Open banking – revolution or risk? – Lexology

Open banking – revolution or risk? – Lexology

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Total overview
Are you able to provide a total overview of commence banking for your jurisdiction?
Originate banking is in its infancy in Nigeria. On the whole, parties to an commence banking affiliation in Nigeria are the actual person (payer or payee), the actual person’s bank and third-occasion financial suppliers (TPPs). TPPs licensed by the Central Financial institution of Nigeria (CBN) consist of:
fee services and products resolution suppliers;
cell cash operators;
other financial establishments, shall we embrace:
micro finance banks;
critical mortgage establishments;
finance homes;
building finance banks;
effectively-organized agents;
fee terminal services and products suppliers;
net portals; and
fee provider banks.

Originate banking in Nigeria would possibly perchance perchance perchance moreover moreover appreciate fresh gamers equivalent to electricity distribution firms, accounting firms and a myriad of other utility provider suppliers, which purpose to toughen their provider provide to the final public by recordsdata analytics within the market by virtue of commence banking.(1)
While commence banking has the functionality to revolutionise the Nigerian banking alternate, just a number of the indispensable infrastructure wished for it to thrive is serene lacking. For instance, the alternate is but to agree traditional utility programming interface (API) requirements. Thus, licensed third-occasion suppliers would possibly perchance perchance perchance moreover must individually connect with particular particular person banks given the disparate interface specifications within the alternate. Any such assignment imposes critical costs, time and effort when in contrast with a actually commence API framework.
With respect to regulation, there’s at display no whole regulatory framework for commence banking operations in Nigeria. On the opposite hand, some CBN, Nigerian Communication Price and Nationwide Recordsdata Know-how Constructing Company regulations note. Relevant CBN regulations consist of:
the CBN Guidelines on Cell Cash Services and products in Nigeria 2015;
the CBN Guidelines on Operations of Electronic Price Channels in Nigeria 2016;
the CBN Guidelines on World Cash Switch Services and products in Nigeria; and
the CBN Guidelines for Licensing and Law of Price Carrier Banks in Nigeria 2018.
On the opposite hand, in 2018 the Originate Know-how Foundation launched Originate Banking Nigeria to work with other stakeholders to provide and recommend for commence API requirements in Nigeria. In addition to to those deepest efforts, the CBN launched a inquire of for recordsdata (RFI) doc on 14 May perchance well perchance 2019 on Formulations of a Price Systems Vision 2030 (PSV 2030). In its RFI, the CBN prioritised commence banking within the improvement of PSV 2030. The CBN is at display engaged on an publicity draft on commence banking pointers in Nigeria, which is anticipated to give noteworthy-wished path to the alternate.
How does commence banking revenue banks, because it’s conducted by third-occasion provider suppliers?
In Nigeria, commence banking is at display conducted by third-occasion suppliers as effectively as digital banking arms of some worn banks. There are some banks that appreciate commence banking would possibly perchance perchance perchance consequence within the weakening of purchaser relationships as clients would possibly perchance perchance perchance deal straight with TPPs. As a consequence, some banks are increasing competing platforms of their very appreciate (eg, Wema Financial institution Plc’s ALAT).
While commence banking comes with dangers, it has the functionality to to find appreciable advantages to all gamers within the financial services and products sector. The advantages of commence banking to banks in Nigeria consist of the next:
As clients’ needs change into more various and worn banks cannot provide the solutions craved by clients, commence banking would possibly perchance perchance support to provide better financial products by recordsdata gathered from third-occasion suppliers. For instance, banks can exhaust recordsdata gathered from various TPPs to assess a borrower’s likelihood of repaying loans, their financial disclose and targets and purchasing preferences. Banks will be better positioned to know particular person financial behaviour and trends and would possibly perchance perchance perchance moreover offer more precious financial products.
Originate banking APIs give banks a brand fresh manner of accelerating digital revenue. One such fresh revenue circulate entails bank costs on TPPs for customer recordsdata entry per transaction. Whereas banks would possibly perchance perchance perchance beforehand offer handiest additional financial services and products contingent on banking recordsdata to their very appreciate clients, they can now wait on clients of other banks, with the functionality of tremendously more revenue.(2)
Banks would possibly perchance perchance perchance moreover actively support such TPPs by offering additional functionality, dedicated toughen or even developmental collaboration. In exchange, third parties can return the favour with various non-monetary offerings (eg, additional product functionality for the bank in question or faulty branding).
