What you need to know about Nigeria’s Open Banking

Two years after the first Open Banking framework circular was released, the CBN issued operational guidelines for Open Banking on Tuesday, March 7, 2023, heralding a start for what many anticipated would bring about a much-needed change in financial services.

It is worth noting that the Central Bank has positioned Nigeria as an innovator in Africa by embracing open banking, being the first in the continent to do so. This act by the CBN signalled a commitment to fostering financial inclusivity and a more interconnected financial ecosystem within the country. 

What is Open banking?

First, we’ll tell you what open banking is not –  it is not a technology.

Open banking is not a technology itself; rather, it is a financial concept or initiative that allows customers to grant third-party financial services access to their financial data from their respective bank(s). Key players in the financial ecosystem helped conceive this initiative to promote not only financial inclusion but also healthy competition in the ecosystem.

How do customers grant access? — Customers securely grant this access to third parties through an explicit consent system, contributing to a more secure and regulated open banking environment.

What are APIs? — Simply put, APIs, or Application Programming Interfaces, serve as bridges between two software components under a set of protocols. In the context of open banking, APIs play a role in facilitating secure and standardized communication between financial institutions (AKA Banks) and third-party applications. An illustrative example of API integration is the automatic synchronization of time and date on your laptop when you travel to a different time zone. 

Use cases of open banking — With access to a person’s financial data, businesses and financial service providers are able to offer personalized product offerings. For instance, under open banking guidelines, you can consent to your bank sharing your financial data (cash inflow, transactions, account statements etc) with a lender of your choice so they can assess your creditworthiness in minutes, as opposed to manually having a back-and-forth with your lender trying to prove the legitimacy of your creditworthiness.  

Other use cases of open banking — You can conveniently view and manage multiple accounts in a unified platform, AKA Account aggregation. Others include Assets advisory, Debt financing, Pay-Now-Buy-Later loan options, Personal finance management, Budgeting, and lots more.

What are the benefits of Open Banking?

• Open banking empowers an individual user with control over their financial data. You can decide which third-party entities are liable to have access to your financial information. This control extends to the ability to revoke access promptly in the event of a breach of an agreement. 
• Open banking provides a wide array of personalized product offerings and services designed to cater to your unique financial needs and align closely with your financial health, making it easier to manage your money. A good example would be offering customized product payment plans, budgeting tools, investment options, etc.
• As a business owner, open banking allows you to gain consented secured access to your customers’ accurate financial data in a matter of minutes, a marked improvement from the past when obtaining such data was time-consuming and challenging. 
• Through access to detailed financial data, business owners can also gain insights into their customers’ behaviors, preferences, and financial habits, enabling more personalized and targeted offerings to enhance the overall customer experience.
• As a business owner, open banking also helps you provide personalized products and services likely to fit each customer. In the long run, this leads to higher customer satisfaction and, consequently, increased sales for your business.

Highlights of the Central Bank’s operational guidelines for Open Banking

1. Compliance requirement: The guidelines for open banking in Nigeria outline clear expectations for all parties involved, which include a commitment to maintaining international standards. Additionally, participants must obtain specific licensure from the Central Bank of Nigeria (CBN), ensuring a regulated and compliant environment that fosters trust and accountability. It also outlines the duties of all participants across different tiers, specifying the required level of administration and the Service Level Agreement (SLA), which includes:

• Accounting and settlement
• Fee structure 
• Reconciliation bills 
• Registration and sponsorship responsibilities

2. Qualified stakeholders: The guideline also establishes the eligibility criteria for organizations to participate in the open banking ecosystem in Nigeria. Any organization holding customer data can join the ecosystem, provided they are willing to exchange this data with other entities for strictly innovative services. These participants are grouped under: 

• APl providers
• API consumers
• Customers

3. The Open Banking Registry (OBR): The guideline states that the CBN shall provide and maintain an Open Banking Registry (OBR) for the industry. The OBR shall be maintained for the following purposes:

• To provide regulatory oversight on participants
• To enhance transparency in the operations of Open Banking
• To ensure that only registered institutions operate within the open banking ecosystem.

4. Consent management:  Data in the wrong hands can do more harm than good, so the CBN prioritizes customer consent in open banking, ensuring no data is shared without explicit approval. This prevents unauthorized access to sensitive information. Violating customer consent comes with severe repercussions, and there are clearly stated strict measures in place to deter and penalize any entity attempting unauthorized data access. Customers must always be informed of the following:

• When a request to access data is initiated
• What type of data will be shared
• Who data is shared to
• Duration for which third parties maintain access to data

5. Data privacy control: The guideline states that all parties involved must comply with the Nigerian Data Protection Regulation (NPDR) or any CBN-issued data protection regulation for financial institutions. Data ethics and privacy are implemented to safeguard customer data and foster trust within the financial ecosystem.

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The adoption of open banking in Nigeria marks a positive step in Nigeria’s financial services sector. However, its success heavily depends on the execution strategy that the CBN and all parties involved will adopt. If effectively executed, open banking would deepen financial inclusivity in our Nation, cut transaction costs, foster collaboration amongst players in the ecosystem, bridge the credit gap by making credit more accessible to Nigerians, and improve the quality of services rendered and a plethora of untold benefits. Failing to update you is a disservice, and Lendsqr is committed to ensuring that doesn’t happen. We are also more than happy to answer your questions; send us a message at [email protected].