Open banking, changing traditional financial transactions —Expert

WITH the arrival of fintech and other innovators on the banking scene, the way people bank and carry out financial transactions is constantly changing, says an analyst, Davidson Oturu from Aelex, a commercial and dispute resolution law firm.

According to him, some of these developments led to considerations for the creation of a seamless system that would lead to the sharing of financial data through open banking.

These developments, facilitated by the European Union’s Payment Services Directive (PSD 2), led to the creation of open banking on the global scene.

Describing open banking as part of the emerging areas within the fintech ecosystem presently in use in Europe, the United Kingdom, China, Japan and Singapore, Oturu in a position paper stated that it grants third-party providers (TPPs) open access to consumer banking, transactions, and other financial data from banks and non-bank financial institutions (NBFIs) through the use of Application Programming Interface (API).

With open banking, customers can share their financial data with different financial institutions.

According to him, in order for this to be effected, the institution requires the express consent of the customers.

“Open banking represents a shift from a closed model, where financial institutions operated in silos, to one in which data is shared between different members of the banking ecosystem with authorisation from the customer.

“Thus, with open banking, financial technologies (fintechs) and banks can communicate seamlessly through the networking of accounts and data across institutions for use by consumers, financial institutions, and TPPs.

“Open banking will lead to a situation where regardless of how many accounts and financial products a customer has with multiple institutions, he can manage them from a centralised location without having to check out from one system to another,” he said.

According to Oturu, for example, a consumer could have a bank account with Zenith Bank PLC, have a mutual fund account with ARM Investments and operate an account with a fintech like Piggyvest. When the customer wants to check his inflows and outflows from his different accounts, he will have to log into the separate platforms.

However, with open banking, the customer can seamlessly operate his investments and track his transactions on the three platforms from a centralised location through the use of APIs, he observed.

The APIs can also look at the transaction data of the customer and identify the best financial products he can invest in that would yield better interest rates.

On the importance of APIs to open banking, he said that API is a software intermediary that enables technology platforms or applications communicate with each other. Some popular platforms that use APIs to accelerate the delivery of their services to consumers include Facebook, Google, Twitter and PayPal.

A banking API is an interface through which a financial institution provides data about customers, accounts and transactions. With a banking API, users of payment services will not be solely dependent on the direct services offered by their own bank. They can make use of third-party financial services, which, in turn, access the data required by the original bank via the banking API.

Oturu listed some of the stakeholders that APIs in open banking are beneficial to.

One of such are bank customers as APIs improve the customer experience, since customers can conveniently complete all transactions in the respective context and under one user interface. Also, the paperwork that would typically apply when running multiple transactions on different accounts would be minimised.

With APIs, online providers can offer customers better services that include product selection and real-time arrangement of consumer credits, he said.

TPPs in the technology sector – technology providers whose solutions create interfaces to financial institutions and thereby create the technological infrastructure.

Other stakeholders are financial institutions. He said  fintechs and banks will be able to expand their payment services ecosystem and onboard new customers through third party platforms; fraud detection companies as APIs enable fraud detection companies effectively monitor customer accounts and identify problems as soon as they arise.

On February 17, 2021, the Central Bank of Nigeria (CBN) issued the Regulatory Framework for Open Banking in Nigeria (“the framework”).

The framework establishes principles for data sharing across the banking and payment ecosystem. It is aimed at promoting innovation, broadening the range of financial services and products, and deepening financial inclusion.

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