By Ibukun
While the concept of seamless financial operations has existed for some time now, the absence of a common API standard has made their execution almost impossible, even for the most innovative and persistent business. However, with the emergence of open banking, implementing these ideas seems more feasible, and procedures can now be executed automatically with minimal intervention. Nevertheless, the following question remains: Do Nigerian businesses comprehend the implications of this development?
First, it holds paramount importance to distill the buzzword. Open banking refers to the concept of consumers granting third-party app developers access their transactional information, usually from their banks, directly through an application programming interface (API). This facilitates the fintech ecosystem to cultivate further value, creating tools that aid customers in their day-to-day lives, and deliver significant insights into their banking data. Open banking has been a concept for numerous decades, but it has only recently been put into action, promoting frictionless finance and generating novel prospects and efficiencies.
Although in its infancy, considerable progress has been made in Nigeria’s open banking sector. Open banking has been explored by banks and other financial institutions to provide Product Information and Service Touchpoints (PIST), Market Insight Transactions (MIT), Personal Information and Financial Transaction (PIFT), Profile, Analytics, and Scoring Transactions (PAST). Early supporters of open banking in Nigeria included Sterling Bank, KPMG, PwC, EY, Paystack, Teamapt, Wallet Africa, and OnePipe. The coalition has now expanded to include Mono, Switch, Lendsqr, Palmpay, Carbon and Trium. Moreover, despite initial reluctance, the Central Bank of Nigeria issued operational guidelines for using and delivering open banking services in the country. According to the guidelines, any organization processing customer data that can be used to provide financial services to individuals is eligible to participate in the open banking ecosystem, provided the customers consent to the use of such data.
Who benefits from open banking?
The tenets of open banking centers on maximizing consumer satisfaction, but they benefit not only end-users, but also businesses, banks, and financial institutions. Thus, open banking unlocks a new vista of opportunity that reciprocally benefits each party. For instance, open banking empowers banks to provide more tailored solutions that enhance customer experience. However, this also allows banks to better understand their clients and diversify their product offerings. Therefore, open banking provides opportunities for all parties and yields benefits for all stakeholders involved. But the focus here is on businesses, particularly in Nigeria, as we explore how open banking can foster their success.
Open Banking presents a plethora of possibilities, and Nigerian businesses stand to reap considerable advantages by tapping into various payment service providers. The main benefits of open banking for businesses are as follows:
Lower costs
Open banking encompasses two significant domains, payments and accounts, and reducing expenses is a paramount consideration. In the present business milieu, accepting credit card payments has become an inescapable reality, with consumers deeming it the safest and most reliable mode of online payment. However, the costs of these transactions are exorbitant, prompting an exploration of the vast possibilities for open banking payments. Indeed, the economic implications of adopting open banking payments are compelling, with businesses realising an estimated 70%-80% reduction in costs compared to credit cards. The absence of acquirers, networks, and risk solutions that levy additional fees, coupled with direct transfers from the customer’s account to the business account, implies a minimal need to raise prices to pay credit card fees. Open banking payments eliminate intermediaries and third-party vendors, rendering it an incredibly attractive market for any online business.
Improved customer experience
The quest for any business is to enhance consumer satisfaction and maximize revenue. By harnessing the power of open banking, Nigerian businesses can offer customers seamless and effortless experience. How does this play out? Open banking enables Nigeria businesses to gain access to a plethora of customer data that can be utilized to create customized products and services. For instance, existing Nigerian businesses can gain insight into their clients’ spending patterns and offer innovative services to foster better financial management. Furthermore, customers can authenticate their payments via biometric credentials, such as thumbprints or facial recognition, rather than manually typing in a series of numbers that are susceptible to theft. This added layer of security not only fortifies the customer experience but also reduces the risk of fraudulent activities.
Security
Security is at the core of open banking, fortified by its capability to mitigate peril fraud for businesses. Open banking transactions traverse the Automated Clearing House (ACH) network as opposed to credit card networks, translating to significantly lower ACH fraud rates. This dynamic feature of open banking not only diminishes the possibility of fraud but also augments the confidence of Nigerian businesses in their payment operations.
Instant settlement
In open banking, a plethora of possibilities emerge for third-party service providers seeking to broaden their payment options. Through the innovative use of instant payment rails, account-to-account (A2A) payments are now processed with unparalleled swiftness, even across borders, as transfers are being rapidly validated. As a result, Nigeria businesses can now efficiently fulfil their orders, and e-commerce enterprises, in particular, businesses located in Nigeria can easily receive payments from customers across Africa and other part of the world, inevitably bolstering their payment acceptance rates.
Given these benefits, there is no gainsaying that open banking engenders a plethora of opportunities for both businesses and consumers in Nigeria. It is vital for these businesses to recognize that they also benefit their customers in the long run. Open banking provides a fascinating avenue for Nigeria businesses that have been facing increased competitive pressure, inflation, declining macroeconomic conditions, or a combination of these challenges. By creating novel mobile applications and offering simplified investment opportunities, Nigeria businesses can shift their focus from the traditional system to the online context. Although open banking is still at its nascent stage in Nigeria, its potential benefits are too significant to be overlooked. To harness this potential, Nigeria businesses must partner with API providers including banks and other financial institutions.