The prospects for FINTECH – Businessamlive
BY CHUMA AKANA
Open banking is simply defined as a system where data is shared between banks, investment companies, fintechs or other third-party apps, through the use of application program interfaces (APIs). It is widely accepted that traditional banking models can be used to provide more tailored services and alternatives to customers, and one of such innovative tools is through the proper use of open banking services. In February 2021, the Central Bank of Nigeria issued a regulatory framework for the operation of open banking in Nigeria, establishing the framework for data sharing across the banking and payment ecosystem, which will promote innovation, expand the range of financial products and services, and most importantly, deepen financial inclusion.
Under an open banking regime, participants will be able to download and share information on account balances, payments, transactions and investments. Open banking extends to cases where a third-party app may be allowed to initiate transactions from a customer’s account, such as sending payments or withdrawing money. Spokesmen have also argued that financial services can be more personally tailored to the individual’s behavior and lifestyle and thus make banking more efficient and useful for the consumer. In fact, a number of financial technology “tools” will make managing money more convenient, easier and faster.
With such a large potential, there is a need for adequate guidelines to regulate and monitor the open banking area in Nigeria. This is more important as data from customers will be shared by all actors in the ecosystem; therefore, guidelines that promote fairness and data security are important. In its regulatory framework, CBN categorized open exchange of data and services through the API as product information and service contact points, market insight transactions, personal information and financial transactions, and profile analysis / score transactions, and prescribed a risk assessment for each of these. categories. The regulatory framework also provided the participants with the level of risk management maturity for the above categories and the data and API access requirements and the roles and responsibilities of the participants, which include suppliers, consumers, fintechs and developer communities.
One of the key components of the open banking regulations is the operation and maintenance of the open banking register. To further strengthen the open banking system, CBN published its operational guidelines for open banking in May 2022, where the open banking register is defined as a public repository for details of registered participants. OBR shall be maintained for the purpose of providing regulatory supervision of participants, increasing the transparency of the operations of open banking services and ensuring that only registered institutions operate within the banking system’s ecosystem.
In comparison, India’s open banking policy is largely facilitated by Account Aggregators, which has been developed by the Reserve Bank of India through a main direction. Account aggregators are impartial third party operators, and are only channels through which data will be transmitted based on consent, since they do not have access to, store or use the data handled by them. They are impartial third-party operators and operate a strict consensus model, where there is an authorization agreement between the customer, the bank and themselves.
When a customer agrees that their specific data can be shared with specific Fintechs that search for them for the said purpose for a certain period, account collectors collect the same from the bank that has the data and deliver it to Fintech Company (FC). Based on that, FC can offer new financial services to the consumer. Customers also have the option to withdraw their consent with respect to the time period, Fintech and the specific data shared.
The model is very similar to that found in the UK where the open banking regime is regulated by the Open Banking Standard, which is part of the Open Banking Implementation Entity, where a data sharing or API framework is prescribed and enforced by independent parties, to tackle the competition issues. On the other hand, the US open banking framework is largely industry-driven, even though the country is considering a possible regulatory mechanism.
For Fintech companies, open banking services can help lenders get a more accurate picture of a consumer’s financial situation and risk level in order to be able to offer more profitable loan terms. It can also help consumers get a more accurate picture of their own finances before taking on debt. For example, a mortgage app for customers who want to buy a property can automatically calculate what customers can afford based on all the information in their accounts. Open banking services can also help small businesses save time through online accounting and help companies that detect fraud better monitor customer accounts and identify problems faster.
It will open up a huge market for technology companies involved in embedded finance, as these startups may have to remodel their business and work closely with banks to scale their business. It will help these startups improve customer journeys, access customer data, increase customer lifetime value and create new revenue streams.
However, convenience and simplicity can be at the expense of losing more control over a customer’s money, reduced privacy / security and a more complex marketplace. A key challenge with open banking is data policy, which is to ensure that access to personal information is handled in accordance with the preferences of the persons it affects. In Nigeria, the Nigeria Data Protection Regulation (NDPR) sets out the obligations of the controller and data processor to ensure that the rights of the data subject are respected when data are transferred for analysis and value extraction. CBN’s operational guidelines require API consumers to comply with Nigeria’s data protection regulation or any CBN issued data protection regulation for financial institutions in order to protect customer data.
According to the guideline, consent is required from customers whose data may be required by a service provider to use them in financial products and services. In order for consent obtained from a customer to be valid, the guidelines state that the API consumer must provide complete and complete disclosure of his identity to the customer among other requirements.
In addition, API providers shall only share information about a customer with an API consumer upon presentation of valid proof of customer consent, and shall authenticate such consent to ensure that it comes from the customer. Authentication of end users and validation of information to be shared with the API consumer shall be done directly by the API provider using prescribed authentication mechanisms. API consumers must also comply with existing anti-money laundering (AML) and anti-terrorist financing (CFT) regulations in banks and other financial institutions in Nigeria.
Finally, the operational guideline aims to ensure that open banking players use security systems to protect consumer data, and that consumers have full control over what information they wish to make available to third-party companies. It is now the fintech companies that are responsible for utilizing this initiative to deepen financial inclusion and offer better banking services to customers. Globally, the use of open banking services has led to the deepening of API banking platforms by financial institutions, and thus led to some banks becoming completely digital, the transformation of more payment / lending features into neobanks, the verticalisation of finance, as traditional financial activities will be adapted to needs. to each industry vertically, launch and entry of international neobanks focused on SMEs / unbanked, and expanded funding round for fintechs.
Chuma Akana, managing partner of Chestter Law LP, has its area of practice within Fintech and Intellectual Property Law. He can be reached via [email protected], and is on Linkedin at www.linkedin.com/in/chuma-akana