Originate banking forces banks to toughen their digital infrastructure, which permits recordsdata to be former better internally to toughen customer journey, thereby rising customer lifetime mark.
Banks already procure stable manufacturers and are better positioned to to find the additional role as a centralised repository of deepest recordsdata that will moreover be accessed by approved TPPs (eg, electricity distribution firms) by commence recordsdata agreements.
AML concerns
What would possibly perchance perchance perchance moreover serene the banking alternate manufacture to tackle the anti-cash laundering (AML) concerns linked with commence banking (eg, if a provider is wholly online and there’s not any longer a manner to to find or take a look at long-established paperwork, how will such concerns be addressed)?
Such concerns would possibly perchance perchance perchance moreover moreover be adequately addressed by relevant processes. In step with the relevant CBN regulations on cash laundering and know-your-customer (KYC) requirements, TPPs must to find relevant documentary proof of identification and other required recordsdata, all of which is ready to be submitted electronically, as supplied for below the relevant KYC requirements and regulations.
The regulations additional provide that in cases of non-face-to-face identification, an additional measure or take a look at ought to be undertaken as a supplement to the documentary or digital evidence in show to be optimistic that the applicant is who they impart to be. No recount additional measures are supplied for within the regulations; nonetheless, the measures former must be optimistic that ample documentary or digital evidence to verify the tackle and deepest id of the customer is equipped. These additional measures or tests ought to be applied to all candidates regardless of the place they stay and ought to be seriously thorough the place the applicant requests a bank memoir or other services and products or products that offers a financial transmission or third-occasion fee.
The bank verification number (BVN) system which offers every enrolled customer with a traceable irregular customer identification number will be former for the deterrence, prevention, detection and mitigation of AML concerns within the banking alternate. Biometric and demographic recordsdata is captured within the BVN central database system correct by the enrolment assignment and a irregular identification number is generated for every customer. Tranquil biometric recordsdata is then when in contrast against the biometric recordsdata of all enrolled clients for confirmation capabilities earlier than the issuance of the number. The BVN is then linked to the whole customer’s bank accounts to be optimistic that enrolment is rarely any longer duplicated and that recordsdata referring to the customer’s assignment, particularly within the occasion of suspicious assignment, will be made without concerns within the market.
Blockchain technology would possibly perchance perchance perchance moreover moreover be applied as a invent of KYC verification. Blockchain is an recordsdata structure that captures transactional recordsdata and retail outlets the thought internal ‘blocks’ that will be accessed handiest by permitted persons. Customer identification recordsdata will be saved in such blocks and banks and other financial establishments that treasure to entry such recordsdata will be required to ship a inquire of to the blockchain platform to build entry thereto. This methodology enables for users to preserve possession of the tips whereas providing entry to 3rd parties. This blockchain-based mostly fully KYC system is already being applied by firms equivalent to IBM.
How can banks or other suppliers uncover a know-your-customer (KYC) ambiance the place commence banking services and products are supplied online, pondering that banks or suppliers will be unable to assess customer feasibility straight?
As stated above, online KYC is approved within the regulations governing TPPs. Banks and other suppliers can enable a net based KYC ambiance by taking part with TPPs and making certain that they put into effect ample technology required for an effective eKYC system, collectively with technology for the capabilities of obtaining, verifying, processing, affirming and updating identification recordsdata purchased from clients. Know-how that will be employed by banks and other suppliers within the implementation of an effective eKYC system entails the next:(3)
Photos and scans of identification paperwork will be supplied, the significant parts of which is ready to then be digitised the exhaust of optical persona recognition (OCR). OCR can extract textual recordsdata for the capabilities of figuring out the authenticity of the paperwork. The composed and digitised recordsdata would possibly perchance perchance perchance moreover then be when in contrast with internal bank databases and exterior databases (eg, AML and combating the financing of terrorism databases).
Video calls enable comparison between customer and identification paperwork (eg, passports, driver’s licences and nationwide ID playing cards) and moreover enable a semblance of face-to-face interplay with prospective clients. Facial recognition software program will be applied correct by a video name to resolve the authenticity of id.
Digital signatures, text messages and recorded verbal settlement will be former for authorisation capabilities.
Blockchain technology will be former to store compulsory customer recordsdata in a stable, decentralised platform.
Apps
App suppliers rarely procure native offices and terminate users will most definitely no longer procure the sources to prosecute in a foreign country, making the relationship and recourse to justice unequal. What would possibly perchance perchance perchance moreover moreover be executed to safeguard customers in this respect?
