Services: With explicit user consent, third-party providers can access a customer’s transaction data to assess creditworthiness in a more ethical manner. This can facilitate faster and more accurate loan approvals, especially for individuals or businesses with limited credit history.
Business Treasury Management: For businesses, open banking can streamline treasury management by providing real-time access to account information and facilitating automated cash flow management.
The conversation about open banking as a financial inclusion tool portends a lot of benefits for customers as follows:
- Simplified account management
Customers often have accounts with multiple banks and financial institutions, making it challenging to keep track of their finances. Open banking consolidates all these accounts into one easy-to-use interface, simplifying account management and saving time.
- Smart budgeting and financial insights
Open banking apps and tools help customers budget and save more effectively. By automatically categorising spending and offering financial insights, customers can gain better control of their finances and make informed decisions.
- Secure and convenient transactions
Customers benefit from the convenience of A2A transactions, powered by open banking, by enjoying secure, one-click payments. The fact that a customer’s information can only be shared with their consent, combined with the use of biometric authentication methods, like fingerprint or facial recognition, transactions are both secure and effortless.
- Access to financial products
Open banking enables customers to easily compare various financial products, such as loans, savings accounts and credit cards. This empowers individuals to find the best deals and make financially sound decisions.
- Inclusive access to credit
Open banking is available to anyone with a bank account, making it an inclusive approach for all users to gain access to credit. Its holistic approach to credit assessment considers more than just traditional credit scores. This inclusive method allows a broader range of customers to access credit, helping those who might have been previously excluded.
Like any financial approach, despite its extensive list of benefits, open banking does not come without its challenges. With any new development, it can take time for consumers to get on board.
Challenges associated with open banking that must not be overlooked include:
Data privacy: Customers share their financial data with third parties, posing data privacy concerns, so data should only be shared with reputable institutions and businesses.
Regulatory compliance: Compliance with open banking regulations is complex, requiring significant resources to stay up to date.
Customer confusion: The multitude of third-party applications may confuse some customers, potentially leading to errors.
Technology dependence: The reliance on digital infrastructure means there is a potential for disruptions due to technical glitches.
Conclusion
In embracing open banking, it is crucial to be aware of the risks as well as the benefits associated with the platform. Countries that have adopted Open Banking have made it a commitment to adopt continuous improvement processes to ensure customer security is enhanced. There is no doubt however, that open banking represents the future of banking and Africa must catch up with the latest revolution.
>>>The writer is the Ghana Director for Financial Inclusion Africa and can be reached via [email protected]
