Can Open Banking Support Financial Inclusion in Nigeria or Elsewhere?

Open banking has been a hot topic for financial communities around the globe over the last five years, with several countries embarking on a process to solve the distinct challenges in their local markets. Open banking initiatives need to be well designed to harness and deliver the benefits they promise both consumers and financial service providers. Nigeria’s open banking framework offers us a look at both the opportunities and potential pitfalls of implementing an open banking scheme. 

Open banking is a framework where financial data gets shared – with customer consent –  via APIs among financial institutions to inform the design and delivery of better, lower-cost financial services. In highly banked markets like Australia or the United Kingdom, there is a clear logical path between establishing an open banking ecosystem and greater competition. Open banking helps banked customers switch providers following the best offers without losing their transactional history. But what about the unbanked and underbanked – do they benefit? The answer varies by country and significantly depends on the open banking design.

Nigeria has recently joined the club of countries implementing open banking as part of its aim to promote innovation and competition. Only 45% of Nigerian adults have a formal bank account, and there is recognition that increasing this number substantially during the next decade will take considerable effort and focus, using all the tools at the country’s disposal. Not surprisingly, then, Nigeria’s central bank has added ‘enhanced access to financial services to the list of objectives it hopes to advance through open banking.  

It is a worthy goal, but a challenging and complex proposition. Ultimately, its success will be based on the extent to which the initiative is explicitly designed to tackle current barriers to financial inclusion.  

In Nigeria, the key barriers to inclusion on the customer side are low perceived and actual benefits of using formal financial services that are often expensive, concentrated in urban areas and tailored to the needs of higher-income individuals and corporations. On the provider side, the limited number of service points in rural areas (branches and agents) and the lack of incentives to increase them further combined with difficulties around customer onboarding and a lack of formal documentation stand in the way of greater financial inclusion. 

Some of these barriers can only be addressed if the open banking ecosystem is expanded to include telcos, mobile money providers, e-commerce platforms and utility companies – including those rich sources of data for low-income customers would open space for innovation. A great example of this could be around credit and savings, where enlarging the addressable market with new segments recruited from among those customers would provide incentives for regulated providers to increase their distribution network and incentivize customer acquisition (including through agents). 

For instance, by combining data from telcos and utility companies, a fintech can credit-score thin-file customers, expanding their chances to get a bank or microfinance loan. Similarly, by accessing data from different sources, customer identification and onboarding (including through digital channels) can be greatly facilitated. Finally, microfinance data can lower the cost of insurance distribution to farmers.  

In Nigeria’s case, the draft open banking framework is still in the consultation phase. Some of the ideas being explored include (i) making incumbent bank participation in the ecosystem voluntary (ii) giving incumbents a role in the registration of other open banking participants, (iii) requiring partnerships among FSPs to participate in open banking, and (iv) allowing providers to charge for access to data. 

Such design choices may limit providers’ participation, customer uptake and the extent to which open banking will advance financial inclusion. For example, we are yet to see whether voluntary open banking regimes work at all. The existing voluntary regimes are often highly prescriptive and quasi-mandatory either in the way they are implemented (e.g., Hong Kong) or seen by regulators (e.g., Japan); and even the explicitly mandatory regimes need to strive at promoting incentives for all key players to participate actively rather than default to a defensive strategy. These incentives are missing if the incumbent providers, which are typically least excited about open banking, are also given the most control over the framework’s implementation and success – especially where compliance comes at a high cost.  

For an open banking framework to advance financial inclusion, it is also critical that it creates an even playing field for participants. This is relevant to the question of pricing policy – whether data holders can charge for sharing data and how much – which is another complex issue that countries need to grapple with. It depends on many factors, including market maturity, size and structure. In markets with low financial inclusion, the right to charge fees may incentivize financial service providers and their agents to incur customer acquisition costs in the knowledge that they can ultimately commercialize that data. In early phases, however, free data may be necessary to stimulate innovation, competition and scale of new entrants. 

Given the direction taken to date regarding open banking in Nigeria, it is not clear that the implementation of the framework will have a material impact on overcoming any of the challenges currently constraining financial inclusion. We recognize that there are always competing objectives to consider when designing and implementing an open banking regime – for example, to foster innovation, competition and inclusion – but nonetheless, we encourage all countries aiming to improve financial inclusion through open banking to carefully weigh their design choices and ensure that as they pursue a range of objectives, financial inclusion does not fall by the wayside. 

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