The Connection Between Open Banking And Financial Inclusion In Fintech
The connection between open banking and financial inclusion in fintech
Nigerian banks possess a wealth of consumer data that local fintech startups can only dream of.
Banks in Nigeria possess valuable big data, which includes demographic, personal, and professional information about clients, as well as transaction history, consumption patterns, and movement.
There is a plethora of things that can be done with this data. Lenders, for example, can segment their client base in order to offer tailored savings or loan offers. Additionally, the data can be used to target Nigeria's enormous unbanked population with tailored services based on similar profiles to existing clients.
However, very few, if any, legacy banks in Nigeria actually innovate by leveraging the abundant data reserves. Banks, on the other hand, can share data with third parties that are better equipped to use them, which is the premise of Open Banking.
Open Banking: What Is It?
Open Banking is a rapidly growing global practice of data sharing between banks and other ecosystem participants, such as third-party financial service providers (TPPs), fintechs, and other institutions.
By combining their datasets, the companies can gain a better understanding of their target markets, increase customer acquisition, and develop new customer-centric products and services or enhance existing ones.
According to Ifeoluwa Orioke, Chief Commercial Officer at Flutterwave, one of the ways customers can benefit from open banking is through access to loans tailored to their specific needs.
“A lender can determine your credit score based on your transaction history and tailor credit facilities to your specific needs. Or, for example, interest repayments can be structured around the harvest season for a farmer whose income is seasonal rather than monthly.”
While these are all viable use cases, Open Banking has been shown to be more effective at increasing financial inclusion in Nigeria. By the end of 2020, over 36% of Nigeria's adult population (or 38 million adults) would be unbanked.
Banks are not compelled to target rural areas, which account for the majority of the unbanked population. In their stead, fintech firms are broadening access to financial services in these sectors via agent networks and mobile money wallets.
Fintechs, on the other hand, must integrate data with banks prior to opening agent locations. A common standard for information sharing between the two parties is required to aid in the integration process.
Open Banking establishes this common standard through a standardized Application Programming Interface (API) that banks and fintechs can access. It aides the latter in their efforts to reach the economically disadvantaged or underserved.
“Open Banking is a significant step forward in resolving Nigeria's restricted access to financial services,” Orioke stated. “Those without bank accounts can access the financial ecosystem through Fintechs. Fintechs can provide these individuals with enhanced solutions and personalized services by processing data from banks.”
Open Banking Nigeria, a private initiative focused on developing a common standard for Open Banking APIs in Nigeria, has made significant strides in standardizing API access, thereby simplifying the integration process between fintechs and banks.
Additionally, Nigeria's central bank recently released draft Open Banking regulations, which establish principles for data sharing across the banking and payments ecosystem.
A win-win situation for everyone
According to Orioke, Open Banking is a win-win situation for all stakeholders in the ecosystem, including banks, fintechs, TPPs, and the banked and unbanked populations.
With vast and detailed consumer data accumulated over time, Open Banking enables banks that embrace innovation to create value.
With access to bank data, fintech companies could improve their service to existing customers while also acquiring new ones.
“Open Banking also expands customer options and may attract new customers to the banking system by tailoring solutions to their specific needs,” Orioke notes. “With increased customer personalisation, the financial services industry benefits from increased trust.
Apart from financial services, Open Banking has the potential to affect every aspect of a customer's life, as every activity is connected to finance, whether it is hospitality, healthcare, or insurance.
“It can also boost profitability for all parties involved (including banks), reduce costs, and enhance the customer experience. Open Banking has the potential to be the ultimate solution to all of Nigeria's current access to financial services challenges,” Orioke stated.
Open Banking, with its numerous benefits and rapid adoption, has the potential to revolutionize the Nigerian financial services ecosystem and become one of the most significant innovations in the financial inclusion drive.