Sadly, a particular individual that’s unable or does no longer procure the indispensable sources to prosecute an app supplier that has no native place of work or native sources against which a judgment will be enforced, faces an uphill battle to to find justice or treatment against an app supplier.
Beneath Nigerian legislation, the alternate suggestions within the market to a this kind of particular person are shrimp and this kind of particular person would possibly perchance perchance perchance moreover watch the encourage of the Federal Competition and Person Protection Price (FCCPC) and other regulatory bodies which would perchance moreover exhaust their offices to guard or provide a treatment to this kind of particular person.
As most apps procure an international user corrupt, with whose regulatory requirements must app suppliers comply?
All app suppliers registered in Nigeria and licensed by the CBN will be required to alter to the regulatory requirements stipulated by the CBN and other relevant regulatory authorities in Nigeria whether or no longer or no longer they’ve an international user corrupt.
On the opposite hand, an app supplier that offers services and products to Nigerian users on an offshore basis will no longer ordinarily be subject to Nigerian regulatory requirements except it’s deemed to be carrying on alternate in Nigeria, wherein case this would possibly be required to register as a Nigerian company and be licensed by the CBN.
On the opposite hand, an app supplier providing products to Nigerian users on an offshore basis will at a minimum be required to alter to recordsdata protection or privateness legislation in Nigeria. The processing of deepest recordsdata collectively with app services and products is regulated by the Nigeria Recordsdata Protection Law (NDPR).
All app suppliers are knowledgeable to procure a straightforward and conspicuous privateness policy in disclose. The policy must appreciate:
the tips subject’s consent;
an outline of collectable deepest recordsdata;
the purpose of the deepest recordsdata assortment;
significant parts of the technical solutions former to bag and store deepest recordsdata (eg, cookies and net tokens);
significant parts of third-occasion entry;
within the market treatments within the match of violation;
significant parts of a treatment timeframe; and
significant parts of a limitation clause, if any.
The NDPR gives that recordsdata processors, collectively with app suppliers, must be optimistic that recordsdata processing applies with the purpose consented to by the tips subject and that any recordsdata purchased is saved for handiest the length for which it’s wished and is secured against all foreseeable hazards and attacks.
Person protection
How can banking clients ensure their financial recordsdata would possibly perchance perchance perchance moreover no longer be former by unauthorised commence banking suppliers or shared among other unauthorised parties? What form of recordsdata protection can banks provide clients?
In addition to to the tips protection rights outlined within the NDPR, banks are certain by the CBN Person Protection Guidelines (CPR), which locations a accountability on banks to guard customer recordsdata and sources entrusted to them from theft, unauthorised entry and unauthorised disclosure. Extra, the CPR holds banks accountable for acts or omissions which arise in respect of the CPR. The CPR stipulates that in show to make optimistic recordsdata protection and privateness, banks must:
to find written consent from customers authorising the assortment and processing of their deepest recordsdata for recount capabilities and provide the option of withdrawal of consent at any time;
no longer switch customers’ deepest recordsdata to a 3rd occasion without obtaining their recount consent, with the exception of in cases of compliance with a correct form obligation;
stammer customers every time their recordsdata is exchanged with an permitted third occasion and provide significant parts of the exchange;
evaluate recordsdata processing and privateness procedures in show to make optimistic the persevered validity of the purpose for which the initial consent used to be granted; and
preserve real and up as a lot as now customer recordsdata always.
Will clients be up as a lot as now by their banks (the place they’ve supplied their consent to part their financial recordsdata) about which commence banking suppliers had been permitted?
Customers will be up as a lot as now based mostly fully on the CPR. Search for the first particular person protection resolution above.
Will banks or third-occasion suppliers be at likelihood of customers for recordsdata breaches, unauthorised payments or defective payments?
The CPR requires that banks to find the recount consent of clients sooner than transferring their deepest recordsdata to a 3rd occasion. On the opposite hand, the CPR gives no penalties for recordsdata privateness breaches, but as an different contains penalties supplied below enabling approved pointers and regulations equivalent to the NDPR.
In addition to to doable civil liabilities, the penalties for a breach of the NDPR are:
within the case of an recordsdata controller dealing with better than 10,000 recordsdata issues, a comely of two% of its annual incorrect revenue within the earlier one year or N10 million, whichever is greater; or
within the case of an recordsdata controller dealing with fewer than 10,000 recordsdata issues, a comely of 1% of its annual incorrect revenue within the earlier one year or N2 million, whichever is greater.
