Although banks throughout sub-Saharan Africa have expanded their customer base in recent years, there still is a huge population that is underserved and locked out of the financial ecosystem due to cost and lack of access to services.\n\nThis has prevented enterprises from reaching large segments of the population. Nigeria is combatting the problem by promoting open banking, which embraces the use of APIs to allow exchange of data among merchants, service providers and financial institutions.\n\nIT leaders in enterprises can take advantage of the growth of open-banking services to enable their businesses to reach new customers, and streamline their back-office and transaction processes.\n\nOpen banking also aids financial inclusion in a variety of ways, for example by allowing lenders and merchants to check on payment history of customers who do not have traditional bank accounts, and by enabling very small businesses to offer a range of payment services that in the past would have been too expensive to implement.\n\nNigeria's approach is different than that taken in other countries \u2014 namely, mobile money, led by service providers in East Africa. Mobile money providers such as Kenya-based Safaricom offer payment services that were once a preserve of brick-and-mortar institutions.\n\nThe mobile money revolution has not caught on in West Africa, however. In Nigeria, for example, the slow process for licensing mobile money products has hindered the industry's potential. On the other hand, Nigeria has developed progressive banking policies in other areas, which have helped it become a financial hub, with international megabanks and new local banks setting up shop in the country.\n\nThis has led to the growth of an open banking regime, with banks, fintech companies and third parties such as insurance, retail and telecoms companies using standard APIs to connect and share data. As a result, access to data and banking in general is being democratized.\n\nWhat is open banking?\n\n"Open Banking is a blanket financial services (FS) term used to describe the use of open technologies by third-party providers (TPPs) to build services and applications around financial institutions. It guides how TPPs can access and utilize customer bank data in a standard format to provide more open, transparent and competitive banking services," according to a PwC report, The Case for Open Banking in Nigeria.\n\nSpeaking at Digibank Summit in October 2020, Chris Esezobor, chief digital officer at Keystone Bank in Nigeria, described open banking as a system where the customer owns the data and authorizes the bank to share and use their data including personal, financial and transactional information.\n\nEsezobor noted that open banking in Nigeria is supported by a centralized system, the Nigeria Interbank Settlement System (NIBSS). The platform is owned by the banks and the regulator. It makes inter-banking transactions possible, and allows fintech and third-party players to connect and exchange data with other entities on the system.\n\n"By making data and systems available to third parties, financial institutions can expand their addressable market, achieve product diversity, and commercialize core systems," the PwC report denoted.\n\nOpen banking start-ups proliferate\n\nNew API-based services are already causing a stir in Nigeria. Mono, a Nigeria-based start-up, provides APIs and development tools to businesses that are looking to simplify payment processing and risk assessment by, among other things, streamlining account verification with bank data.\n\nOnePipe, another Nigerian start-up, raised almost U$1million in a pre-seed round with a plan to make API integration seamless for banks and fintech companies. It is already providing banking information to 20 banks and fintech companies. Its basic service involves aggregating APIs from multiple entities into one gateway, simplifying the process of integrating APIs from multiple business partners on a one-by-one basis.\n\nTed Martynov, a serial entrepreneur, is setting up an API-based data marketplace in Nigeria to provide secure data exchange among financial institutions. His firm, CARMA, aims to enable exchange of customer data on a peer-to-peer basis without exposing companies' entire databases. He says it will give financial intuitions a new revenue stream by letting them charge for inquiries about industry and customer data.\n\n"Nigeria is a great combination of ramping digitalization and financial services footprint, multiplied to the biggest population in sub-Saharan Africa," Martynov said, explaining why he has zeroed in on Nigeria.\n\nHe added that customer data put together from different industries helps lenders and merchants to make better credit decisions, as many potential customers may not have traditional bank accounts. Hence this sort of data exchange can have a positive impact on financial inclusion. His company is looking to expand on the Nigerian experience to other countries and regions, including Kenya and South East Asia.\n\nOpen banking benefits customers and providers\n\nThe overall impact of open banking Nigeria so far is the development of streamlined, standardized payment systems for businesses and customers. "Open banking is good news for customers, on the grounds that an open banking model will enable them to gain easier access to a wider array of financial services offered by a larger selection of providers," according to \u00a0Open Banking Nigeria. "Open APIs will make it much easier for banking customers to transfer their accounts, manage payments, and conduct transactions through multiple banks and fintech companies \u2014 thereby creating new opportunities for banks, FinTechs and aggregators to offer products and services from multiple providers on a single platform."\n\nFor example, Nigerian payment companies such as Flutterwave, which in 2019 processed US$5.9 billion in payments, and Paystack, which was acquired by Stripe and has 60,000 corporate customers, help businesses and users accept payments from anywhere in the world, bolstering online merchant services including e-commerce.\n\nWhat makes a good open banking ecosystem?\n\nFor Nigeria, open banking has flourished due to forward-looking banking policies. According to PwC, the Central Bank of Nigeria has nurtured standards in the banking sector via initiatives such as the Nigeria Uniform Bank Account Number, Bank Verification Number and NIBSS (Nigeria Inter-Bank Settlement System) Instant Payment.\n\n"These standards have driven the expansion and security of the payment ecosystem, landing Nigeria a position in the top five attractive countries for foreign direct investment in Africa," PwC stated, in its open banking report.\n\nAlex Booth, managing director of Business Intelligence and Investigations at risk consultancy Kroll, suggested that Nigeria is reinventing itself as a financial innovator in Africa. Booth says its financial services sector has undergone a significant digital transformation in recent years as new technologies have been accompanied by appropriate security structures.\n\n"Open banking adoption is the latest change, and it's gathering pace. Competition between providers is driving better services and more choice, and consumers are speaking through their decisions as increasing numbers use open banking solutions," Booth said.\n\nEast Africa's mobile money systems are a bit closed, and adopting open banking could open up opportunities in the financial ecosystem in the region, Booth noted. Growing trust among the private sector, government and customers will be the bedrock of inclusive data sharing for the benefit of all financial systems in Africa, Booth said.\n\nGuarding the ecosystem\n\nThere are, however, cybersecurity and privacy pitfalls that should be taken into account when implementing any data-sharing system.\n\n"A secure governance framework managing consent approval is the fundamental tenet for safeguarding abuse of customer data," said Prabaldeep Paul, associate director and head of Strategy Research at Acuity Knowledge Partners, a research and analytics firm.\n\nPaul encourages financial system stakeholders to actively invest in improving customer awareness about data security practices, and phishing attacks in particular, as customers often fall prey to malicious emails asking for sensitive information.\n\nSince data is being shared outside the banking systems, Paul urges financial institutions and regulators to evaluate third parties to ensure they are qualified to handle security protocols.\n\n"Periodic assessments of third parties' security capabilities, along with close to real-time monitoring, will be critical in this new ecosystem," he said.\n\nBut if it is well-implemented, open banking is a plus for the financial sector, giving banks a stream of income beyond deposits, and also improves customer experience through personalized products and services, Paul said.\n\nAs open banking develops in Nigeria, the country could be a beacon for a new age of financial services on the continent.