Open Banking Explained: How CBN’s New Regulations Affects Consumers and Companies

By FintechNGR 6 months agoNo Comments
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In a move that fosters innovation in the fintech ecosystem, the Central Bank of Nigeria recently released the Nigerian Regulatory Framework for Open Banking to help organizations embrace a more competitive way of providing financial services in Nigeria.

Open banking is a system of banking which enables a customer to grant third-party financial platforms access to his/her bank account information, account balances, investment history, payments and transactions. Through Open Banking, a customer can also authorize a third-party platform to perform key banking transactions such as making withdrawals, transfers or receiving payments.

How does Open Banking work?

To fully facilitate access to a customer’s account by more than one party simultaneously, financial platforms need software that can connect them to banks. This software is known as Banking Application Programming Interfaces (Banking API).

In the concept of banking, APIs allow a bank to give 3rd party access to a set of custom services. For instance, Bank A can have a dedicated set of APIs that allow an external company B to access the account information and transaction history of its client AA.

Open Banking functions on APIs, a fact which is also recognized by the Central Bank of Nigeria in its new Open Banking regulations.

The CBN will continue to regulate the Open Banking ecosystem through the Open Banking Registry (OBR). Through the registry, the apex bank will provide regulatory oversight on participants, ensure transparency and see to it that only registered institutions operate within the open banking ecosystem.

How Open Banking impacts businesses

Overall, the new operational guidelines for Open banking are expected to drive competition and improve people’s accessibility to banking and payments services. The regulations will extend to every organization that has access to the data of customers which can be exchanged with other organizations for the purpose of providing financial services to the customer in Nigeria.

With the CBN championing the cause of open banking, companies will have more ground for competition because there is now an approved guideline for accessing the data of customers from 3rd party companies. Ultimately, this is expected to result in better financial services at competitive prices for the customers.

As a result of the CBN’s new regulation, open banking recognises the ownership and control of data by customers of financial and non-financial services, and their right to grant authorisations to service providers to access innovative financial products and services.

Are there risks associated with Open Banking?

Although 3rd party organizations that make use of the consumer’s data are required to have a data ethics framework in place, there are still risks associated with open banking.

The sharing of data between the API consumer and the API provider makes the financial system more vulnerable to cybersecurity issues. These issues include Fraud, Denial of Service (DDoS), Man-in-the-Middle, Phishing, Malware and Cross-site Scripting.

In addition, there is also the risk that the customer information that is provided by an organization is incomplete or inaccurate as it is being shared across different IT systems. Other risks include Regulatory and Compliance Risk, violation of data privacy, Money Laundering and contract management risks between the financial service providers.

What it means for the common man

For every Nigerian, the Open Banking regulations mean that you will be able to share your financial details with more organizations in a more seamless way. You are the sole owner and controller of your financial data, however, and you can choose who you want to share it with.

As more organizations join the open banking ecosystem, you should be able to open account with different financial services providers without having to input your personal data afresh each time. By granting access, you can allow a company to obtain your financial records from another company.

As previously established, this will put your data at risk but it will also mean that you have more financial services available to you at better pricing, terms and conditions.

To protect you, the CBN guidelines mandate organizations to create and regularly test an Incident Response Plan which will keep those organizations adequately prepared for events such as cyber attacks or violation of data privacy.

In conclusion, the Open Banking regulations will foster more competition among companies that provide financial services to consumers. It will result in companies sharing the data of consumers with multiple third parties using their APIs and along the way, consumers will have more financial options available to them.

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