Open banking represents a promising opportunity for incumbent banks and up and coming fintechs to develop and deliver innovative digital financial services to consumers everywhere. Nowhere is this potential more promising than in the emerging markets of Africa, where the World Bank estimates that up to 65% of adults in sub-Saharan Africa are unbanked.
To unleash the potential of open banking, banks and fintechs, with government support, need to come together to provide economic stimulus and financial inclusion opportunities to the 370 million unbanked and unserved citizens across the continent. Research has proven that financial inclusion can improve GDP by up to 30% in frontier markets like Kenya – dramatically higher than the 2% – 3% increase that most economists consider to be healthy.
What is open banking?
Open banking is a privacy-protected, data-sharing ecosystem, supported by regulators and aimed at creating competition and promoting innovation in financial services. Within an open banking ecosystem, incumbent banks and other financial institutions like digital banks and telco mobile money providers exchange consumer data with other financial services providers or third-party providers like fintechs. The data sharing takes place within a tightly regulated privacy framework centered on consumer consent.
With open banking a variety of third-party financial service providers can access the consumer financial data that is held by a bank or telco through the simple use of application programming interfaces (APIs). It increases a service provider’s go-to-market speed by eliminating the need to use back-end applications to change existing data architecture. Through the use of APIs, third parties aggregate several data sources to create more holistic customer credit profiles and more relevant financial services offerings.
Data sharing is a prerequisite for open banking products, yet most unbanked individuals have no digital financial profiles or data trails. For this reason, it is important to consider how other types of digital data from mobile phones such as social media activity, airtime purchases and utility payments could be leveraged by open banking ecosystems. Mobile money wallets are a key driving force in Africa with over 320 million users representing a single point of integration.
Sub-Saharan Africa is the most developed market for mobile money, accounting for two-thirds of global mobile money transactions in 2020. There is a huge opportunity to leverage this growing popularity to encourage financial inclusion, with open banking as the driver.
By responsibly sharing customers’ digital financial data, fintechs and other types of financial institutions can do a better job than traditional banks of offering products and promoting financial behaviors that alleviate some of the pain points experienced by unbanked and underserved customers.
Here are a few examples of how open banking can enhance financial inclusion.
- Reducing barriers to access. Cumbersome customer sign-up/KYC procedures can result in prohibitive cost barriers for unbanked customers. By expanding open banking to include telecommunications, social media, money wallets and other types of data, a simple SIM card registration could come into play.
- Providing access to responsible credit. Properly designed, open banking products, through the use of alternative financial data, can expand access to credit that helps consumers accurately assess what they can afford. Such data can include mobile bill payments, rent payments, utility bill payments, etc.
- Encouraging informed financial behaviors. Personal finance and budgeting awareness can empower consumer insights generated from consumer transaction data. Consumers can put these insights into practice and develop informed financial behavior.
- Enabling participation in the global economy. By providing consumers with access to digital payment products and services such Pay-to-Person (P2P) or Pay-to-Merchant (P2M), open loop schemes such as virtual debit or credit cards from Visa or Mastercard allow the unbanked to participate in the global economy, thus spurring economic growth and driving financial inclusion.
In Africa, telcos are a key piece of the financial inclusion puzzle.
Mobile phone penetration is roughly 50% in Africa, lower than world averages, but it is growing at the fastest global pace, at over 6% annually. Smartphone penetration remains low and concentrated in certain countries such as Nigeria, Egypt and South Africa.
However, owners of feature phones can still take advantage of some of the many open banking-enabled products such as automatic savings sweeping, smart loan repayment and decentralized KYC. These types of services use data only on the backend and do not require the consumer to own a smartphone. Others, such as switching utilities or personal finance management, could work on SMS or USSD menus but with limited functionality.
Over the next 5 years, as mobile phone penetration continues to grow and open banking adoption spreads across the continent, the opportunities for new services and product offerings for the unbanked in Africa are immense. Open banking will enable the unbanked and underserved to make more informed decisions and better manage their limited resources when incomes are severely constrained. Credit products can cover immediate liquidity needs responsibly. Savings products can help customers prepare for hard times. Finally, enabling consumers to transact with anyone in the world opens untapped possibilities.
With open banking technology we are taking a step in the right direction toward financial inclusion. By simplifying and democratizing financial services through personalized offerings that serve a wider spectrum of individuals, a more inclusive financial culture can emerge. This is the promise of open banking in Africa and beyond.
For a deeper-dive into how open-banking can help drive financial inclusion, I found this excellent report from CGAP to be very helpful. https://bit.ly/3f6ZKwD