Open banking to transform East Africa’s digital financial services

BY Victor Adar

Open banking, in which banks share certain data via secure application programming interfaces (APIs), allows for the development of a range of digital financial services that can be used by customers to more easily transact, manage their finances and have full access to all their data. Since financial service providers are authorised to use this data without having to build new data stores of their own, open banking paves the way for improved customer experience and greater transparency in banking.

It sounds good but one question on peoples’ lips is whether open Banking will drive transformation in digital financial services. Will it, for instance, simultaneously empower consumers to own and share their data while enabling financial service providers to leverage this data to deliver enhanced capabilities to the marketplace?

“In developed nations, fintech is helping transform the existing financial services landscape, where in Africa it is about bringing financial services to large sectors of the population who have never had access to financial services before. Open Banking can play a unique role in this,” says Willie Kanyeki, Myriad Connect business development director – Africa.

According to Mr Kanyeki, open banking is revolutionising the financial services landscape across the world, and presents opportunities for transformation and financial inclusion throughout East Africa. However, the region should learn from the experiences of other markets and leapfrog directly to the next era of open banking. The fresh mobile technology for banks simply implies that for now firms cannot sit pretty as it is time to quickly adapt to changing trends and offer new and unique services to customers.

“Open Banking will drive transformation in digital financial services by simultaneously empowering consumers to own and share their data and enabling financial service providers to leverage this data to deliver enhanced capabilities to the marketplace,” says Kanyeki, who believes that many banks and fintechs already have a closer working relationship in East Africa than those in Europe.

East Africa now, he says, has an opportunity to build on the experience of other markets that are already embracing Open Banking, and move directly to a more effective model in the region. Positioning financial institutions to move quickly to an Open Banking environment across the East African financial services ecosystem will go along way. He notes that regulation of the environment is necessary, though: “If the market is left to its own devices with no regulation, the region could find itself in a position where there is a dominant player and regulators or the financial services ecosystem are, as a result, limited in how they can introduce regulation or control Open Banking initiatives in that market.”

In the European Union, on the other hand, Payment Services Directive 2 (PSD2) legislation was introduced last year to obligate banks to provide third-party Account Information Service The legislation ends banks’ monopoly over financial services, bringing new competition, new urgency to innovate, and potentially – additional costs.

For customers, this brings the freedom to manage their finances with the app or service provider of their choice. However, one shortcoming of PSD2 has been the lack of a clear standard for secure authentication.

“East Africa can manage its own Open Banking initiative to avoid the pitfalls already experienced in other markets. Choice and a level playing field are desirable outcomes of Open Banking, but the emergence of a monopoly, or the erosion of banks, may not be,” says Michael Muturi, solutions consultant, Myriad Connect.

Putting standards in place for API formats (which is basically referring to a design that supports various data formats) is also important as it allows Open Banking to deliver on its potential, offering simple integration and development.

Although learning and introducing a new technology to any sector can give employees, and customers at large, some jitters, Open Banking may be changing the way people bank. Some technologies like mobile or internet banking are currently being embraced big time. Technology seems to have turned around how banks operate in the past three years. But are there checks and balances especially for this new kid on the block?

“As East Africa prepares to embrace Open Banking, this is an opportune time for banks and financial services providers to work together to approach regulators to put in place mutually beneficial regulations across the ecosystem. It is also important to consider uniform standards for APIs, security and authentication ahead of mainstream adoption of Open Banking.”

Security and authentication are essential components of Open Banking, Muturi points out – both to ensure every digital transaction is properly authenticated to prevent and detect fraud, but also critically, to provide express consent for consumers’ data to be shared in the ecosystem.

 “With significant potential for innovation and development in financial services through the advent of Open Banking, East African stakeholders need to move quickly to pave the way for an environment that is properly governed, beneficial for all, and secure and convenient for consumers,” says Kanyeki.

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