In Europe, the Open Banking concept aims to foster a more dynamic and customer-centric financial market. Using secure application programming interface (API) integration with banking systems and mutually agreed security and technology protocols lets consumers expose their banking data to third-party fintech providers for new and innovative financial products and services. This principle is particularly valuable in the domain of digital payments in emerging markets.
In Africa, by contrast, digital mobile payments, modelled on the person-to-person (P2P) three-party payment innovation pioneered by Safaricom’s M-Pesa mobile payment, have become ubiquitous. M-Pesa is now a de facto payment scheme in East Africa, having secured market dominance by exploiting its first-mover advantage in Kenya. Any two M-Pesa customers can pay each other instantly through SMS messaging.
However, now that banks are launching their own siloed QR digital payments, all three-party payments are limited to a single ecosystem where the payer and payee are both users of the same mobile network operator (MNO) or bank. This means that no single provider has the local market dominance to replicate the M-Pesa story.
Payment between separate siloed financial institutions is more challenging. Instant payment and settlement gateways achieve some of the benefits of interoperability but are still limited, particularly when it comes to merchant payments and acceptance of digital payments by businesses. To achieve real interoperability, a four party Open Banking digital mobile payment scheme is required.
A four-party payment is where different financial institutions agree to a common set of rules for the clearance and settlement of a defined payment type. This means a customer from Bank A can pay at a merchant who banks with Bank B. Neither banks nor merchants or consumers know (or care) who banks with whom, yet the payment works.
This kind of account-based, non-card based, open-loop payment works in an Open Banking environment. First, the participating financial institutions need to agree on a set of rules. Then, they expose access to the customer account through secure APIs which are approved as an acceptable standard compliant with local regulation,security, and data protection protocols. Banks can then provide their merchants and their customers with access to a digital option to
pay at any merchant that displays acceptance of the payment type by any participating bank.
The UK is leading the pack with Open Banking by allowing third-party providers to access the financial information of banking customers through secure and approved APIs. The idea is to provide customers with more customer centric and personalised products and services while also fostering fintech innovation and competition in the market.
Regulation and supervisory guidance are important elements in the development of the Open Banking world. Big banks and the ‘winner takes all’ culture may not be consistent with Open Banking principles, so some regulatory ‘carrot and stick’ incentives may be required to create a more level playing field, breaking up the established legacy arrangements that Open Banking aims to disrupt.
But giving customers the option of providing access to their accounts to third-party fintech, in particular for digital payments, is a powerful market demand-led intervention that can generate more innovation and competition as well as a better end-user experience. Established banks can choose to either be disrupted by new players or they can align with fintech to bring their customers a richer, more valuable, payment experience while creating deeper banking
relationships for both customers and merchants. This is incredibly important in emerging markets where financial inclusion has been focused almost exclusively on the consumer. In Africa, 50% or more of GDP and employment come from the informal sector – traders, artisans, producers – and through innovation that is completely unseen by the formal financial sector.
The digital transparency of small, medium and micro-enterprise (SMME) cash flow, coupled with track record data from suppliers and other sources, can be used to build a risk profile and create effective demand for more enriched financial services such as insurance, savings, transactional banking, and lifestyle-related services. Small merchants prefer cash, for cultural and privacy reasons, so digital must bring positive external benefits that are much more
valuable than simple cash replacement.
Digital payments need to be a gateway to formal financial products and services. The more formal finance that can be provided to an SMME, the greater the opportunity to grow the business and contribute to wealth creation, jobs and a mutually beneficial relationship between the enterprise and formal finance. As these businesses are enriched by formal finance they grow and, in turn, increase the total addressable market for financial services.
Open Banking with four-party digital mobile merchant payments operating off the card rails, and unaffected by the costs, physical limitations and shallow penetration of legacy cards, is an important strategy to advance digital transformation and real financial inclusion of the informal sector in the formal economy. This will provide more people with access to the essential financial products and services they need to develop their business and personal potential and, by doing so, unlock the potential of the human capital of the informal economy.
About Bluecode:
Bluecode is a mobile payment technology, combining cashless payments via smartphones with value-added services and enabling payments with merchant and banking apps alike. While providing a secure,frictionless E-commerce payment where no customer data is compromised because there is no customer data within the transaction.
Founded in Europe, Bluecode has now expanded into Africa. Bluecode Africa is taking mobile payments into markets where its value as a technology payment service and scheme can make a significant difference for retailers, SMMEs and in the everyday lives of consumers. Bluecode Africa is focused on providing technology to facilitate safe payments where no customer data is compromised, to help grow business and provide digital transparency.
For more information: www.bluecodeafrica.com or email the Africa team at info@bluecodeafrica.com
