Although no African country has implemented a clear regime or legislative framework for Open Banking, there are promising developments in a number of countries. Imran Sumra takes a closer look at the Open Banking Journey and what it might mean for the future.
Open banking emerged from the EU with the PSD2 regulation. The original intent was to spur innovation and competition in the financial services sector. PSD2 forces banks to routinely and securely share their customers financial data for the purposes of account aggregation and payment initiation via APIs.
Open banking has long been hailed as one of the major trends shaping the future of banking. Although adoption rates have been sluggish over the last two years, 2020 has exponentially fast-tracked digital transformation and the push for open banking has come of age. However, many countries have their own maturity cycles. As much as others are ahead of the curve in adoption, there are some countries which are not aware of the potential open banking brings to the wider financial spectrum.
In Africa, the open banking regulation has not landed yet, however, should it appear, it will help bank the unbanked population. Telcos with their Mobile Money (Mpesa) offering have been the front runners in the race to open banking, open APIs and financial inclusion. With the introduction of Mobile Money, over 10 years ago, payment by mobile has not only become a convenient means of trade, but also helped boost cashless business transactions. With its convenience, continuous innovation and reach of the agent network, it has made it a de facto means of trade currency with the SMEs and the unbanked market.
So, what can you do with open banking? The opportunities are aplenty. Here’s touching on a few:
Fintech
Mobile smart phone and internet access in Africa, enabled a new breed of the younger population to adopt technology. In Kenya, 75% of the population is under 35 years of age. Access to the internet on an affordable smartphone introduced a new wave of technology enthusiasts who started solving problems for themselves or their communities; this created a new breed of technology-savvy individuals who were creating access rails to financial services for the unbanked in Africa. With the COVID19 pandemic came the avoidance of cash and the adoption of these digital services. This in turn has led various industries and institutions to revisit how their customers access their systems and has culminated in the buildup of various mobile-based app businesses.
API
For businesses to thrive in the new age connected world, exchange of data in real-time was a key component for the success of various digital businesses. The challenge that emerged was how to access the financial information data being hoarded by various narrow-minded financial institutions. However, some digitally enlightened banks saw an opportunity to expose such data and enable secure payment channels via the API rails. This immediately made them the favourite of the fintech players who wanted to connect their apps to the banks and businesses who wished to get real-time updates on their transactions and account data to make real-time decisions. This opened up a new revenue model and acquisition of customers through fintechs which the banks could not have gotten through the usual walk-in account opening model. The success of this new API banking method by one of the largest banks in Kenya (Equity Bank), was immediately noticed by wider East African and West African banks who started easing their thinking away from hoarding customers to sharing their customers, enabling collaboration between different entities and organisations.
LEGACY
Many bricks and mortar banks have had challenges and have been pushed to adopt digital transformation. They have had a huge and outdated stack of technology that is not agile, thus adapting fast to the changing needs of the customer is a painful journey.
DATA
Today, banks hold an insurmountable amount of data, but it all sits somewhere catching dust either in files or disks in silos. The potential of that data has been realised by fintechs and big techs who wish to have the transactions passing through their app such that they could analyse the spending patterns of the customer and guide them on their next purchase or monetise their data to a willing buyer, who would then target relevant ads to the customer. Not surprisingly Google has partnered with a US bank to provide checking accounts to its clients in order to understand their spending habits.
SKILLSET
A major blocker for organisations across Africa is the lack of institutions able to nurture specialised talent in our educational institutions. This will create a huge shortage for key capabilities especially in fintech security.
United Nations Capital Development Fund – UNCDF International organisations have seen great success and the capability of how PSD2 regulation has profited customers in the EU. The next step of that is now pushing for open banking in Africa (Uganda for a start), to help reach the unbanked faster, improve their lifestyle and help spur economic growth. This would be a win win for all sides
involved.
INFRASTRUCTURE
Investment – Money flowing into African Fintechs has been rather slow and selective in the African market. There is a huge opportunity for growth to support local developers and solutions for the local governments and private sectors to jump into this new technology enabled world.
Regulation – many countries in Africa have not yet understood the potential of startups, whereas most governments outside of Africa are creating and enabling environments and funding to help spur the growth into becoming billion dollar ideas. Enabling regulation focused on the technology needed to adapt faster to help Africa be in the forefront of technology would be advantageous.
Cyber Security – With digital transformation comes cyber security threats. You cannot escape them, you just need to plan for mitigating them. The constant adoption of new skills and tools is extremely important now more than ever before. This is a huge area of concern for many organisations in Africa, in both the technology front as well as in regulation to help fight and prosecute cyber crime. Many industries lack the budget and vision to understand and invest in the future survival of their businesses.
Internet – The cost of internet connectivity is still relatively high in Africa. If the price of internet connections can be made further affordable with a wider reach inside Africa, more economic growth will follow. We are now in an internet economy, the greater the connectivity and reach the more growth a country will have. This has been proven by various research, with the penetration of the internet.
Open Source – Adoption of open source technology is still lacking across Africa. This is primarily due to a lack of awareness and knowledge of such revolutionary technology available in the market. The big techs have for a long while pushed the expensive, rigid software blinding the corporates from taking advantage of the open source solutions. If everyday people understood how to use such technology and be able to support it, there could be new tools and solutions coming out for the market affordably. A lot of big techs run on open source software.
In closing
When Covid hit China’s ground zero, banks were closed for weeks and no one realised. This was a wake-up call for many banks that had not adapted to the new ways of the customer. Today you need to be relevant and necessary as a company in your customers’ journey or else you will be outdated. As a Microsoft boss said once, ‘banking is necessary, but banks are not’. That was proved by the pandemic. It’s time financial institutions think of becoming technology companies, be mobile first in all their thinking and data first in all their actions.
Hope for Africa: –
With Africa opening its borders to its fellow Africans and the world at large, this will be a trillion-dollar opportunity for trade. This in turn will spur adoption of technology and skill migration, helping countries which were previously devoid of such technology now being able to easily adapt and get support. This will further open opportunities to a huge market that currently remains widely untapped. Africa is home to the youngest, population in the world and by 2050, Africa will have doubled its population to more than 2 billion people, most of whom will be young and hungry for technology. With an enabling environment, affordable infrastructure, investment in education, research and technology, this continent is a superpower awaiting takeoff!
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