Market focus
What can financial regulators manufacture to forestall market focus and the emergence of a dominant participant within the commence banking market?
One amongst the drivers of commence banking is the would like to foster opponents between worn or incumbent banks and TPPs. Thus, the emergence of a dominant participant within the commence banking market stifles opponents and defeats the critical purpose to promote a fairer, more efficient and competitive financial services and products market.
The top regulator of opponents in Nigeria is the FCCPC. The FCCPC can forestall market focus and the emergence of a dominate participant within the commence banking market by imposing the FCCP Act 2018.
The FCCP Act contains provisions that prohibit the abuse of dominant disclose, the flexibility of firms or TPPs to enter into cartel arrangements and the flexibility to damage up firms which would perchance moreover very effectively be deemed to be monopolistic in nature or that abuse their market dominance.
Revolution or likelihood?
Produce the advantages of commence banking outweigh the functionality pitfalls?
Originate banking would possibly perchance perchance perchance consequence in unintended penalties with doubtlessly incorrect implications except the functionality pitfalls are effectively managed from the outset. The dangers linked with commence banking consist of privateness breaches, cybercrime and fraud. As stated above, the CBN has prioritised commence banking in its PSV 2030. It’s believed that whole commence banking pointers (besides to Nigerian privateness and anti-cybercrime approved pointers) can also support to mitigate the dangers linked with commence banking in Nigeria.
A doable pitfall of commence banking in Nigeria is the likelihood to technically exclude weak credit rating quality clients by banks and TPPs. It’s beneficial that dynamic products which cater for all clients with various credit rating rankings ought to be developed to manage the likelihood of financial exclusion.
Damaged-down Nigerian banks (treasure their counterparts within the European Union when the EU Price Services and products Directive (2015/2366/EC) (PSD2) used to be being formulated) are alive to that commence banking will weaken the relationship between banks and their clients or consequence within the loss of clients to fintechs or TPPs. The operation of the PSD2 has proven that TPPs are a brand fresh customer corrupt for banks that can produce and innovate in particular person-facing areas that banks would possibly perchance perchance perchance moreover no longer be resourced ample to type out. Extra, the authentication and id administration phase of this fresh evolving ecosystem serene rests completely with the memoir-keeping banks.(4)
Originate banking is a barely fresh theory in Nigeria, and this suggests that numerous trial and blunder instances are but to return. On the opposite hand, the next advantages some distance outweigh the dangers posed by commence banking in Nigeria:
In its Financial Inclusion Newsletter of July 2019, the CBN disclosed that adult financial inclusion targets will attain 95% in Nigeria by 2024. Originate banking would possibly perchance perchance support Nigeria to chop its approximately 60.1 million unbanked inhabitants (which is the very most life like worldwide).
Originate banking also has the functionality to extend the services and products of worn banks. With better customer insights (eg, clients’ spending patterns), fresh products more suited to clients’ needs will in most cases emerge.
Originate banking has already begun to interchange the landscape. It affords clients greater preserve a watch on at some level of all their bank accounts and better different. As such, clients will revel in competitive pricing and fee for their cash having been given a greater different of financial products or provider suppliers from which to preserve.
Original alternate channels and opportunities are doubtless to originate strongly in Nigeria as a results of commence banking (eg, alternate offerings equivalent to comparison websites and centralised KYC administration). While these firms are no longer prevalent in Nigeria as a consequence of an absence of public recordsdata equivalent to loan charges, present memoir returns and mounted deposit charges, commence banking gives the chance for this procedure of alternate to seize off in Nigeria.
In conclusion, commence banking would possibly perchance perchance support to release the potentials of the cost services and products alternate in Nigeria. In step with CBN recordsdata, cell cash transaction quantity rose by 333% between 2018 and 2019, whereas quantity of net transactions rose by 104% from 50.82 million in 2018 to 103.5 million in 2019. This upward pattern is poised to continue. With a whole commence banking guideline, just a number of the ideally suited concerns listed above would possibly perchance perchance perchance moreover moreover be mitigated.
Endnotes
(1) NIBSS Recount Paper on Originate Banking (December 2018).
(2) Thomas Bush, “6 Reasons for Banks to Embody Originate Banking”, 6 February 2020.
(3) Deloitte, “Digital Onboarding for Financial Services and products: Predominant for digital natives”.
(4) The Financial institution as Universal Digital Depended on ID Provider, a white paper produced by Finextra in affiliation with HID World, October 2018.

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